Archive for the ‘Mortgage Market’ Category

WeeklyBasis 8/20: Headline Rates vs. Reality

August 22nd, 2011 by Julian Hebron

 

Rates ended even last week, capping off a three week down trend. Below I discuss the direction of rates from these record low levels. But first, a word on rate headlines vs. reality.

Nearly all ‘record low’ rate headlines hit Thursdays. That’s the day Freddie Mac releases its weekly rate survey covering the previous week. The survey is source material for nearly all media, but the rates aren’t relevant for all homes nor borrowers.

Rate Headlines vs. Reality
Headline rates are expired by the time you’re reading about them, and here’s some other fine print most media stories don’t catch: those rates are only for loans to $417k, single family homes only, owner-occupied only, and those loans have .7% to .8% in points (aka extra fees) on top of a full set of closing costs.

So if you bought a condo with 20% down earlier this year and you’re looking for a zero-cost refinance of your $475k loan, your rate quote as of Friday was about .48% higher than the headlines you were reading. Here’s the fine print.

Rates change throughout each day as mortgage bonds trade, and a rate quote is based on your profile and your property profile, so it must come from a lender to be specific.

Double-Dip Fears Fuel Low Rates
Last week’s U.S. economic data fueled double-dip recession worries. Fed manufacturing reports (1, 2) confirmed a three-month slowing trend, existing home sales posted an eight month low, and jobless claims again broke above 400k after just one week of improvement.

Business and consumer inflation (PPI and CPI) were both a bit hotter, but not enough for alarm bells, especially when lower inflation readings from the manufacturing surveys suggest PPI will moderate.

Rate Preview August 22-26
Weak data suggest rates shouldn’t spike next week, but the “here and gone” rate lows will continue as mortgage bonds battle tough price ceilings. Rates drop when bond prices rise, and every time mortgage bond prices touch highs in the past two weeks, they quickly retreat, sending rates higher.

To manage this volatility, you need to set a rate target you can’t or won’t go below, then watch the market to see if it goes lower. BUT you should give your lender a standing order to lock that rate if it’s ticking up—which happens in minutes, not days.

Here’s a case for why rates might go even lower next week, but this is rooted primarily in Treasury trading, not mortgages. So the safe bet is the standing lock order recommendation above.

Economic calendar highlights next week include July New Home Sales Tuesday, FHFA home prices Wednesday, jobless claims Thursday, and the second of three 2Q2011 GDP readings Friday. The first reading was an anemic 1.3%.

We also have $99b in Treasury auctions as follows: $35b 2yr Notes Tuesday, $35b 5yr Notes Wednesday, $29b 7yr Notes Thursday.

Stay tuned daily on Twitter and Facebook.

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WeeklyBasis 8/13: Stunning Week, Record Rates

August 17th, 2011 by Julian Hebron

Rates dropped .125% last week continuing an unpredictable three-week down trend. The first catalyst was awful GDP data two Fridays ago, then last Friday began with a questionable jobs report and ended with S&P downgrading the U.S.

This picture I took best describes last week’s stunning volatility. Net result: mortgage bonds up, rates down. But not without wild swings that make advising clients an extreme sport. And it makes headlines of record rates deceiving. They’re here, then they’re gone. Below is last week’s recap, next week’s preview, and rate locking tips.

Why Rates Are Down
Rates drop when mortgage bonds rise on rallies, and that trend began after the July 29 2Q2011 GDP report showed weak 1.3% growth and 1Q was cut from 1.9% to 0.4%.

The week of August 1 showed manufacturing slowing, weakness in the jobs report fine print, Europe’s debt crisis spreading to France and Italy, and Washington’s long-awaited budget deal did nothing to support growth or address long-term issues.

So S&P downgraded the U.S. Friday, August 5 as an indictment of paralysis in Washington, and stocks best tell how that played out from August 8-12:

The Dow closed down 634, up 429, down 519, up 423, up 126.

Mortgage bond markets swung similarly, and just like stocks were net down, bonds were net up. Bond yields (or rates) move inversely to price, and this is why rates ended down.

The week of August 8 brought mildly encouraging data: jobless claims below 400k (at 395k) first time April, retail sales up most in four months. But this was overshadowed by Europe’s debt crisis and a Fed policy announcement explicitly stating they’d keep overnight rates near zero “at least through mid-2013″ and remain open to more quantitative easing—bond buying to lower rates.

