Archive for the ‘Mortgage Market’ Category

WeeklyBasis 12/24: Better Housing News & The Fine Print

December 27th, 2011 by Julian Hebron
 

Rates were up .125% last week, retreating slightly from record lows: 30yr single family home loans to $417k closed at 3.875%.

Below I recap last week’s good (and not so good) economic data, and preview the rate and stock week ahead. Scroll to ‘Bottom Line’ if you’re in a holiday rush. And I hope you get some time to sit back and relax this long Christmas weekend.

RECAP DECEMBER 19-23 MARKET WEEK

Homebuilder Confidence Best Since 2006: The index of homebuilder confidence rose for the third straight month in December to 21. Still a long shot from 50+ mark that signals a healthy market, but it’s the best since April 2006. Here’s how it looks 1985-Present.

Home Construction Jumps: Construction was up 9.3% in November to 685k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but highest since April 2010 when homebuyer tax credit boosted production. Excluding that one-time event, construction is highest since October 2008. Here’s the single family vs. multifamily breakdown. Building permits were up 5.7% to 681k, best since March 2010.

Existing Home Sales-Watch This Closely: November’s existing home sales were 4.42m annualized, up 4% in November and up 12.2% since November 2010. This is the highest mark in 10 months and 34% above mid-2010 low point. But NAR also revised 2007-2011 sales down 14%, tarnishing credibility of current numbers. And cancelled deals spiked again: 33% of Realtors reported at least one cancelled contract in November. Same for October, which was up sharply from 18% in September and August, and up from 9% in September 2010. I’ll be watching this EHS dataset, very interesting on many fronts.

Worst New Home Sales Ever?: November’s new home sales were 315k (annualized), 1.6% better than October, 9.8% better than year ago. This is the best since April, but well below the 700k needed for a healthy market, and 2011 looks to be the worst year ever for new home sales. Average November new home sale price: $242,900.

GDP Cut Again: The third of three GDP readings for 3Q20111 was revised down to 1.8%. Second reading was 2%, first reading was 2.5%. Like existing some sales, revisions are moving in the wrong direction.

Good News On Jobs Outlook: Claims for unemployment insurance were 364,000 for week ended December 17, down 4,000 from previous week and the lowest post financial crisis reading so far. Below 400k signals improving jobs picture and the average since 2000 is 390,000. So 1-week and 4-week numbers are trending below this long-term average: good news. More in next week’s preview below.

Inflation Flat, Again: The Fed’s favorited measure of inflation, the personal consumption expenditures index (PCE), is flat. November’s annual figures were 2.5% total and 1.7% excluding food and energy. Same story with flat monthly and annual PPI and CPI the week before last. November’s annual PPI was 5.7% total and 2.9% excluding food and energy. Annual CPI was 3.4% total and 2.2% excluding food and energy.

PREVIEW DECEMBER 26-30 MARKET WEEK

Next week’s economic calendar is light, but below are noteworthy highlights with rate impacts.

Home Prices Down Again?: Last month, Case Shiller’s September report showed home prices across 20 major U.S. metro areas were down 0.6% since August and down 3.6% since September 2010, breaking a (rather weak) five-month ’20-City’ gain streak. Tuesday’s October report will determine if the monthly figure can reclaim positive territory or not. Either way, rates won’t move much on this data.

Jobless Claims Trend: Rates didn’t rise last week despite declining jobless claims (recap above). Markets will wait for December jobs report January 6, and to see more jobless claims declines–next read this Thursday.

Pending Home Sales: Existing home purchase contracts entered into were up 10.4% in October and up 9.2% since October 2010. November figures are Thursday. This is a leading indicator of existing home sales expected to close in 60 days. But remember stat from above: 33% of Realtors are reporting cancelled existing home sales contracts. Rates don’t typically move on this report.

