Mortgage Rates Drop to Record Low:

30 year fixed mortgage rates dropped to their lowest levels in 39 years according to a new survey released by Freddie Mac, the second largest mortgage finance company.

Interest rates on 15 year fixed rates and hybrid adjustable rate mortgage rates reached fresh lows as well.  While record low rates and high housing affordability helped the housing market gain ground over the last year, the sector is struggling since the popular home buyer tax credit expired on April 30th.

According to a Freddie Mac survey, the average 30 year fixed rate for conventional (non-FHA and VA) mortgages averaged 4.69 percent for the week ended June 24th and is the lowest since Freddie Mac started the survey in April 1971.  Still, Freddie Mac’s data is at least a week old before they publish it and it has been another week since then.  Rates do vary depending on credit, debt ratios, down payment, area of the country, property type, points paid and many more factors.

GDP, Economy Grow at Slower Pace in 1st Quarter:

U.S. economic growth was slower than previously estimated in the first quarter of 2010.  In its final estimate, the Commerce Department said the Gross Domestic Product (GDP) expanded at a 2.7% annual rate instead of the 3% pace it reported last month.

Although the growth pace was below market expectations it still marked three straight quarters of of expansion as our economy digs out of its most brutal downturn since the 1930s.

The Federal Reserve left their key interest rates unchanged this week and struck a cautious note on the economy and said that the recovery was “preceding” and that the economy is not expected to to fall back into a recession.  Fears of a “double-dip” recession is one of the factors that have kept mortgage rates so low.

What Happened to Rates Last Week?

Mortgage backed securities (MBS) gained +62 basis points last week which caused 30 year fixed rates to decrease for both government and conventional loans.  Rate declined on the heals of a a slow down in existing and new home sales and a downward revision in our GDP.

Sellers Stand Firm On Listing Prices:

A new study by Trulia.com showed that sellers lowered their asking price at least once on 22 percent of homes listed for sale as of June 1st.  This means that 88% of sellers did not lower their asking price from listing to sale.

The 22% is a decrease from this time last year where the number was 23.6%.  More expensive homes ($2 million and up) saw the largest price reductions.  Real estate is very localized:  A year ago Las Vegas saw price decreases on 30% of all listings.  But this time around, they only dropped prices on 10% of homes listed for sale.  But in Kansas City, prices were dropped on 31% of homes listed compared to 20% a year earlier.

Obviously, low 30 year fixed mortgage rates and the now expired tax credit has helped.  But the improvement in the ratio of original asking price vs. sold price is more likely the result of properly listing the home at the correct and current market price.

Consumer Prices Remain Tame:

The Consumer Price Index declined -0.20% last month according to the U.S. Department of Labor.  This is very important to housing because consumers will hold off on major purchases if they feel that the cost of every day items is increasing.  So, this report is a positive for housing.

The Producer Price Index also shrank.  It decreased -.30%, which means that costs are not increasing for manufacturers and it probably will lead to continued lower prices for consumers.

What Happened to Rates Last Week?

Mortgage backed securities (MBS) gained +47 basis points last week which caused 30 year fixed rates to decrease for both government and conventional loans.  We saw our best rates on Friday as the MBS market moved upward on the very weak Philly Fed Manufacturing data.

Tax Credits May See Extension:

The home buyer’s tax credit has been wildly popular. It gave both first time and previous home buyers a sizeable tax credit provided that they sign a purchase contract no later than the end of April and close no later than the end of June.

It was so successful, that pending home sales (contracts signed but not yet closed) rose 22.4% when compared to April 2009.  However, with increased underwriting turn times, many people that met the requirement by signing a contract before the end of April will not be able to close in time.  Under the current law, they would lose their tax credit.

Senator Harry Reid is offering an amendment to the American Jobs and Closing Tax Loopholes Act of 2010 that would extend the closing time from June 30th to September 30th.  Note: If you did not sign a contract by April 30th then there is no extension for you.  It is only for those that signed a contract in time but just can’t close on time.  It remains to be seen if his proposal will pass, I will keep you posted.

Consumer Confidence Reaches a High Point:

According to a newly released report by Reuters/University of Michigan, their Consumer Confidence index rose again to a reading of 75.5.  This is the best reading this year and the best reading since January 2008.

It shows a picture that consumers are more confident in how they perceive their economic outlook. A higher consumer confidence number generally signifies that consumers are more willing to spend.  This is important because consumer confidence is one of the largest factors in home demand.

What Happened to Rates Last Week?

Mortgage backed securities (MBS) lost -35 basis points last week which caused 30 year fixed rates to increase for both government and conventional loans.  We did have a large swing in the middle of the week that helped us to reach another new low in mortgage rates.  But we very quickly gave up those gains to close down for the week.