That’s why cautious bets on bonds won the week and kept rates low.

Rate Outlook August 15-19
Next week brings critical manufacturing, housing and inflation data that all impact rates.

The Fed’s August New York and Philadelphia area manufacturing surveys are Monday and Thursday. New York manufacturing contracted last two months, and Philadelphia manufacturing rebounded in July (+3.2) from a big contraction (-7.7) in June. Rates will stay low if these numbers are weak.

Housing starts and building permits for July are Tuesday and existing home sales for July are Thursday. June housing starts were highest since January, but they’re still drastically off long term trend. June existing home sales were at at 7-month low. Again rates will stay low if these trends continue.

July producer and consumer inflation are Wednesday and Thursday. These figures are all within the 1-2% no-inflation-threat range, and there is no reason to expect surprises. Rates will most likely be neutral on this data.

We may see some unwinding of the post-Fed, post-downgrade bond rally that could push rates up slightly. But it will come down to these reports and developments in Europe.

Volatility & Rate Locks
As we enter further into uncharted economic territory, market volatility will continue and so will wild daily/weekly swings in mortgage rates.

When locking rates in this environment, remember that rate locking strategy isn’t like investing strategy. With investing, you stick with a plan and adjust slightly through short-term bumps. With rate locking, it’s a trading exercise.

You have to pick a high-end target that you can’t or won’t go above, and be ready to act whenever it’s there.

Since rates change throughout each trading day, make sure your mortgage advisor knows your target so they can lock your rate at a moment’s notice as markets dictate.

Keep your seatbelt on, and stay tuned:

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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WeeklyBasis: Rate Impact of S&P Downgrade (part 2)

August 10th, 2011 by Julian Hebron

Rates dropped .125% last week after a string of bad economic reports. Rates touched all-time lows momentarily Thursday after a six-day mortgage bond rally, then retreated (but held 2011 lows) after a less bad July jobs report Friday. After Friday’s close, S&P downgraded U.S. debt one notch from AAA to AA+ with the promise of further downgrades if politicians can’t get our fiscal priorities straight.

The quote of a rough market week came Friday—before the open and before S&P’s downgrade—from Crossing Wall Street: “All across the board, investors are dumping risk and hoarding security. Fear is giving greed a major beat-down.” Now the question is: will that theme hold for bond/rate markets next week?

That statement continued to be true for stocks in a highly volatile session Friday, but the “hoarding security” theory broke down for bonds: mortgages (FNMA 4% coupon) were down a massive 100 basis points. Rates rise when bond prices fall like this and that’s why rates went back up Friday.

Then came the S&P downgrade.

Lots of hysteria this weekend about an event that had been telegraphed for months. Not to mention that bond markets measure the creditworthiness of Treasury securities every day regardless of what a ratings agency says.

There’s been a theory for weeks that U.S. debt—which includes Fannie and Freddie mortgage bonds since the government backstops these agencies—is a safe haven for its own downgrade because it’s the least bad option.

Treasury and mortgage bonds have been in high demand since last year on fears about Europe’s own debt crisis, and weak U.S. economic data. This is why rates are low. Again, when bond prices rise on demand, yields (or rates) drop.

There’s nothing fundamentally different about the global economic picture since S&P’s downgrade. If anything, deteriorating U.S. economic data would suggest continued high bond prices and low rates.

Next week’s economic calendar is pretty light, with the highlights being a Fed meeting and press conference Tuesday and $72b in new Treasury debt auctioned into markets as follows: $32b 3yr Notes Tuesday, $24b 10yr Notes Wednesday, $16b 30yr Bonds Thursday.

I think fear will continue to overpower greed next week (rates down), and I also think the downgrade could adversely impact bond market sentiment (rates up). So rates will continue to be volatile, but I don’t see a massive bond selloff and rate spike on downgrade news.

That said, nobody truly knows because we’re in uncharted territory. It’ll be another wild week and we’ll have to take it day to day, starting Monday morning. You can follow along on Twitter or Facebook.

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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WeeklyBasis 7/23: Rates & Debt Ceiling (part 2)

July 25th, 2011 by Julian Hebron

Rates rose .125% last week, on target with last Sunday’s WeeklyBasis prediction that “rates should be even to up slightly.” As of Friday evening, there’s no budget deal in Washington so politicians will continue work on a budget compromise, which if it comes, will enable the debt ceiling to be raised.