Stock & Bond Technicals: Looking at stocks, the S&P 500 closed at at 1265, up 3.69% on the week, ending above its 200-day moving average of 1259. Huge change from last week when it closed below 50- and 200-day moving averages, signaling a rally could continue next week. But analyst Robert Sinn warns that last week’s rally was on anemic volume and fails to meet key technical qualifiers for a run higher. As for mortgage bonds (MBS), the 3.5% Fannie Mae coupon—a key benchmark lenders use to price consumer rates—dropped 66 basis points on the week to close at 101.98. This is why rates rose .125%, and this kind of MBS drop would normally mean rates rise more but lenders held the line since MBS moves were (like stocks) on very low volume. MBS are now just 18 basis points above their 50-day moving average, a line that’s been a concrete floor of support even when stocks rally. But downside risk (pushing rates up) exists because MBS dropped below their 25-day moving average to close last week.

Bottom Line: Last week, I said “rates should be even to up .125% as MBS drop a bit and stocks rise a bit” which happened. That makes a two month roll of nailing weekly rate predictions. Now that I’ve said that, I’m sure the streak will be broken! Anyway, next week has little MBS-moving data so stock activity will drive bonds. Sentiment seems to favor a Santa rally for stocks, suggesting rates should be even to up slightly as the 25-day average on MBS is tested.

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WeeklyBasis 11/5: Rates Holding Near Record Lows

November 7th, 2011 by Julian Hebron

 

Rates were down .125% last week, ending .125% above record lows last hit October 3. But we did touch those record lows of 3.875% zero points (on single family home loans to $417k) briefly during Tuesday’s trading.

Below I recap last week, preview what’s coming next week, and remind consumers how to lock record rate lows that come and go in minutes. NOTE: Bond/rate markets closed Friday, November 11 for Veteran’s Day.

RECAP OCTOBER 31 – NOVEMBER 4 MARKET WEEK
Manufacturing: The Institute for Supply Management October manufacturing index was 50.8, with 50 as dividing line between expansion and contraction. September was 51.6. Good news: 27 months of growth. Bad news: barely growing.

Fed AND European Central Bank Meetings: No surprises from the Fed: overnight bank-to-bank rates near zero and they’ll continue reinvesting proceeds from mortgage holdings into new mortgage bonds to keep longer-term rates low. Europe’s Fed equivalent, now led by Mario Draghi, cut their one-week bank-to-bank rates from 1.5% to 1.25% to provide extra liquidity amidst debt crisis.

Jobs Report: 80k non-farm jobs were created in October. Weak report even with September revised from 103,000 to 158,000 and August revised from 57,000 to 104,000. About 2.3m jobs were created since an employment trough in February 2010, but there are still 6.47m fewer jobs than the beginning of the recession in December 2007. Over the past 12m, about 125,000 new jobs were created per month: not enough to keep pace with population growth.

PREVIEW NOVEMBER 7-11 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Greece/Europe: Rates and stocks rose after the Oct 27 EU deal saying private Greek bond investors must take 50% writedowns. This was one condition of the next EU/IMF bailout payment Greece needs within 30 days to stay afloat. Another condition is ongoing austerity: pay cuts and tax hikes. So last week Greek prime minister George Papandreou said he wanted to let his people vote on austerity measures—as though they have a choice. The result: rates dropped again as U.S. mortgage bonds rallied and stocks sold. This up-down rate (and stock) trend will continue as the Greek charade continues.

Treasury Auctions: $72 billion in new Treasury debt will be auctioned into markets as follows: $32b 3yr Notes Tuesday, $24b 10yr Notes Wednesday, $16b 30yr bonds Thursday. Demand for these auctions, especially the 10yr and 30yr maturities, can dictate the mood in mortgage bond trading, but rates should remain even on auctions as U.S. debt remains a safe haven.

Consumer/Real Estate Themed Earnings: Another big earnings week with lots reports that will give a reading on consumers and real estate, including: Priceline.com, Sotheby’s, Dish Networks, Toyota, Vodafone, Anheuser Busch InBev, General Motors, HSBC, Macy’s, General Growth Properties, Ralph Lauren, Wendy’s, Cisco, Lionsgate Entertainment, Viacom, Disney, Kohl’s, Nordstrom, DR Horton.

Jobless Claims: This is a weekly report Thursdays. Claims for unemployment insurance were 397k last week, below the 400k threshold considered to signal an improving jobs picture. Still the 4-week average is 406k, so next week would have to continue the trend. Unless Thursday’s number is meaningfully below last week’s mark, rates will be even.

