Mortgage Rates Steady

There were few surprises from the economic news released this week. The economic data generally was very close to the consensus forecasts, and activity levels were low during the holiday season. While daily volatility remained high, mortgage rates ended the week nearly unchanged from last week.

After reaching record lows in early November, mortgage rates have since increased, although they remain at historically low levels. The rise in mortgage rates can be attributed primarily to a good thing, increasing expectations for future economic growth. The trend in most economic measures over the last few months has generally shown improvement, and the passage of the tax deal last week is expected to provide an additional boost. A growing economy creates jobs and increases the demand for homes, but it also leads to higher inflation, which is negative for mortgage rates.

The housing sector data released during the week was positive. November Existing Home Sales rose 6% from October, and inventories of unsold existing homes fell 4% to a 9.5-month supply. November New Home Sales also increased 6% from October.

Also Notable:

• The Core PCE inflation index rose at a 0.8% annual rate, matching October’s record low level
• The Treasury will auction $99 billion in 2-yr, 5-yr, and 7-yr securities next week
• Oil prices rose above $90 per barrel, the highest level in two years
• The Fed’s Bullard stated that he is in favor of regularly reviewing the quantitative easing program

Week Ahead

As usual, the Economic Calendar will be light during the final week of the year. Consumer Confidence will be released on Today. The Chicago PMI national manufacturing index will come out on Thursday. Pending Home Sales, a leading indicator for the housing market, is also scheduled for Thursday. There will be Treasury auctions on Monday, Tuesday, and Wednesday. Mortgage markets will close early on Friday in observance of the New Years holiday.

Existing Home Sales Continue Upward Climb:

Sales of existing homes that have been previously occupied increased once again in November.  July is generally considered the height of the purchasing season as buyers want to complete their move before school starts.  So it is great news that we have continued to beat July’s sales each and every month.

The median price paid for a home increased +0.4% in November and it was the first increase in housing prices since August.  This means that even though we are selling more units, it is not due to slashing prices.  November saw an increase in the total number of units sold and in the median price, which is a big positive for the housing market.

The supply of home inventory also decreased slightly.  Too many homes on the market at once is never good.  During July we had 12.5 months of supply available, that moved lower to only 10.5 months worth of supply in November.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -33 basis points from Monday’s open to Thursday’s close causing 30 year fixed rates to move slightly upward from the previous week.  We had several rounds of QEII Treasury purchases that helped to keep rates from moving higher.  From a technical perspective, our 10 day moving average was a very solid resistance level that prevented any improvement in mortgage rates.

Housing Starts Rise:

U.S. Housing starts rose more than expected in November. The Commerce Department said that housing starts rose 3.9 percent to a seasonally adjusted annual rate of 555,000 units.  They also revised October’s numbers upward to a 534,000 unit pace, it was originally reported at 519,000 units.

Ground breaking for new homes last month was lifted by a 6.9 percent rise in single-family home construction which continues to shows strength.  The multi-family sector continues to struggle and fell 9.1 percent.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +12 basis points last week causing 30 year fixed rates to move sideways from the previous week.  This was the first week out of the last seven where pricing improved.  However, it was a bumpy ride.  MBS reached their worst levels on Wednesday which drove 30 year fixed rates to their highest levels since last May.  We clawed our way back as the 10 year Treasury started to rally on very light volumes which skewed the rally somewhat.

Congress Passes Tax Deal

It was another tough week for mortgage rates. Tuesday’s Fed meeting contained no surprises, so investors focused on stronger than expected economic growth data and progress on the tax deal, which was passed late in the week. Once again, nearly all the news was unfavorable for mortgage rates, which ended the week higher.

Recent economic growth data has mostly exceeded expectations, causing several economists to raise their forecast for GDP in 2011. In particular, this week’s Retail Sales and manufacturing sector data surpassed the consensus estimates. Faster economic growth generally produces higher future inflation expectations, which leads to higher bond yields.

The tax deal has been negative for mortgage rates in three ways. First, it’s expected to boost economic growth. In addition, it will increase the budget deficit, which will lead to a larger supply of Treasury securities, pushing bond yields higher. Finally, this additional fiscal stimulus will make it less likely that the Fed will add more monetary stimulus. That said, the Fed is focused on unemployment that is far too high and inflation that is below its desired level. At this point, the Fed is in no rush to begin to tighten policy.

Also Notable:

• As expected, the Fed made no change in the fed funds rate
• Core CPI inflation rose at a very low 0.8% annual rate
• November Capacity Utilization climbed to the highest level since October 2008

The ECB adopted a new program to aid countries with debt troubles

Week Ahead

Next week, the final revisions to third quarter Gross Domestic Product (GDP) will be released on Wednesday, along with Existing Home Sales. Thursday will be the big day with Personal Income, Durable Orders, New Home Sales, Jobless Claims, and Consumer Sentiment. Mortgage markets will close early on Thursday and will be closed on Friday in observance of the Christmas holiday.