August 2 is when the U.S. will reach its borrowing limit, so the target resolution date is next week. Short-term reactions have been higher rates for a budget deal and lower rates for no deal. Below is an explanation on why, and an outlook for the coming market week.

Preview of July 25-29 Week
The economic calendar begins Tuesday with May’s S&P Case Shiller home price report, the most market-credible of all monthly home price reports.

Last month, Case Shiller for April showed home prices were up 0.7, the first gain in eight months, but prices were down 4% since April 2010 and still at 2003 levels. The May data are likely to show a similar trend.

Also Tuesday, we have June new home sales which are expected at 320k which is similar to the 319k from May. Again, no big improvement expected, so it’s rate neutral.

Thursday brings June pending home sales, which is a report of homes for sale that entered into contract. It’s a gauge of buyer momentum in the market. While the May pending home sales were up 8.2%, April was down -11.3%. This report is also rate neutral.

Friday is the biggest day of regularly scheduled data with the first of three 2Q2011 GDP readings. Consensus estimates call for 1.6% growth vs. 1.9% final reading for 1Q2011. Expectations are low enough to where we could have an upside surprise, and even a slight upside surprise could cause rates to rise as investors sell bonds (pushing rates up) to buy stocks.

Rate Reaction To Debt Ceiling Saga
It’s all going to come down to the budget and debt ceiling debate. As discussed last week, there are two rate scenarios on the budget/debt ceiling negotiations:

(1) One theory says rates will spike if no debt ceiling deal is reached because ratings agencies will downgrade U.S. debt. But U.S. Treasury and mortgage debt is still the preferred safe haven trade in a questionable global debt picture. So ironically, Treasuries and mortgages could rally short-term in a debt ceiling impasse, pushing rates down.

(2) Stocks will rise more if a debt ceiling deal is reached because it removes a key short term uncertainty factor, and rates would rise as Treasuries and mortgages sold on stock strength. It’s been a strong earnings season, and also stocks reacted positively last week to progress on Europe’s debt problems: Dow up 1.6% to 12,681, S&P 500 up 2.2% to 1345, and Nasdaq up 2.5% to 2858.

Being politically optimistic, the most probable scenario is number two. Combine this with rate-neutral housing data next week and possible (albeit minimal) upside surprise on GDP next week, and my outlook holds for a second week: rates even to up slightly.

But politics can change quickly as we saw Friday, so here’s how to manage rate volatility.

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WeeklyBasis 7/17: Rate Reactions To Debt Ceiling

July 18th, 2011 by Julian Hebron

Rates were down slightly last week but there’s reason for caution coming into this week: there’s no deal yet on U.S. budget proposals and until there’s a budget agreement, the U.S. debt ceiling won’t be raised.

The U.S. will reach its borrowing limit August 2, but it takes time to process legislation and money flows needed to raise the debt ceiling, so the target deadline is to agree on a budget by this Friday, July 22. If a deal is reached this week (or next), stocks are likely to rally and bonds would sell, pushing rates up. Below is a recap of last week and preview of this coming week.

Recap of July 11-15 Week
Rates dropped last week on weak economic data: Retail sales down, trade deficit spiked, consumer sentiment plummeted, manufacturing (Empire State) weakened, consumer and business inflation flat, European bank stress tests showed vulnerability, and Moody’s and S&P threatened to downgrade U.S. credit ratings if lawmakers don’t raise the debt ceiling.

During his two-day Congressional testimony last week, Fed chairman Ben Bernanke first said Fed would do whatever’s necessary to help fragile recovery, then took a harsher stance so markets don’t make false assumptions about more quantitative easing.

Here’s every economic stat from last week broken down by day—and we do this every day.

Preview of July 18-22 Week
There are key housing reports throughout this week: July homebuilder confidence Monday, June housing starts and June building permits Tuesday, June existing home sales Wednesday, and May FHFA home prices Thursday—this includes homes that have Fannie/Freddie mortgages.

We also have usual mortgage applications volume Wednesday which has been weaker lately and could mean we see weaker home sales (also Wednesday), a Fed survey of manufacturing activity in the Philadelphia area Thursday, and weekly jobless claims Thursday.

Also the debt ceiling budget battle will be center stage. There are lots of theories on market reaction to this, but there are two main views worth sharing:

(1) One theory says rates will spike if no debt ceiling deal is reached because ratings agencies will downgrade U.S. debt. But U.S. Treasury and mortgage debt is still the preferred safe haven trade in a questionable global debt picture. So ironically, Treasuries and mortgages could rally further in a debt ceiling impasse, pushing rates down.