Technical Trading Factors: Looking at stocks, the S&P 500 closed last week at 1253, below the 200 day moving average they topped the week before. Charts suggest a trading range of 1215 to 1285 near term. It’s a broad range but volatility this year warrants it. The theme is similar for mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets. They closed the week well above their 50 day moving average, suggesting rates could move a bit lower. But the stock/bond reverse correlation is critical here. The volatility on both sides will continue as investors shift back and forth.

Bottom Line For Rates: Going into last week I said the week would be key to determine whether rates rise near-term or hold this volatile .25%-above-record-low range we’d been in since October 7. Now, record lows (see paragraph 1) seem feasible to touch again given technical trading factors noted above. Next week is a slow economic week so Europe will be the main theme, which means continued extreme volatility. So as I’ve been saying for several weeks, read the post below to understand how to capture the lows.

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WeeklyBasis 10/29: Jobs, Fed, ECB Center Stage

October 31st, 2011 by Julian Hebron

 

Rates were even to end last week after +/- .25% daily swings, and are still up .25% from all-time record lows set October 3-4. Another huge week ahead: Fed and ECB rate meetings, October jobs report, lots more earnings, and Europe’s debt crisis slogs on.

Below I recap last week, then preview what’s coming. And please note: you can see if you qualify now for HARP II, the new refi plan for underwater homeowners, but loans won’t be made until November 15 at the earliest.

RECAP OCTOBER 24-28 MARKET WEEK
Home Prices: Case Shiller’s reported home prices rose 0.2% July to August, the fifth straight monthly gain but a tiny gain. Prices are down 3.8% since August 2010 and stuck at 2003 levels. So: Is owning a home smart?

GDP: The first of three 3Q2011 GDP readings showed the economy grew at 2.5%, compared to 1.3% for 2Q and 0.4% for 1Q.

Europe Debt Deal: Rates rose Thursday on news of the EU debt deal but reversed Friday as skepticism grows. Next week’s preview below.

Consumer inflation: The Fed’s preferred measure of consumer inflation, the Personal Consumption Expenditures Index (PCE), was within their 2% annual cap. They focus on ‘Core’ which excludes food and energy prices. From Sept 2010 to Sept 2011, all-inclusive PCE was 2.9% and Core was 1.6%. Inflation ok for now.

PREVIEW OCTOBER 31 – NOVEMBER 4 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Manufacturing: Tuesday is the Institute for Supply Management October manufacturing report. September was 51.6 with 50 as dividing line between expansion and contraction. Good news: 26th months of growth. Bad news: barely growing. Also, manufacturing is weak as measured by two other October surveys: Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48, fifth straight monthly contraction. For PA/NY surveys, 0 is line between growth/contraction. ISM shouldn’t be a blowout number so rates even.

Fed AND European Central Bank Meetings: The Fed’s meets two days with a policy announcement Wednesday. Rates dropped after their September 21 meeting because they recommitted to mortgage bond buying (not QE!). The Fed is unlikely to surprise markets, but Thursday’s European Central Bank meeting is huge: the first with new ECB President Mario Draghi (bio). His stance on ECB policy and EU debt crisis is key. Rates even to down on Fed meeting. Rates are wild card for ECB meeting.

Jobs Report: Markets expect Friday’s jobs report to show 88k-100k new jobs created in October and unemployment to hold at 9.1%. The economy added 103k new jobs in September, plus August was revised from zero to 57,000 jobs created, and July was revised from 85k to 127k. I think this one will be close to consensus. If so, rates even.

Europe Debt Crisis: Besides Thursday’s ECB meeting, there’s a G20 Summit Thursday and Friday. Both may elaborate on last week’s debt deal, which helped stocks and hurt rates. Another wild card for rates.

Corporate Earnings: Another big earnings week including reports from Pfizer, Kraft, Nissan, Honda, Comcast, Clorox, Mastercard, AIG, Unilever, Credit Suisse, Anadarko, Time Warner, News Corp, Sony, LinkedIn.

Technical Trading Factors: Last Thursday, the S&P 500 broke clearly above it’s 200 day moving average of 1274 for the first time since August 2, and closed at 1285 Friday. Also Thursday, mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—dropped clearly below the 50 day moving average they were hugging since October 7. Mortgage bonds regained much of Thursday’s sharp post-EU news losses Friday, but they’re still below the 50 day moving average.

