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.

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.

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

Mortgage Deliquency Rate Falls:

The U.S. mortgage delinquency rate declined last quarter as the employment picture brightened.  The Mortgage Bankers Association reported that the rate of delinquency on single-family homes for the third quarter fell 0.72% from the previous quarter for a reading of of just 9.13%.

The media coverage of the housing market would lead most to assume that almost every house is in foreclosure and that most mortgages are delinquent or in foreclose.  This is far from true.  Certainly a delinquency rate of 9.13% is higher than what any banker wants to see, but it also means that  90.87% of all mortgages are paid on time.  And with businesses adding 151,000 jobs last month andInitial Jobless Claims continuing to fall, we appear to be on firmer ground.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -59 basis points last week causing 30 year fixed ratesto increase from the previous week.  This is after the prior week’s -147 basis point sell off. TheFederal Reserve’s $600 billion Quantitative Easing II plan was in effect for the second straight week and the longer term bonds such as MBS are not a big fan.  MBS have sold off -122 basis points since the first day of their Treasury purchase program which has pressured mortgage rates upward.

Consumers Point to Stronger Housing:

Consumers drive the housing market.  So when we see improvement in consumer behavior, it paints a prettier picture for housing.

Retail Sales rose more than expected in October to post their largest gain in seven months.  The Commerce Department reported that total Retail Sales increased 1.2% which is the biggest increase since March.  They also upwardly revised last month’s data.

This report follows the much better than expected Consumer Sentiment report published by Reuters/University of Michigan. They reported that their preliminary consumer sentiment index jumped to a reading of 69.3 in November compared to 67.7 the month prior, putting in on track to be the best results since June. The release beat out analysts´expectations of 69.0.

Both of these reports show that consumers are back on track and coupled with very low mortgage rates could lead to more demand in housing.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) lost -147 basis points last week causing 30 year fixed rates to increase from the previous week.  The sell-off in mortgage backed securities started with much weaker than anticipated demand for the U.S. 10 year and 30 year Treasury auction.  We had our second straight week of positive economic data with stronger than expected Initial Jobless Claims, Consumer Sentiment and Wholesale Inventories which also pressured MBS pricing.

Employment Picture Helps Housing:

Housing and employment levels are directly linked, so it is great news that our nation’s employment picture has brightened.

The U.S. Labor Bureau reported that their national unemployment rate remained unchanged at 9.6% from the previous month.  But the real story is the increase in the private sector.  It is the private job growth that is reflective of economic growth.  Non-Farm Private Payrolls grew at the best pace in over a year, adding 159,000 jobs.  Plus, their last month’s figures were revised upward by 110,000.

This along with very positive manufacturing data has put the final nail into the coffin of the “double-dip” recession theories.  After this month’s blistering Existing and New Home sales data, the positive job growth adds further stability to our nation’s housing market.

What Happened to Rates Last Week:

Mortgage backed securities (MBS) gained +29 basis points last week causing 30 year fixed rates to decrease from the previous week.  Most of our gains occurred Wednesday afternoon after the Fed’s announcement that they would purchase $600 billion of Treasuries by the end of the 2nd quarter in 2011.  But we gave up much of our gains by Friday’s close on the very strong employment data.