Existing Home Sales Jump Again:

Despite bad weather, U.S. home sales jumped more than expected in December.  Sales of previously occupied homes soared 12.3 percent last month which far surpassed national forecasts of an increase of only 4.5%.  This marks the second straight month of significant gains in sales.  In November, Existing Home Sales surged 6.1%.  The national median home price in December was $169,300 which was only 0.2% lower than levels a year ago.  This is important to note because 36% of homes sold in December where under the “distressed” category.  And even though this is a larger than normal percentage of sales, the national median home price barely moved.  In fact, it actually increased in some ares such as the Midwest (+3.3%).

In other news, Housing Starts decreased from 553K to 529K.  While the media has had a field day of reporting this as bad news…it is actually good news!  The number one reason that the housing industry fell was over supply.  And with supply levels still above where they need to be, any addition to those levels (for example by building even more homes) is not a good idea.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -54BPS from Tuesday’s open (Monday was closed due to the holiday) to Friday’s close which caused 30 year fixed rates to move higher.  MBS generally trade in the opposite direction of positive economic news.  And last week we had a lot of positive economic news with strong results from Existing Home Sales, Initial Jobless Claims, Leading Economic Indicators and more.

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Mortgage Rates Climb

Stronger than expected economic data with a hint of higher inflation was negative for mortgage markets this week. Concerns about the level of demand for US securities from China added to the pressure. As a result, mortgage rates ended the week higher.

A number of factors combined during the week to push mortgage rates higher. The recent trend of improving economic data continued this week in the housing sector. The inflation component of the Philly Fed manufacturing report also revealed a sharp increase. Later in the week, a Treasury auction for securities which provide protection from inflation showed that investor concerns about future inflation are growing. Investors also worried about a decline in demand for US bonds from China. The Treasury reported that China was a net seller of Treasury securities in November. As the largest foreign holder of US fixed-income securities, any sustained drop in demand from China would have a large impact on US bond markets, including mortgage-backed securities (MBS) markets.

Overall, this week’s housing sector data was positive. December Existing Home Sales rose 12% from November to an annual rate of 5.28 million units. The inventory of unsold existing homes declined 4% to an 8.1-month supply. First-time buyers purchased 33% of existing home sales. December Housing Starts fell 4% from November, but December Building Permits, a leading indicator, rose 17% to the highest level since March. The performance of the housing market varied in different regions, but to see improvement on the national level is encouraging.

Also Notable:

• Continuing Jobless Claims fell to the lowest level since October 2008
• Fed officials suggested that the economy is improving but a drop in unemployment will be gradual
• The Treasury will auction $99 billion in 2-yr, 5-yr, and 7-yr securities next week
• Troubled European countries have been seeking private buyers for their government debt

Week Ahead

The biggest economic event next week will be Wednesday’s FOMC meeting. Investors will be looking for an update on the economy and the Fed’s plans for monetary policy. The most important economic data will be Friday’s report on Gross Domestic Product (GDP), the broadest measure of economic growth. Before that, New Home Sales will be released on Wednesday. Pending Home Sales, a leading indicator for the housing sector, and Durable Orders will come out on Thursday. Consumer Confidence and Consumer Sentiment will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.

 

Fed Says Economy Improved in Last Six Months:

The economy has improved in the last six months, signaled by greater consumer spending, durable goods purchases and some signs of increased investment according to Federal Reserve Governor Daniel Tarullo which echoed the optimism of his boss, Chairman Ben Bernanke.

Tarullo stated “….has reinforced the sense that we are going to have slightly-above-trend growth going forward and that it is a firmer imbedded growth than may have been apparent six months ago.” As we have discussed several time, as the economy grows – so does demand for housing.  So, this is great news that our recent trend of improving Existing Home Sales will receive a boost from economic growth just in time for a busy Spring buying season.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -31BPS from Monday’s open to Friday’s close which caused 30 year fixed rates to move higher.  Don’t be confused by media reports about interest rates.  They reported last week that rates decrease when in fact they increased.  Why are they so wrong?  Because the media simply reports the results of a Freddie Mac interest rate survey that is always at least a week old before it is published.  Contact me for real information on rates.