Bottom Line For Rates: These technical factors suggest stocks and rates could start the week stable, but volatility will remain extreme as politicians and central banks hog center stage. Also the 10yr Note yield, a key benchmark for rate markets, has risen enough (now 2.32%) to create upside rate rate risk near-term. Long-term, a rate spike isn’t warranted by weak global economic conditions. But next week is key to determine whether rates rise near-term or hold this volatile-but-steady range we’ve been in since October 7, which is .25% above record lows.
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Rate Shopper Must-Read:
How To Shop For A Mortgage

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WeeklyBasis 10/22: HUGE Market Week Ahead

October 24th, 2011 by Julian Hebron

Rates dropped .125% last week but are still up .25% from all-time record lows set the week of October 3. Next week is huge for U.S. economic data, corporate earnings, and Eurozone debt crisis updates.

I’ll quickly recap last week, then preview what’s coming. Also please note: loan limits weren’t increased in Washington last week, just discussed.

 

Recap Oct 17-21 Market Week
Last week’s slight rate drop was due to mortgage bonds remaining a safe investment amidst global market uncertainty. Rates drop when bond prices rise on buying. Here are the key stats:

Weekly jobless claims were 403k, close to the 400k mark below which the job market is considered to be improving. The 4-week moving average was also reported at 403k. This is better economic news if it holds.

Consumer and producer inflation were both near the 2% Fed comfort zone: CPI 3.9% and PPI 6.9%. Even the Fed’s preferred ‘Core’ readings that exclude food and energy crept up: Core CPI 2% and Core PPI 2.5%.

Manufacturing is still weak, measured by two key regional October surveys. Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48 vs. -8.82 September, fifth straight monthly contraction. For both surveys, 0 is line between growth/contraction.

Existing Home Sales were down 3.0% in September but up 11.3% since September 2010. UGLY STAT: 18% of contracts didn’t close, same as August but up from 9% in September 2010. This was due to homes not appraising for contract price and buyers getting cold feet after inspections.

Preview Oct 24-28 Market Week
Here are next week’s economic calendar highlights with rate impacts:

August Home Prices: Tuesday brings Case Shiller and FHFA home price reports. Case Shiller was up 0.9% in July, the fourth straight monthly gain, but prices were down 4.1% since July 2010. It’s the broadest home price measure. The FHFA report only measures prices of homes with Fannie/Freddie mortgages. Annual Case Shiller figures aren’t likely to go positive, so rates even.

GDP: Thursday is the first of three 3Q2011 GDP readings. Estimates range from 2% to 2.5% economic growth, compared to 1.3% for 2Q and 0.4% for 1Q. And remember 1Q was revised down sharply along with the first 2Q release. Rates up if higher-end estimates prevail.

Consumer inflation: Friday brings the Fed’s favorite measure of consumer inflation, the Personal Consumption Expenditures Index (PCE) for September. The Fed looks for ‘Core’ PCE (which excludes food and energy prices) to be 2% or less. In August, PCE was 2.9% total and 1.6% Core. Rates up if Core hits 2% or more.

Corporate Earnings: 790 companies report earnings this week including Caterpillar, Netflix, Amazon, UPS, Ford, Boeing, Exxon, Procter & Gamble, and Altria.

Technical Trading Factors: On the stock side, the S&P 500 has traded above key overhead resistance levels and is around its 200 day moving average. On the mortgage bond side, the FNMA 3.5% coupon (that most lenders watch to price rate sheets) is just below it’s 50 day moving average. If anything, the charts look like stocks correct a bit and bonds hold.

Europe Drives Everything: Economic data and earnings will still take a back seat to Europe. This weekend, the 27 EU leaders met then the 17 Eurozone leaders met separately to discuss options. Their latest: To be properly capitalized for Eurozone defaults (my words, there was no explicit mention of defaults), European banks need about 100b euros in capital after marking their sovereign-debt holdings to market values. This estimate looks low. Let’s not forget that during testimony Q&A back in July 18, 2007, Ben Bernanke told congress subprime losses would be contained to “$50 to $100 billion,” then a few weeks later he said it could be “several multiples of that,” then one year later financial markets imploded. The same EU/Eurozone leaders meet again this Wednesday, October 26 to fine tune a plan. Markets await.

