February Existing Home Sales Beat Forecasts

The National Association of Realtors released their report of the sales of previously owned homes.  Compared to a year ago, Existing Home Sales increased an impressive 7.0 percent.  At 5.02 million units, they beat the market expectations of 5.0 million units.  Month over month sales decreased 0.6 percent.

Other interesting news from the report: First time home buyers made up 42 percent of sales and all-cash purchases accounted for 26 percent. The sector that had been hit the hardest, condominiums and co-ops actually rose 4.8 percent – finally showing some demand in that sector.

Positive Economic News Pressures Rates

The U.S. Census Bureau reported that Durable Goods Orders (excluding the volatile transportation sector) increased by 0.9 percent.  This was a 120 percent increase from the prior period.  As orders for Durable Goods increase, it leads to substantial capital investment and is a precursor to stronger economic growth.

Initial Jobless Claims fell for the fourth consecutive week and came in below an important level.  They finally broke through the 450,000 level at 442,000.  All eyes will be on the Friday release of the Unemployment data.  Many economists feel that we have the potential to see actual job creation in the non-farm payroll sector.

Mortgage rates naturally rise when the economy expands. Since the economic data above was positive it helped to push mortgage rates higher.

Warning: The Federal Reserve Bank of New York will end their $1.25 trillion Agency mortgage backed security purchase program this Wednesday!  This will remove the single largest purchaser of Fannie, Freddie, and Ginnie mortgage backed securities in the market.  How will this impact rates?  Contact me and I will keep you in the loop – but this will certainly lead to some volatility this week.

What Happened to Rates Last Week?

Mortgage backed securities (MBS) lost -62 basis points last week which caused 30 year fixed rates to increase for both government and conventional loans.  Our worst mortgage rates were on Wednesday after we dropped -90 basis points in just one day.  We saw further erosion on Thursday but made a small come back on Friday.

Housing Starts Beat Forecasts

Two key indicators of new construction beat economists forecasts.  New Housing starts were reported at an annualized rate of 575,000 vs. market expectations of 570,000.  The month-over-month comparisons showed a drop of 5.9 percent.

New Building permits came in at 612,000 units vs. market expectations of 610,000 although they did decrease 1.9 percent from the previous month.

What is important is that we are not seeing a spike in new housing activity.  This is great for housing markets that still have too much inventory to work through.  By not adding to the existing inventory by building new homes, this helps to stabilize pricing.

Initial Jobless Claims Fall Again

Weekly Initial Jobless Claims fell for the third consecutive week.  Initial Claims fell 5,000 compared to the period week, which makes a drop of 41,000 new claims for unemployment benefits over the past three weeks.

In a separate report, the Consumer Price Index (CPI) remained unchanged from the prior month.  This is important as a rise in CPI will decrease the purchasing power of consumers.  And any decrease in purchasing power could have an impact on housing.  So, for now, this is seen as a positive for housing.

What Happened to Rates Last Week?

Mortgage backed securities (MBS) lost -4 basis points last week which caused 30 year fixed rates to increase slightly for both government and conventional loans.  Our best mortgage rates were on Wednesday but closed the week out on a bad note as Friday saw our highest mortgage rates. Make sure you call me for the real story on mortgage rate movements.

Listing Prices Stabilize

According to a newly released report by Trulia.com and Reuters, the percentage of U.S. homeowners who cut the listing price on their homes fell in February to the lowest level in 10 months, as initial pricing became more realistic heading into the Spring selling season.

Buyers and Sellers are finally coming together and sellers are pricing the homes properly from the  start as prices on 19% of homes on the market had been cut at least once.  That means that 81% of homes listed for sale have not cut their listing price.  Since homes are priced right from the start, this means that they are on market for less time. This sets the stage for a more balanced market this Spring and Summer as sellers are no longer forced to cut their listing price several times.

Retail Sales Look Strong

Sales at U.S. retailers rose unexpectedly in February despite a drop in vehicle purchases and inclement weather that was expected to curtail shopping, bolstering hopes of a sustainable economic recovery.