Pending Home Sales Surge:

A pending home sale is simply a signed contract on a home that has not yet closed. The National Association of Realtors reported that we continued to see gains in home sales for the third consecutive month.  The index rose 6.0% last month and 22.4% when compared to April 2009.  The April increase follows a 7.1% in March and a 8.3% increase in February.

While certainly some of the gain can be attributed to the rush to get a contract signed prior to the end of the tax credit, there is definitely underlying demand as consistently low rates and increased consumer confidence in the housing market has helped to drive up demand for homes.

Unemployment Rate Drops:

The Labor Department reported that our nation’s unemployment rate dropped from 9.9% to 9.7%.

Non-farm payrolls increases 431,000 in May.  However, 390,000 new hires were due to the wave of census hiring.  That means that only 41,000 private sector jobs were created.  While this is an improvement, it was certainly much less than market expectations and a further sign that our recovery isn’t as hot as once believed.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +69 basis points last week which caused 30 year fixed rates to decrease for both government and conventional loans and pushed mortgage rates to match the year’s best levels.  The better mortgage rates were due to very mild economic data and continued concern over debt and banking issues in the European Union.

Jobs Report Falls Short

The big economic news this week was Friday’s Employment data, which fell short of Wall Street forecasts and pushed mortgage rates lower. Investors continued to watch the situation in Europe, but there were no major market moving developments. Due to a rally on Friday, mortgage rates ended the week lower.

The May Employment report revealed the largest monthly increase in jobs since March 2000, but nearly all of the gains came from the hiring of temporary census workers. Without the census workers, the data fell short of expectations. A total of 431K jobs were added in May, below the consensus forecast of 500K. 411K jobs came from census hiring, leaving a net gain of just 20K jobs when those workers are excluded. The Unemployment Rate dropped to 9.7% from 9.9% in April, but this was mostly due to people dropping out of the labor force. Investors had expected stronger results from private sector job growth, and the stock market fell after the news. Weak labor market figures generally lead to lower inflation and are favorable for mortgage markets.

The news from the housing sector was more positive. April Pending Home Sales rose 6% from March, which was stronger than expected, to the highest level since October 2009. Pending sales are a leading indicator of future housing market activity. The April 30 expiration of the homebuyer tax credit likely pulled some pending sales forward which otherwise might have taken place later in the year. The benefits, though, of extremely low mortgage rates and very affordable home prices are in place to promote home buying activity even without the homebuyer tax credit.

Week Ahead

Next week, Industrial Production, an important indicator of economic activity, will be released on Monday. The Fed’s Beige Book will come out on Wednesday. The Retail Sales report will be released on Friday. Retail Sales account for about 70% of economic activity. Consumer Sentiment and the Trade Balance will round out the schedule. There will be Treasury auctions on Tuesday, Wednesday, and Thursday.

New Home Sales at 2-Year High:

The Commerce Department reported that sales of newly built homes rose much faster than expected in April, rising to their highest levels in nearly two years.  Sales jumped 14.8 percent (month-over-month) to an annualized rate of 504,000 units in April.  This is the highest rate since May of 2008.

The year-over-year increase was in excess of 22 percent.  Certainly, the rush to sign a contract prior to the tax credit expiring has had an impact.  But there is something else that it less temporary that is also having an impact.  Consistently low 30 year fixed rates, an increase in consumer confidence, and a rise in non-farm payrolls are helping to fuel demand for housing.  And unlike the tax credit, these items will not expire but continue to move upward.

The report also showed that inventories of new homes for sale fell a record seven percent to 211,000 units in April.  That is the lowest level of inventories since October 1968!  Lower inventories will eventually lead to further price stabilization.

Consumer Sentiment Rises:

The Thomson Reuters/University of Michigan’s report showed that consumer sentiment rose again in May.  The final May reading on the overall index was 73.6, up from April’s reading of 72.2.

Consumer Spending drives 70 percent of our economy, so an increase in consumer sentiment readings could be good for economic growth in the near-term.  Also, both consumer sentiment and consumer confidence are significant drivers for housing demand.  Simply put, consumers are more likely to purchase a home if they feel more confident about their own financial outlook.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -69 basis points last week which caused 30 year fixed rates to increase for both government and conventional loans.  The prior week, they were at their best levels of 2010.  MBS pricing decreased (which causes mortgage rates to go up) due primarily to a rebound in the stock markets which pulled some money way from bonds.  We also saw some strong economic data such as the Chicago PMI, Consumer Sentiment and Initial Jobless Claims.  As the economy shows sign of expansion, it takes a toll on long bonds such as mortgage backed securities.  However, mortgage rates remained at fantastic levels.