Bottom Line For Rates: Rates will be extremely volatile next week, but it’s hard to see rates spiking since European uncertainty will likely cap stock gains. Rates should trade in a +/- .125% range next week. I’m holding to my premise that rates can touch record lows as Eurozone issues play out. Here’s a MUST READ to explain this: How To Shop For A Mortgage.

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WeeklyBasis 10/15: Rates Up .375%

October 17th, 2011 by Julian Hebron

Rates rose .125% last week after a .25% climb the week before. Rates are up .375% in the past two weeks, but still extremely low. My WeeklyBasis prediction last week was even rates as markets “start with rates up slightly on perception of progress in Europe, then fade.”

It didn’t fade yet but I also noted that “rates will continue to rise and fall on each little development in the European debt crisis.” So let’s look at the latest in Europe and preview the October 17-21 week.

Recap Oct 10-14 Market Week
Overly optimistic interpretations of “less bad” news and data continue to drive trading.

Jobless claims last week were 404k, above but close to the 400k line, below which the job market is considered to be improving.

September retail sales were 1.1%, which was at the high end of expectations and the largest gain in 7 months.

Eurozone leaders are inching toward a new plan for recapitalizing banks and the bailout du jour for Greece. More below.

The result of this less bad news and data was that the S&P 500 rose squarely above it’s 50 day moving average (chart), and mortgage bonds (3.5% FNMA coupon) dropped below their 50 day moving average.

Rates rise when bond prices drop like this.

Preview Oct 17-21 Market Week
Here are next week’s economic calendar highlights with rate impacts:

Monster Earnings Week: This week is huge for earnings including reports from Apple, Microsoft, Intel, IBM, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Coca-Cola, McDonald’s, and GE. Tech companies should be ok but financials may offset. Stock momentum was strong last week, contributing to bond selling that pushes rates up. Rates could rise a bit more on better earnings.

Manufacturing Reports: The October Empire State and Philly Fed manufacturing reports are released Monday and Thursday. Both reports were down sharply last month (-8.82 and -17.5 respectively). Any improvement will be in the ‘less bad’ category, which would bring negative rate sentiment. Rates even to up.

Europe Remains Huge U.S. Rate Factor: I’ll repeat a note from last week that market optimism about Eurozone bank safety nets misses the main point: Bank liquidity moves probably won’t stop defaults, they’ll just help manage liquidity problems when defaults come—and U.S. rates would likely benefit from Eurozone defaults. This needs to play out further, but there’s still no clear evidence supporting a sustained rate spike. It might not come this week since there’s new reports of progress, but this story is far from over, and the only bright spot is low U.S. rates medium term.

Technical Trading Factors: The 50 day moving averages noted above are important because there’s still room to drop from here—enough to push rates up another .125% to .25% near term. Charts (or “technicals”) are critical but ultimately impacted by economic fundamentals, which aren’t strong.

Inflation: September consumer and business inflation reports are Tuesday and Wednesday. No strong inflation trend here, so rates even.

Housing Starts & Existing Home Sales: Housing starts have been dismal and no big change expected. Existing home sales rose 7.7% in August, a five month high, so if this turns into a two-month trend, it will provide some optimism. Rates even.

Bottom Line For Rates: Rates could rise more next week on further perception of progress in Europe and corporate earnings, but it’s still reasonable to expect another dip to record levels in the coming months as Eurozone issues play out.

Here’s a MUST READ while waiting: How To Shop For A Mortgage.

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WeeklyBasis 10/1: How To Shop For A Mortgage

October 3rd, 2011 by Julian Hebron

Rates held under 4% again last week. The link shows how rates closed Friday in the three mortgage price tiers: loans to $417k, to $625k, and to $2m.

But rates change in real time. Example: they rose and fell .25% last week as Eurozone optimism did the same and U.S. home prices, jobless claims, and GDP were first perceived positively then sentiment reversed. This extreme daily volatility won’t stop. So here’s how to shop for a mortgage.