(2) As noted above, stocks could rise if a debt ceiling deal is reached. If so, rates would rise as Treasuries and mortgages sold on stock strength.

The most probable scenario is number two. Combine this with next week’s housing data which should keep rates flat because the data are likely to reveal continued economic headwinds, and rates should be even to up slightly.

Volatility will continue and it’s hard to predict rates, so remember last week’s discussion on handling rate volatility.

And here’s all you may need to know on timing a debt ceiling deal.

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WeeklyBasis 7/10: Locking Rates In Volatile Markets

July 11th, 2011 by Julian Hebron

Rates were down .125% to end last week, regaining half of the .25% rise from the week before. As the last WeeklyBasis noted: “Jobs would have to be worse than already-low expectations” for rates to improve, and that’s exactly what happened, with only 18k non-farm payrolls created vs. 110k expectations.

Safer assets like mortgage bonds are again rallying on an increasingly anxious market outlook, and rates drop when bond prices rise on rallies. Below is this week’s rate outlook, and tips on locking rates in this volatile environment.

Why Rates Dropped July 5-8
As the U.S. runs low on fiscal and monetary stimulus options, all asset classes including mortgages are getting even more volatile. When economic data are even slightly better, mortgage bonds sell and rates rise. Worse data have the opposite effect.

As daily data are released, rate markets swing wildly. Here’s an example of the last two weeks:

Early last week, rates were holding onto increases from the week of June 27 to July 1 when stocks rallied and bonds sold (pushing rates up) as Greece politicians agreed on budget cuts and tax hikes needed to secure the next payment in their bailout. But July 5, Moody’s cut Portugal’s debt to junk, reminding markets that the European debt crisis is far from over, and this helped rates drop.

As last week moved on, rate hikes in China and Europe, plus strong U.S. jobs data from private payroll provider ADP caused rates to rise again.

Then mortgage bonds (and rates) were relatively steady after the Institute of Supply Management reported that June non-manufacturing activity was similar to May, and inflation is moderating in the U.S. non-manufacturing sectors.

And of course Friday’s BLS jobs report noted above caused a massive mortgage bond rally which caused rates to end net down .125%.

Interestingly, sentiment about the ISM non-manufacturing report has now changed to more negative.

Outlook for July 11-15 Week
Next week’s economic calendar highlights include consumer and business inflation, retail sales, New York region manufacturing, and $66b in Treasury auctions as follows: $32b 3yr Notes 7/12, $21b 10yr Notes 7/13, $13b 30yr Bonds 7/14.

Wednesday, we’ll see the release of the June 22 FOMC meeting minutes, and now that Fed chairman Ben Bernanke is doing post-FOMC press conferences, these minutes are less likely to reveal anything markets haven’t yet heard.

More relevant to markets will be Bernanke’s semiannual Congressional testimony on the state of U.S. monetary policy Wednesday and Thursday. We can expect that he’ll be grilled on dismal U.S. employment conditions and other market moving topics.

Volatility and Rate Locks
Rates are likely to hold current levels next week because good economic news is fleeting right now.

As we enter further into uncharted economic territory, market volatility will continue and so will wild daily/weekly swings in mortgage rates.

When it comes to locking rates in this kind of environment, remember that rate locking strategy isn’t like investing strategy. With investing, the goal is sticking with a plan and adjusting slightly through the short-term bumps. With rate locking, it’s more of a trading exercise.

You have to pick a high-end target that you can’t or won’t go above, and be ready to act on that whenever it’s there.

Since rates change throughout each trading day, make sure your mortgage advisor knows of this target so they can act as markets dictate.

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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Future of Mortgages, part 9: Jumbo is Back Full Force

July 8th, 2011 by Julian Hebron

Mortgage loans have three rate tiers: (1) lowest rates for conforming loans up to $417,000, (2) .125% to .25% higher than tier 1 for super-conforming loans from $417,000 to $729,750, (3) .125% to .375% higher than tier 2 for jumbo loans above $729,750.

The first two rate tiers are lower because Fannie Mae and Freddie Mac buy these loans from your lender (though you usually still get statements from lender) so lenders have built-in liquidity and less risk. The third tier is highest because these loans are ineligible for sale to Fannie/Freddie due to size. On October 1, more loans will be ineligible as the cap is reduced from $729,750 to $625,500. Time to panic? Or just a new step toward recovery?