Total retail sales rose 0.3 percent, according to the Commerce Department.  Core retail sales which strip away the volatile auto and gasoline sectors increased a robust 0.9 percent. Consumer spending had been low as a direct correlation to the unemployment rate.  But a pickup in retail sales data could signal some strength in consumer confidence going forward.

This is important as consumer confidence is a large factor in the demand for homes.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -38 basis points last week which caused 30 year fixed rates to increase for both government and conventional loans.  Our best mortgage rates were on Tuesday but closed the week out on a bad note as Friday saw our highest mortgage rates. Make sure you call me for the real story on mortgage rate movements.

Pending Home Sales Show Mixed Results

A Pending Home Sale is a when a contract is in place to sell a home but it has yet to close.  The National Association of Realtors reported that from January 2009 to January 2010 this index increased by 12.3%.  So, the year-over-year numbers show some improvement in the housing market.

However, Pending Home Sales shrank 7.6% in their monthly comparisons between December 2009 and January 2010.  Home Sales traditionally pull back during the colder months.  The warm, Spring air traditionally starts to heat up demand for housing and that is right around the corner.

Unemployment Rate Remains Unchanged

We had two very important measures of Unemployment last week.  On Thursday, the Initial Jobless Claims data was released and showed that new claims for unemployment benefits fell by 29,000 from the previous week to a seasonally adjusted 469,000.

The Unemployment Rate was released Friday.  It remained unchanged from the prior period at 9.7%.  Most economists and the market expected it to increase.  But two consecutive readings of 9.7% is starting to bolster the consensus view that we may have started to see the beginnings of some gradual healing and that we could be on the brink of showing some actual job creation by the next report.

What Happened to Rates Last Week?

Mortgage backed securities (MBS) gained +13 basis points last week which caused 30 year fixed rates to decrease for both government and conventional loans.  Our best mortgage rates were on Thursday as we matched our best pricing levels of the year which occurred previously on 02/08/2010.  However, we lost -25BPS the very next day on the relative strength of the Unemployment Report. Make sure you call me for the real story on mortgage rate movements.

Mixed Data Affects Rates

Economic data was the primary force driving mortgage rates this week. Generally weaker than expected data resulted in modest improvement in rates for most of the week. This was completely offset by an increase in rates on Friday due to stronger than expected Employment data, however, leaving mortgage rates nearly unchanged from last week.

Against a consensus forecast for a decline of -50K jobs, the economy lost -36K jobs in February, and the revisions from prior months showed more jobs than previously reported. The Unemployment Rate remained unchanged from January at 9.7%, which was lower than expected. The payrolls figures and the unemployment rate are calculated from two separate sets of data. The payrolls report focuses on larger companies, while the unemployment survey covers all companies. The more volatile unemployment survey surprisingly showed an increase of 308K jobs in February, indicating that smaller companies were a source of job gains.

This week’s housing data was weaker than expected. January Pending Home Sales fell 7.6%, far below the consensus forecast for a small increase. They were still 12% higher than one year ago, however. The expected surge in sales from the extended homebuyer tax credit has failed to materialize so far. The chief economist of the National Association of Realtors (NAR) suggested that unusually harsh weather “hampered shopping activity” in many regions, so a pickup in sales still may be seen as buyers take advantage of the tax credit before the April 30 deadline.

Also Notable: The Fed’s Beige Book reported that the economy continued its slow growth As expected, the European Central Bank (ECB) made no change in rates The Treasury will auction $74 billion in 3-yr, 10-yr, and 30-yr securities next week The Fed purchased $10 billion in agency MBS, with about $34 billion more to go

Week Ahead The Economic Calendar will be very light next week. The Trade Balance will be released on Thursday. The big Retail Sales report will come out on Friday. Retail Sales account for about 70% of economic activity. Consumer Sentiment will also be released on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. There were strong reactions to the last auctions for these securities.

 

Hidden Strength in Existing Home Sales

The true measure of the housing market is the demand for Existing Homes.  Existing Homes are homes that have been previously owned and are much less volatile than new construction.  The National Association of Realtors reported that sales of previously owned homes dropped 7.2% from December to January.  Naturally, this is the number that the media ran with.  But they also reported that year-over-year sales were up 11.2% which is very strong indeed.