Shop For Loan Agents, Not Rates
Every consumer shops for mortgages and they should. But this is the critical distinction: you should be shopping for the best mortgage advisor. If you have that, you’ll get the best rate.

Here’s what I see every week with shoppers focused only on rate: I quote a rate only after I’ve analyzed their entire financial profile and analyzed their home’s value and condition—also known as pre-approving them.

They’ll either tire of the pre-approval analytics or be unhappy with the rate and go somewhere else.

Then 80% of those cases come back to me because the competing rate quote was revealed to be incorrect when the other lender actually completed the client’s profile, or the home’s value/condition made the loan ineligible.

Mortgages are extremely competitive so rates and fees are generally the same with most (established, credible) lending firms.

What’s not the same lender to lender is the loan agent’s ability to advise properly, analyze borrower and property profiles, and close with no surprises.

So shop to find the lender and loan agent you feel most confident can perform on these three things.

Then work with that loan agent to pick a rate target you can’t or won’t go above, and give them a standing order to lock when they see it.

That’s for refinancers. For homebuyers, you can’t lock a rate until you’re in contract to buy a home. Once you’re in contract, the same approach applies.

Rate Targeting
Their are two reasons for the pre-approval and rate targeting tactics discussed above:

(1) A rate quote that flies through the air means nothing. If a loan agent doesn’t issue you written terms after obtaining a full profile on you and your home, then you haven’t received a quote you can count on.

(2) Rate lows are here and gone each trading day as mortgage bonds rise and fall on economic and technical trading signals. So rate targeting ensures you’ll obtain the best rate amidst all the volatility.

Your loan agent should also be able to brief you daily or weekly on the market outlook.

Rate Preview October 3-7
Here are next week’s economic calendar highlights with rate impacts:

ISM Manufacturing Index Monday: This is a national reading of manufacturing activity, and while the last two months barely crossed into positive territory in July and August (50.9 and 50.6 respectively. Above 50 is expansion, below 50 is contraction), the regional surveys out of New York, Philadelphia and Chicago haven’t shown any consistent strength in recent months. This may drop to 50 or below, and if so, rates would be even to down.

Jobs Reports Wednesday & Friday: Payroll provider reports their September jobs figures Wednesday, and the official Bureau of Labor Statistics September report comes Friday and markets are expecting to show 60k new payrolls created. This after the economy added zero non-farm payrolls in August. Plus July was cut to show 85k new payrolls instead of the previously reported 117k, and June was cut from 46k to 20k. If Friday’s report is below expectations, rates will fall.

Europe Debt Crisis: As the Economist explains this week, political paralysis in Europe is still the theme so rates will still rise and fall on each little development in Europe.

Also Ben Bernanke gives his economic outlook to Congress Tuesday, and the Fed’s Operation Twist—where they sell short-term Treasury debt and buy long-term debt—begins Monday. Bernanke will likely reiterate the Fed’s rather dismal outlook reported September 21, which is neutral to better for rates.

Bottom line: Rates are likely to remain even next week, along with some brief dips below current lows.
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Must-Read for mortgage shoppers:
Refi Roadmap: A Locked Rate Isn’t A Closed Loan

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Year-End Real Estate Outlook

September 22nd, 2011 by Katy Dinner

Beginning on October 1, Fannie Mae and Freddie Mac will cut the size of loans they purchase from lenders. This will force many future borrowers into more expensive and harder-to-get jumbo loans. According to USA Today, the Fannie Mae and Freddie Mac conforming loan limits were raised in 2008 in some high-cost housing markets to stimulate the economy. In many areas such as San Francisco, the limits rose to $729,750, and next month they will fall to $625,500.

The reduction in the conforming loan limit will hurt buyers shopping in the $800,000 and $1.2 million neighborhood the most, and so a slowdown in that segment of the market is expected. On the other hand, this change has been well publicized and some lenders, even as early as August, have already changed their underwriting guidelines to reflect this new reality. A positive change was that buyers in this segment rushed to purchase property, which in turn, helped to increase sales numbers in the last couple of months.

The Consumer Confidence Index®, which improved slightly in July, worsened in August to a reading of 44.5 (a reading of 90 indicates a healthy economy), in reaction to pessimism about the job market and political wrangling over the debt ceiling. Of note, the decline in confidence in August was underway before the S&P downgrade of the U.S. down one notch to AA. Still, based on these factors, consumers are expected to continue being very vigilant about what they purchase, and spending rather cautiously. 