Consumer Sentiment Rises:

U.S. Consumer Sentiment rose more than expected in early December while an index of current conditions jumped to its highest level since January 2008, a survey released on Friday showed.  Housing demand is directly correlated with consumer sentiment so an increase in this reading is definitely a boon for housing.

The Reuters/University of Michigan’s Consumer Sentiment Index rose to 74.2 which is the best reading since June.  At the same time, the survey’s barometer of current economic conditions rose to 85.7, which is the best reading since January 2008.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -189 basis points last week causing 30 year fixed rates to increase from the previous week.  This marks the fifth straight week of increasing mortgage rates.  This further proves that you should not listen to news reports about mortgage rates.  The U.S. government cannot and does not control mortgage rates.  These are set by an open market place of willing sellers and purchasers of MBS.  And as our economy continues to rebound, we will continue to see a longer-term trend of higher mortgage rates when compared to our artificially low mortgage rates in October.  Now is the time to take advantage of mortgage rates before they increase further.

Tax Deal Pushes Mortgage Rates Higher

At the start of the week it looked like mortgage rates might reverse some of their recent increases. Tuesday’s announcement that President Obama reached an agreement with Republican leaders on a tax package was very unfavorable for mortgage rates, however, and they rose sharply following the news. Despite strong demand for the Treasury auctions later in the week, mortgage rates ended the week at the highest levels since June.

While investors generally expected an extension of the Bush era tax rates for all income levels, the proposed tax deal includes additional spending measures that were more of a surprise. The plan includes a one year payroll tax reduction and an extension of unemployment benefits for the long-term unemployed. As a result, estimates for the size of the tax plan are significantly bigger than expected, leading to the large reaction in mortgage rates. There is some resistance to the deal, but most analysts expect the final version to be similar to the current proposal.

If passed, the proposed tax deal is expected to boost economic growth but also increase the budget deficit, both of which are negative for mortgage rates. Faster economic growth generally increases the outlook for future inflation, and higher inflation leads to higher mortgage rates. An increase in the budget deficit means the government must issue more Treasury securities to pay for the spending. As the supply of Treasuries goes up, yields must rise to attract additional investors, so mortgage rates must rise as well.

Also Notable:

• Consumer Sentiment rose to the highest level since June
• The four-week average of Jobless Claims declined to the lowest level in two years
• Fed Chief Bernanke expressed strong support for the quantitative easing program

Oil prices rose to $90 per barrel, the highest level in two years

Week Ahead

The biggest economic news next week will be Tuesday’s FOMC meeting. Investors will be looking for an update on the Fed’s plans for the quantitative easing program. The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales, an important indicator of economic growth, will be released on Tuesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, is scheduled for Wednesday. Housing Starts will come out on Thursday. Empire State, Leading Indicators, and Philly Fed will round out the week.

Pending Home Sales Surge Ahead:

Pending sales of existing U.S. homes unexpectedly surged despite concerns that problems with foreclosures might curtail activity.

The National Association of Realtors Pending Home Index, which is based upon contracts that are signed but not yet closed, jumped 10.4% in October.  Economists had been expecting a decline of 0.5%.

This strength in housing is directly reflective of the positive Consumer Sentiment levels.  Buyers are also taking advantage of great pricing levels while they can before mortgage rates rise.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -66 basis points last week causing 30 year fixed rates to increase from the previous week.  This marks the fourth straight week of increasing mortgage rates.  This further proves that you should not listen to news reports about mortgage rates.  The U.S. government cannot and does not control mortgage rates.  These are set by an open market place of willing sellers and purchasers of MBS.  And as our economy continues to rebound, we will continue to see a longer-term trend of higher mortgage rates when compared to our artificially low mortgage rates in October.

Consumer Sentiment Continues to Rise:

Consumer Sentiment plays a very large roll in housing.  Simply put, if consumers feel good about their prospects and the overall economy – they are more likely to purchase a home.  So, it is great news that the Reuters/University of Michigan’s Consumer Sentiment Index rose for the third consecutive month.  It came in at a revised reading of 71.6 which far outpaced the market expectations of 69.5.

Also, the national economy grew at a much faster pace than originally thought. The U.S. Gross Domestic Product (GDP) for the third quarter was upwardly revised from 2.0% to 2.5%.  A half point in an economy our size is a very large move upward and marks the best reading in five quarters and the third straight quarterly improvement.  Both of these reports are a big positive for housing demand.

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.

MM