Katy's Korner

RATE SNAPSHOT

Rates have dropped steadily since May 6 and hit two new record lows in each of the last two weeks. Rates for Conforming loans up to $417k, Super Conforming loans $417k-729k by county, FHA loans, and jumbo loans above $729k are below. Also below is a chart showing Conventional (non FHA) 30yr Fixed mortgage rates from 1971 to Present. The all-time record low of 4.58% with .7% in points was set the week ending July 1. The fine print on rates used in the chart is here: 

In an unprecedented rate stimulus exercise from January 2009 through March 31, the Federal Reserve bought $1.25 trillion in mortgage bonds. Rates are tied directly to mortgage bonds, so when those bond prices rise on buying rallies, yields (or rates) drop. Rates were already near all-time lows as of March 31 when the Fed ended its program.

Then a week later on May 6, Greek parliament voted on austerity measures to increase taxes and cut spending (including wage cuts for about 20% of their workforce), and rioting ensued. That caused a brief 1000 point drop in the U.S.’s Dow stock index, and despite recovering from lows that day, stocks (again using the Dow as a benchmark) have lost 1240 points, or 11.35%. European bonds have taken big losses as the debt crisis spread beyond Greece. And here in the U.S., weaker new and existing homes data in the past 2 months, and June’s weak employment report has also caused market participants to question the strength of the economic recovery. 

The end result is heavy buying of Treasury bonds and mortgage bonds since they’re both considered the safest investments relative to other options globally. Mortgage bonds have steadily risen from Fed-induced March 31 highs to staggering new heights, which is why rates are down.

This report has maintained a rate lock bias since mid-May for current homebuyers and for homeowners who have borrower AND property profiles that qualify for refinancing. It seems improbable that current levels of mortgage bonds can hold, and if they break lower, rates will rise. There are no economic reports of particular note for the holiday shortened week beginning Tuesday, July 6. 

In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting

http://bit.ly/9jL8nI. The fine print on the rates in this WeeklyBasis report is at the bottom of the report. www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

Zero-point rates on 30yr fixed Conforming loans (up to $729k) ended last week at their lowest levels since official records began in 1971, and Jumbo 30yr fixed loans (above $729k) touched the low-5% range. By the time last week’s rate levels are officially announced by Freddie Mac on May 27, rates are likely to be higher. Below is a recap of how rates got here and rationale for why rates may rise next week.

WHY RATES & STOCKS HAVE DROPPED
The Dow dropped 1000 points before closing down 348 points on May 6. The press has dubbed it a “Flash Crash,” but let’s go beyond the clever label to understand what happened that day, why the Dow is down 675 points since that day, and why mortgage rates are down .25% since then.

MAY 6 STOCK CRASH
Europe’s troubles started with Greece facing default on it’s bonds due to insufficient tax revenue, so they were granted a $140b bailout package by the IMF and fellow members of the European Union. As a condition of the bailout, they were forced to cut salaries of Greek citizens and raise taxes, measures which Greek parliament voted into law May 6. The vote caused rioting and death on the streets near the Greek parliament in Athens, and it tipped off the so-called Flash Crash here in U.S. stock markets.

MAY 9 TO PRESENT
U.S. and non-U.S. stock markets continued down Friday May 7, on fears that more EU countries were in similar trouble. On Sunday May 9, the EU announced a nearly $1t bailout (similar to the U.S. TARP program) to support the debt of all member countries. But since then, investors have been unconvinced, so they’ve been heavily shorting European stocks and government bonds even if they don’t own the securities. This ‘naked shorting’ was banned by Germany last week to little effect, as the market still finds ways to punish securities it deems overvalued.

RATE IMPACT
As investors have sold out of (or shorted) stocks and European debt, they have purchased safer U.S. Treasury and mortgage bonds, driving prices on both to 2010 highs. When mortgage bond prices rally like this, yields (or rates) drop, and that’s exactly what has brought us to record lows on conforming 30yr fixed rates. We touched these same record lows once in April 2009 and again in November 2009, but these three dips are the lowest rates have gotten since official records began in 1971.

WHY RATES MAY RISE MAY 24-28
Whenever there’s talk of a “stock market crash” or “record low rates,” we can be sure volatility is the central theme. As such, those phrases can quickly change to “rally” or “rate spike.” On top of ongoing Eurozone issues and U.S. regulatory reform, there’s a full slate of economic data contributing to the volatility mix next week. The biggest market movers are highlighted below.