San Francisco Association’s Market Focus report for September 2011. A report is issued each month by the Association.

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WeeklyBasis 9/18: How Europe Keeps U.S. Rates Low

September 19th, 2011 by Julian Hebron

Rates were up .125% last week, rising off record lows touched briefly the week before. Is this the start of a rising trend? Unlikely given weak U.S. economic fundamentals, but volatility will continue as markets reconcile U.S. data with Europe’s debt crisis.

Below I cover how Europe affects U.S. rates, recap rates last week and preview next week.

So far this statement from my September Rate Outlook a few weeks ago is holding true:

Given all these fundamental and technical factors, we’ll likely be in a trading range until the September 21-22 Fed meeting, with rates +/- .25% from current levels until markets can get a clear signal from the Fed and forthcoming economic data.

Rates were up last week for a few reasons:

(1) Rates rise when mortgage bonds sell, and they sold Thursday because consumer inflation was higher. Inflation makes the future income a bond pays to an investor worth less, so bonds usually sell on inflationary threats.

(2) Despite weak manufacturing activity readings, Empire State and Philly Fed surveys last week both showed inflation creeping up. Same inflation-fear theme as noted in #1 above applies.

(3) News of central banks in Europe, U.S., Japan, England and Switzerland providing liquidity for Eurozone banks was perceived as good news causing stocks to rally, bonds to sell, and rates to rise. But this isn’t good news. It’s an acknowledgement that Eurozone defaults are imminent. The move won’t stop defaults, it’ll just help manage liquidity problems when defaults come.

But rates shouldn’t spike from here because U.S. economic fundamentals don’t support it.

Jobless claims are running at a 419,500 four-week average, and have been in this range or higher for 3 years. Home sales are driven by cash buying bargain hunters and not the broader population. And last week we learned that the consumer mood about the future is the worst since 1980, which doesn’t bode well for spending.

As for Europe’s bank liquidity, money manager Comstock Partners agreed that the stock rally and bond selloff on this news was short-sighted, and reiterated key points about sustained U.S. weakness.

Net result in near- to medium-term: flight to quality will continue with U.S. Treasuries and mortgages benefitting, keeping U.S. rates low.

Next week, we’ve got August housing starts (a measure of new homes construction which has also been dismal), August existing home sales, and the Fed’s policy announcement Wednesday following their two-day FOMC meeting.

Operation Twist is a likely outcome of that meeting, which is when the Fed shifts its debt holdings to longer durations buy selling shorter-term debt and buying longer-term debt.

This could also support lower rates in the near term, as long debt prices rise and yields (or rates) drop.

But volatility will reign supreme: investors have already been buying long Treasury debt in anticipation of Operation Twist and may sell on this announcement. And from a technical perspective, mortgage bonds are clinging to the 25-day moving average with a big gap to drop to the next support level—this could bring some upward rate risk until debt markets are spooked again by the dire Eurozone situation.

Stay tuned daily on Twitter and Facebook.

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WeeklyBasis 9/3: September Rate Outlook

September 6th, 2011 by Julian Hebron

Rates dropped .125% last week. This after dropping three straight weeks beginning July 25 then staying flat two weeks. The downtrend began with awful Q2 (and Q1 revised) GDP, then a mediocre-at-best July jobs report, then S&P’s U.S. downgrade. Then rates held steady despite worse manufacturing and housing data, and resumed their drop after Friday’s grim August jobs report.

Below are details on what’s driving rates down, plus September’s rate outlook.

RECORD LOW FOR 10YR NOTE
The 10yr Note yield, a key benchmark for long rates in the economy, closed below 2% for the first time ever Friday.

A yield is a rate, and rates drop when bond prices rise on buying rallies. The 10yr Note and mortgage bonds have rallied as safe haven investments during questionable economic recovery.

The 10yr hit record levels after Friday’s jobs report showed zero August jobs created. Mortgage bonds also rallied, which is why rates fell again.

Markets interpret weak jobs data to mean low company confidence now and even lower consumer confidence going forward.