The Final Countdown

30 year fixed mortgage rates have been artificially too low for some time.  This is due to three major factors: The purchasing of Fannie Mae and Freddie Mac mortgage backed securities by the Federal Reserve, the U.S. recession, and global instability in the financial markets.

The Federal Reserve is near the end of their $1.25 trillion dollar purchase program of Agency mortgage backed securities. This program will officially end in just 27 business days.  They have been slowing down their weekly purchases from $20 billion to $11 billion as they stretch out their remaining funds until the end of March.  When this purchase program is done it will remove the single largest weekly purchaser of mortgage backed securities in the market.  This removes the artificial demand for a financial product that 12 months ago no one would buy.  Since all of our mortgage rates come from the sale of mortgage backed securities, this will pusch mortgage rates higher.

The second reason why rates have been artificially to low has been the weakness of the U.S. economy.  Mortgage rates are extremely sensitive to inflation. And there can be no inflation when the economy is shrinking.  However, growth naturally leads to inflation in some measure.  The 4th quarter of 2009 grew by 5.9% as measured by our GDP.  As our economy continues to recover and grow, it will put pressure on mortgage rates.

The third reason, global instability, will continue for some time and will still provide some level of support for mortgage backed securities.  A good example of this is the recent concern of Greece defaulting on their sovereign debt.  Concern over this and the domino affect in the European Union has helped to make our Treasuries and mortgage backed securities attractive to foreign investors as a safe-haven.

There is no question that mortgage rates will rise by the end of March.  However, this is not necessarily a bad thing.  Review the following data:

Housing markets must be allowed to function based upon natural and competing market forces.  We have not been operating that way for the past 18 months.  Artificially low rates are not good for the housing market because it postpones the natural equilibrium that must occur for market forces to work correctly.  The data above is very clear.  The top five years that we have ever had in the housing market all had higher 30 year fixed rates that are much higher than recent trends.  This means that the ongoing recovery in the housing market will not be slowed by increasing mortgage rates.  Mortgage rates increase as the economy grows.  As the economy grows, more people are back to work and consumer confidence increases.  These are the two greatest factors that impact home buying.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +82 basis points last week which caused 30 year fixed rates to decrease for both government and conventional loans.  We had a very short week that was light with economic data so MBS traders reacted strongly to very limited data.  We realized our gains primarily on the continued and growing concerns over Greece and the possibility of their default and the rippling affects that this could have on the financial markets.  Make sure you call me for the real story on mortgage rate movements.

What to Watch Out For This Week:

The following are the major economic reports that will hit the market this week.  They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages.  I will be watching these reports closely for you and let you know if there are any big surprises:

Date	ET	Release	For
1-Mar	8:30	Personal Income	Jan
1-Mar	8:30	Personal Spending	Jan
1-Mar	8:30	PCE Prices – Core	Jan
1-Mar	10:00	Construction Spending	Jan
1-Mar	10:00	ISM Index	Feb
2-Mar	14:00	Auto Sales	Feb
2-Mar	14:00	Truck Sales	Feb
3-Mar	7:30	Challenger Job Cuts YoY	Feb
3-Mar	8:15	ADP Employment Change	Feb
3-Mar	10:00	ISM Services	Feb
3-Mar	10:30	Crude Inventories	26-Feb
3-Mar	14:00	Fed’s Beige Book	Mar
4-Mar	8:30	Initial Claims	27-Feb
4-Mar	8:30	Continuing Claims	20-Feb
4-Mar	8:30	Productivity-Rev.	Q4
4-Mar	8:30	Unit Labor Costs	Q4
4-Mar	10:00	Factory Orders	Jan
4-Mar	10:00	Pending Home Sales	Jan
5-Mar	8:30	Unemployment Rate	Feb
5-Mar	8:30	Nonfarm Payrolls	Feb
5-Mar	8:30	Hourly Earnings	Feb
5-Mar	8:30	Average Workweek	Feb
5-Mar	15:00	Consumer Credit	Jan

I know you are busy and it is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.