I think it’s a step toward recovery of credit markets, and it’s a good thing because private markets must take up more slack on lending.

Fannie, Freddie, and FHA have controlled most of the home lending market since the crisis hit critical mass in 2008.

Up to that point, Fannie/Freddie conforming loans were capped at $417,000. The super-conforming loan caps of $729,750 were implemented March 6, 2008 as the crisis got worse and jumbo lending was non-existent.

Now, as part of weaning private markets off of government help (and winding down Fannie and Freddie), the Fannie and Freddie limits are being pared back slightly.

Not all the way to the original $417,000 limit. Just to $625,500.

No big deal.

Here’s what consumers must remember:

This loan limit reduction has been known and planned for throughout the mortgage industry since January.

That’s why we’ve seen the Jumbo market re-emerge since then after laying dormant during the three years Fannie/Freddie were allowing up to $729,750.

There is (and will continue to be more) reliable, competitive loan options from $625,500 to $2m.

I say this as a mortgage banker who’s watched our jumbo loan options grow rapidly in the past six months alone.

Here’s a summary on the re-emergence of jumbo as I’ve seen it in my own company during 2011:

Property types
-started with single family homes.
-now we can also lend on condos and 2-4 units

Down payment requirements
-started with 25-30%
-now 20%

Qualifying parameters (income)
-started with max 35% debt-to-income ratio
-now max 40% debt-to-income ratio
-Note: Fannie/Freddie allows up to 45% ratios

Qualifying parameters (assets)
-started with 36 months reserves required after close
-now must have 12-24 months reserves
-Note: Fannie/Freddie/FHA allow 0-6 months reserves

Qualifying parameters (credit)
-started with 740 credit score or greater
-now can lend down to 700 credit (but rates are worse)

Loan types
-started with 5yr ARMs
-now have 30yr fixed and 7yr and 10yr ARMs
-now have interest-only options on ARMs

Appraisals
-started with 2 appraisals on all transactions
-now only 1 appraisal for loans from $625,500 to $1m

Rates and fees
-started with rates .5% to .75% above super-conforming
-now that spread is .125% to .375%
-underwriting $100 more than conforming

As you can see, credit markets are regaining their risk appetite without conceding to flimsy approval guidelines of the years leading up to the crisis.

This will continue to October, and the jumbo marketplace will be better able to accommodate the reduction of Fannie/Freddie limits.

And in my view Fannie/Freddie should go back down to their single-tier limits in order for private credit markets to continue evolving.

But I don’t see that or any other meaningful movement on Fannie/Freddie until after the 2012 presidential election.

Meantime, here’s what to look for in a jumbo lender.

[This is the latest in The Basis Point's Future of Mortgages series]

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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WeeklyBasis: Rate Outlook July 5-8

July 5th, 2011 by Julian Hebron

Rates were up .25% to end last week on perception of improving situations in Greece, U.S. housing, U.S. jobs, and U.S. manufacturing. This week is light on economic data (calendar below), and jobs reports will be the highlights.

Rates are slightly lower to begin this week as mortgage bonds rally to regain some of last week’s losses—rates drop when bond prices rise on a rally and vice versa. Below is last week’s recap and this week’s outlook.

Why Rates Rose June 27 to July 1
(1) Greece passed budget cuts and tax hikes needed to secure the next payment in its bailout package granted last May. Greece is prolonging the inevitable with their bailout, but short-term, markets see this austerity vote passage as positive.

(2) S&P reported that home prices gained 0.7% in April, the first monthly gain in eight months. Markets generally ignored the fact that home prices are still down 4% year-over-year.

(3) The National Association of Realtors reported that May Pending Home Sales gained 8.2% in May and are up 13.2% since May 2010. Pending home sales measures new contracts homebuyers have entered into, and there’s no guarantee they’ll close. But again, markets are keen on the simplest bits of good news.

(4) 2yr, 5yr, and 7yr Treasury auctions were all met with weak demand, which rattled mortgage bond markets as well.

(5) Jobless claims were 428,000 for the week ended June 25, down 1000. Same story here, the short-term reaction is good for stocks, bad for bonds. But claims are still above the 400,000 mark, which is a weak market.