Consumer confidence and spending was picking up but got a lot worse after the debt ceiling circus in July.

And while we got a decent August ISM manufacturing report—a national reading—two important regional manufacturing reports (1, 2) have been on a three-month weakening trend.

Also last week home price data showed signs of stabilizing, with Case Shiller June home prices up 1.1% since May, the third month of gains after seven months of decline.

So there’s a hint of home price optimism, but weak new and existing home sales still weigh on housing.

This sentiment is driving double-dip recession fears, pushing investors into mortgage bonds and Treasuries, which lowers rates.

HOW LOW CAN RATES GO?
Economic data—or fundamentals—is one factor that drives trading in mortgages and Treasuries. Trading patterns—or technicals—are another.

Weak fundamentals support current high levels for mortgages and long-dated Treasuries, but technicals have been capping runs higher. For now.

Mortgage bonds (FNMA 30yr 4% coupon) first hit an all-time high November 2, 2010, one day before the Fed’s QE2 announcement, then sold off when the Fed confirmed QE2 was Treasury buying rather than more mortgage bond buying—which was the focus of QE1.

That selloff caused rates to spike: they rose .875% in six weeks.

During the run up to that—on October 8-9, 2010—30yr fixed rates (for single family home loans to $417k) were 4% at zero points.

Those were the true record lows. Despite headlines in recent weeks, rates haven’t closed a 2011 trading day at 4% zero points.

But it’s close: mortgage bonds have broken through those November 2, 2010 highs four times in the past six weeks—including last week—before retreating.

FED’S ‘OPERATION TWIST’
The Fed’s August 9 statement was open ended about future quantitative easing, which is printing money to buy bonds and lower rates. That’s contributed to this current bond rally even though Operation Twist, a different Fed strategy is likely to come before any more QE.

Speculation about Operation Twist, a Fed tactic of selling short-term securities and buying long-term securities, has also contributed to the 10yr Note rally because investors like to get in before the Fed.

They also like to get out before the Fed so investors could just as easily sell if/when Operation Twist begins, pushing yields higher.

The end result is more rate volatility.

The good news about Operation Twist is that it doesn’t require printing money like QE does. It’s about shifting U.S. debt to longer durations, much like a homeowner might switch from a 5yr ARM to a 30yr fixed while rates are this low.

It remains to be seen whether we’d get more QE, and in what form.

More Treasury-focued QE would likely cause rates to spike like they did in late-2010 because it would push money into stocks. And there’s been no indications about mortgage-bond-focused QE.

SEPTEMBER RATE OUTLOOK
Given all these fundamental and technical factors, we’ll likely be in a trading range until the September 21-22 Fed meeting, with rates +/- .25% from current levels until markets can get a clear signal from the Fed and forthcoming economic data.

PREVIEW FOR SEPTEMBER 6-9
Next week’s economic calendar is slow with August ISM non-manufacturing Tuesday and weekly jobless claims Wednesday as the highlights.

We’ll also get more uncertainty out of Washington as Congress and the White House politicize jobs up to and after Obama’s jobs speech Thursday.

Stay tuned daily on Twitter and Facebook.

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Posted in by Julian Hebron, Mortgage Market, National Housing News | No Comments »

WeeklyBasis: Preview Of August 29 Rate Week

August 29th, 2011 by Julian Hebron

Week-over-week, rates are even. But they’re slightly higher this morning than Friday as stocks extend Friday’s gains. Below is this week’s economic snapshot, click image for details. So far today we’ve had consumer spending and inflation as well as pending home sales. Spending was rebounding early summer but has backed off in past two weeks, and pending home sales (homes for sale that went under contract) were down in July.

Highlights for the week include tomorrow’s Case Shiller June home prices, Thursday’s August ISM manufacturing index, and Friday’s August jobs report. May posted a second straight monthly home price gain after seven months of decline, so stocks and rates would likely rise if the winning streak continues. Manufacturing has weakened significantly in recent months measured by regional Fed surveys, so ISM will confirm if that trend continues—rates would hold lows on continued weakness. July showed 117k new payrolls created and estimates call for 75k on Friday. If it’s more than 75k, rates would rise as bonds sell on broader market optimism. Overall, it’s going to be another volatile week.

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