Low Inflation and Strong Demand

Favorable conditions helped mortgage rates move a little lower this week. The inflation data released during the week showed that inflation continued to remain at very low levels. In addition, demand for longer-term Treasury securities was strong.

Inflation is always negative for bonds, since it erodes their value over time. Despite improving economic growth, there have been few signs of rising inflation in the current environment, which has helped keep mortgage rates at low levels. The December Consumer Price Index (CPI), the most closely watched inflation indicator, was just 1.5% higher than one year ago. Core CPI, which excludes the volatile food and energy components, increased an even lower 0.8% from one year ago. While food and energy prices recently have been rising more rapidly than the overall price level, investors generally focus on core inflation. The Fed considers a range for core inflation between 1.5% and 2.0% to be most desirable for the long term.

A second important influence for mortgage rates is the level of investor demand for bonds. If demand falls, then yields must rise to attract additional investors. A good indicator of investor demand for bonds comes from the Treasury auctions. During the week, demand was stronger than average from both domestic and foreign investors for longer-term 10-year and 30-year Treasury securities. Since mortgage-backed securities (MBS) and longer-term Treasury securities are similar investments, mortgage rates generally benefit from strong Treasury auctions, as was seen this week.

Also Notable:

• December Capacity Utilization increased to 76.0%, the highest level since August 2008
• Continuing Jobless Claims fell to the lowest level since October 2008
• Bernanke suggested that unemployment will fall slowly at current economic growth rates
• China tightened monetary policy again to fight inflation

Week Ahead

Next week’s focus will be on the Housing sector data. Housing Starts will be released on Wednesday. Existing Home Sales will come out on Thursday, along with Leading Indicators. Two regional manufacturing indexes, Empire State and Philly Fed, will round out a light economic schedule next week. Mortgage markets will be closed on Monday in observance of MLK Day.

 

Employment Picture Brightens:

Demand for housing is fueled by consumer confidence levels.  And nothing impacts those levels more than how consumers feel about the job market.  We had three major releases last week that gave us a better understanding of the employment picture.

First up were the Challenger Job Cuts report.  This measures the number of layoffs announced by corporations.  They reported that layoffs decreased by 34% in December.  Next up was the ADP Private Payroll report.  They measure non-farm and non-government hiring.  This report showed a gain of 297,000 jobs in December which was one of the strongest increases on record.  Lastly, the Labor Department reported that the national Unemployment Rate declined from 9.8% to 9.4% which is the lowest reading in 1 1/2 years.

While we certainly still have a lot of ground to make up in the job market, the above news is good for housing and certainly mirrors last month’s gains in both Existing Home Sales and Pending Home Sales.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) moved sideways last week but we certainly did see some big swings in mortgage rates during the middle of the week.  The very strong ADP Private Payroll data pushed mortgage rates upward on Wednesday but rates moved backed down after Friday’s Unemployment report.

Pending Home Sales Jump:

Contracts for pending sales of previously owned U.S. homes rose much faster than expected in November.  This follows last week’s surprise gain in existing home sales.  A pending home sale is when a contract has been signed between a buyer and a seller but the home has not yet closed.

The National Association of Realtors reported a rise of 3.5% in November, economists had expected an increase of only 2%.  Once again, we are seeing a little stronger than expected demand which has been following a very clear pattern of strength over the past four months.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +86 basis points from Monday’s open to Friday’s close causing 30 year fixed rates to decrease from the previous week.  We had several very strong economic reports such as Initial Jobless claims and Chicago PMI.  Normally, the strength in these economic reports would have pressured mortgage rates higher. But traders parked their funds into the safe and boring world of mortgage backed securities before the end of the year which helped mortgage rates temporarily.