Home Picture Brightens:

The constant “doom and gloom” news reports might make you feel as if everyone is in foreclosure and that no one is buying any homes.  Of course, that is the farthest thing from the truth.  In fact, there are some bright spots in the housing market.

The National Association of Realtors reported that sales of existing (previously owned) homes shot up 7.6% in August to a seasonally adjusted annual rate of 4.13 million units.  Another sign of strength is that the median sales prices actually increased, which shows that homes are not being moved due to lower prices.  The median sales price rose 0.8% to $178,600.

Sales grew in every region of the country.  They rose by 14% in the West, 8% in the Northeast and 5% in the Midwest and South.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +34 basis points last week causing 30 year fixed rates to decrease from the previous week.  However, once we reached our best pricing on Tuesday, we pulled back -47BPS by Friday.  The reversal from Tuesday’s highs was in reaction to very strong Existing Home Sales, Business Inventories, and Durable Goods Orders.

Fed Statement Positive for Mortgage Rates

The chance for additional Treasury purchases by the Fed helped mortgage rates improve early this week. Stronger than expected economic growth data trimmed the gains later in the week. The net result was that mortgage rates ended the week a little lower.

As expected, the Fed made no change in the fed funds rate at Tuesday’s meeting. Its statement was very similar to the last one, but investors focused on one important difference. Fed officials stated that they are “prepared to provide additional accommodation if needed to support the economic recovery.” Investors interpreted this to mean that additional bond purchases by the Fed could take place in coming months. While the Fed is expected to purchase Treasury securities rather than mortgage-backed securities (MBS), increased demand for Treasuries would be favorable mortgage rates. As usual, investors immediately priced in this information, and mortgage rates improved. Of course, if this action by the Fed never becomes necessary, then mortgage rates could give back this week’s gains.

The housing data released during the week generally matched expectations. While there are differences in regional performance, overall the housing market is holding steady above the lows reached during the recent financial crisis or improving modestly. August Existing Home Sales rose 8% from July. Inventories of unsold existing homes declined 1% to an 11.6-month supply. August New Home Sales were unchanged from July. August Housing Starts rose 11%, and Building Permits, a leading indicator, rose 2%. The September NAHB home builder confidence index was unchanged from August.

	Average 30 yr fixed rate: Last week: -0.03% This week: -0.05%
	Stocks (weekly): Dow: 10,850 +250 NASDAQ: 2,375 +75

Week Ahead

Next week, Consumer Confidence will be released on Tuesday. The final revision to second quarter GDP will come out on Thursday, along with the Chicago PMI national manufacturing index. GDP is the broadest measure of economic activity. Friday will be the big day with Personal Income, PCE inflation, Construction Spending, ISM manufacturing, and Consumer Sentiment. There will be Treasury auctions on Monday, Tuesday, and Wednesday.

Retail Sales Improve:

The U.S. Census Bureau reported that Retail Sales (excluding food items) rose 0.6%.  This was a much larger increase than what traders expected and put Retail Sales at its highest level since emerging from the recession.

This is very important as home sales are largely based upon consumer confidence or their willingness to spend money.  While various consumer confidence surveys and gauges have had mixed results, it is clear that consumers are showing their true confidence levels by spending more. If this trend continues, it will be very favorable for housing demand.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -34 basis points last week causing 30 year fixed rates to increase to their highest levels since July.  After a short-lived rally on Tuesday, they pulled back -59 basis points.  The markets were reacting to some stronger than expected Retail Sales, Business Inventories and Initial Jobless Claims.  The relatively positive economic data helped to temporarily curb fears of a double-dip recession which reduced a “safety” premium in MBS.

Low Inflation Helps Mortgage Rates

After rising for two weeks, mortgage rates moved a little lower this week. Slower than average economic growth and low inflation persuaded investors to purchase bonds, including mortgage-backed securities. Following three months of declines, mortgage rates appear to be settling into a range so far in September.

The most significant economic data released during the week was the monthly inflation reports. Rising inflation erodes the value of bonds and pushes mortgage rates higher. In the current economic environment, higher inflation is not a concern, and some investors are more worried about the risk of inflation falling too low. The Fed is generally most comfortable when core inflation is rising at an annual rate between 1.0% and 2.0%. In August, the core Consumer Price Index (CPI) increased at a low 0.9% annual rate. While this level is probably not low enough to prompt new action from the Fed, investors will be closely watching what the Fed has to say about inflation rates at next Tuesday’s meeting.

Hearings began this week on the role of government in the housing market, including the future of Fannie Mae and Freddie Mac. The debate is expected to be lengthy, and the Obama administration has stated that it will produce a proposal in January. There is general agreement that government involvement has created a more liquid market for mortgages, which has resulted in lower mortgage rates. The early consensus is that there is an appropriate role for government in the housing market, but that proper safeguards must be established to reduce the future risk to taxpayers. In any case, changes are expected to be phased in gradually over a period of years.

Week Ahead

The biggest story next week will be Tuesday’s Fed meeting. No change in the fed funds rate is expected, but any surprises in the Fed’s statement could have a large impact on mortgage rates. Also on Tuesday, Housing Starts will be released. Existing Home Sales will come out on Thursday, along with Leading Indicators. Durable Orders, an important indicator of economic activity, and New Home Sales will be released on Friday.

Jobless Claims Drop:

Nothing impacts demand for housing more than employment levels.  Quite simply, if someone is out of work or is concerned that they could lose their job, they are not going to make a major purchase such as a home.  So, it is good news that for the second week in a row that the Initial Jobless Claims have decreased.

Initial Weekly Jobless claims dropped by 27,000 which was much larger than expectations.  Continuing Claims also dropped slightly.  The stock market rallied on this positive economic news.

What Happened to Rates Last Week:

We started our holiday-shortened week with with a nice rally as traders returned from the long weekend on Tuesday but then pulled back a huge -93 basis points causing 30 year fixed mortgage rates to reach their highest levels since August 18th.

Mortgage backed securities (MBS) pulled back (causing mortgage rates to increase) due to a much stronger than expected Initial Jobless Claims and Wholesale Inventories reports.

Pending Homes Sales Soar:

Pending sales of previously owned U.S. Homes rose unexpectedly in July, according to the National Association of Realtors.  This index which is based upon contracts signed in July but not yet closed, increased 5.2 percent after the previous month saw a decline of -1.6%.  The market was expecting another decline in the -1.5% range considering that the home buyer tax credit does not apply to any of these new purchase contracts.

While the housing market is far from being fully recovered, this is a very strong reading and is indicative of a market where we enjoy the lowest 30 year fixed rates that we have ever seen and a pool of very good inventory to select from.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) reached another new record on Tuesday which caused conventional mortgage rates to fall to their lowest levels in history.  However, before the market was aware of the great new pricing, we lost it as we pulled back -81 basis points from our best levels.

The reason for the pull back?  After several weeks of very weak economic news, we finally had some economic data that beat market expectations.  These positive reports included very strong ISM Manufacturing, Initial Jobless Claims, Pending Home Sales and Unemployment levels.