Tuesday is the March S&P Case Shiller existing home price report. Last month’s report showed year-over-year home prices going positive for the first time since December 2006. If this trend continues, rates would likely rise.

Thursday is the second of three Q1 GDP readings that will show us if +3.2% GDP growth holds from the first reading in April. If it does, this will solidify a third consecutive quarter of positive economic growth, fueling positive stock sentiment so bonds would sell off, pushing rates higher.

Tuesday through Friday, bond markets will get $113b in new Treasury auctions—$42b in 2yr notes, $40b in 5yr notes, $31b in 7yr notes—and this will be a big test for whether the Treasury and mortgage safe haven from Europe will continue, or new supply will spook bonds and push rates up.

Friday is the Fed’s favorite inflation measure, the Personal Consumption Expenditures Index, and also April Personal Income and Spending will show us whether consumers, who account for two-thirds of GDP, are gaining strength. Tame inflation and better spending could be a net neutral for rates.

DAILY CONSUMER-FRIENDLY COMMENTARY
In addition to this WeeklyBasis report, you can get daily updates in simple terms by visiting www.TheBasisPoint.com. You can follow using Twitter feed at www.twitter.com/thebasispoint and/or you can ‘Like’ www.facebook.com/thebasispoint and headlines will flow into your Facebook stream.

Despite a volatile week, rates were net down .125%, bringing conventional conforming rates (on loans up to $417,000) within .1% of all-time record lows. Below is a recap of last week and rationale for a rate lock bias going into next week. And don’t forget that Friday is the last day homebuyers can be in contract to be eligible for the Federal homebuyer tax credit—those in California have a new state credit with different deadlines. More on both tax credits here:

RATE FACTORS WEEK OF 4/19/10

Three factors pushing rates up mid to late last week were: (1) business inflation measured by the Producer Price Index came in at 6% year-over-year through March, and despite the much tamer 0.9% ‘Core’ number which excludes oil and food costs, bond markets saw it as cause for concern, (2) Treasury announced $129b in new bond supply being auctioned next week and supply concerns caused mortgage bonds to sell off, pushing rates up, and (3) New Home Sales surged 27% in March, positive economic news which was also a sell off signal for bond markets.

5 REASONS FOR RATE LOCK BIAS WEEK OF 4/26

(1) The Greece situation is playing out this weekend as the country explores aid options with the IMF, European Central Bank, Russia, Brazil, and China. The latest Bloomberg report says Greece needs about $60b to help cover maturing debt over the next three years. If any aid package is looking likely next week, that may hurt rates as investors move out of mortgage bonds.

(2) The Fed’s third rate policy meeting of 2010 is Tuesday-Wednesday with an announcement to follow. If rate policy announcement says anything even slightly different than their long-standing “inflation is likely to be subdued for some time” statement, rates could rise.

(3) The February 2010 Case Shiller existing home price report comes out Tuesday, and if it’s similar to January’s report showing year-over-year price declines of just -0.7% across 20 major U.S. metro areas, or if it tips over to become positive for the first time since January 2007, rates could rise.

(4) Treasury will auction $129b of new supply during the week as follows: $11b in 5yr TIPS Monday, $44b in 2yr notes Tuesday, $42b in 5yr notes Wednesday, $32b in 7yr notes Thursday. The direction of rates will depend on the reception of these auctions, but excessive supply hurts rates.

(5) Friday will be the first 1Q2010 GDP reading which will tell us whether the positive economic growth of the last two quarters will sustain itself, and to what extent. This estimate calls for +3.3%, and unless it’s significantly disappointing, markets will acknowledge this as a positive sign, and bonds would sell off, pushing rates higher.

Rate volatility will continue next week, and market outlook suggests rates could rise, so borrowers should be ready to lock rates at a moment’s notice. Below are the top 5 reasons for a rate lock bias. The largest factor pushing rates down early and late last week was the ongoing debt crisis in Greece. As bond market investors have grown more skeptical about Greece’s ability to fund their debt obligations, they have sold out of Greece and other European bonds to buy mortgage and Treasury bonds. When mortgage bond prices rise on this buying, rates drop. http://bit.ly/cgZJYE.