(6) The Institute for Supply Management (ISM) reported Chicago area manufacturing index was 61.1 for June, higher than May and above expectations. Also the ISM June Manufacturing Index, which is a national reading, was 55.3 vs. 53.5 in May and also beat expectations. Readings above 50 signal expansion.

Outlook for July 5-8 Week
It’s all about jobs this week with private payroll provider ADP’s June jobs report Wednesday, weekly jobless claims Thursday, and the BLS jobs and unemployment rate reports Friday.

We also have the ISM non-manufacturing services index for June on Wednesday.

Lots of rate damage done last week with mortgage bonds (FNMA 4% coupon) dipping below the 200 day moving average (DMA) to end Friday. But this morning, bonds are up 31 basis points and touching the 200 day line again.

Bonds would have to break above this 200 DMA plus the 50 DMA which is another 29 basis points above current levels. Jobs would have to be worse than already-low expectations for this to happen.

On the downside, mortgage bonds have 82 basis points to drop to hit their next level of price support at the 100 DMA, which would push rates up about .25%.

For that to happen this week, jobless claims and jobs lost would have to rise, and ISM Services data would have to beat expectations.

Volatility of the past two weeks shows markets reacting strongly even when data is slightly above or below expectations.

We can expect that to continue, and borrowers should be ready to lock rates or have a strong stomach.

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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WeeklyBasis 6/26: Greece Problem in Simple Terms

June 30th, 2011 by Julian Hebron

 

Last Saturday’s WeeklyBasis said rates should be even but could rise slightly on Greece debt crisis progress and Bernanke confirming a June 30 end to QE rate stimulus. Rates actually dropped slightly as Greece worries persist, Bernanke threw up his hands on the jobless conundrum, and weak economic data prevailed: 1.9% GDP for 1Q2011, weekly jobless claims up 9000, FHFA year-over-year home prices -5.7, and a 6mo low for existing home sales.

Rates closed Friday just above the 2011 low set June 8, and below is a preview of this week’s market activity which should keep rates in this range.

Monday is the Fed’s preferred consumer inflation measure. May’s Personal Consumption Expenditures index should confirm flat consumer inflation with and without food and energy prices included. Rates even or better.

Tuesday is the April Case Shiller home price report, which markets consider the most broad home price report. The March report confirmed home prices fell to an eight year low, and home sales reports of recent months don’t suggest the demand that will push any upside price surprise for April. Rates even or better.

Wednesday brings the latest on home sales. NAR’s May Pending Home Sales reports on homes entered into contract during May and are expected to close. No positive surprises expected from this report, and even if there was, it’s still not quite the market moving report that last week’s new and existing closed sales reports are because these new contracts can still not close. Rates even.

Also Tuesday and Wednesday bring $64b in new Treasury supply to bond markets with $35b 5yr Note and $29b 7yr Note auctions respectively. New supply can rattle mortgage bond investors but probably not this week since QE2 finishes up and other data outweigh this as a concern. Rates even.

Thursday and Friday bring June’s regional Chicago and national manufacturing survey reports respectively. Both surveys are done by the Institute for Supply Management and give markets current projected activity levels plus some inflation information. Activity and inflation has backed off the past two months, and June surveys are likely to show the same. Rates even or better.

All week Greece will be a hot topic as their government resumes debates Monday over a five year, $39.7b tax hike and spending cut plan needed to tap into their $156b EU/IMF bailout funds for debt payments due next month.

Even though Greece would default without these funds, the debate rates because citizens are facing both higher taxes and pay cuts. Reuters reports that many Greeks have already lost jobs or seen their real income decline by nearly one-fifth over the last two years.

The unions who organize massive protests to apply pressure during government deliberations have a point when they argue that more austerity will make matters worse.

Still, if an austerity resolution isn’t reached, the contagion could more quickly spread to other vulnerable Euro countries. If more austerity comes, there will be more chaos on Greek streets.

The net for U.S. rates next week is even to better. Stay tuned on daily developments.

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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WeeklyBasis 6/18: Two Reasons Rates Could Rise

June 28th, 2011 by Julian Hebron

 

Rates ended last week even after heavy volatility. Tuesday, rates rose as mortgage bonds sold sharply on less bad U.S. retail sales and a 5.5% spike in Chinese inflation since May 2010. But as the week progressed, bonds rebounded and rates improved on tame U.S. core inflation and contracting U.S. manufacturing activity.

Rates also benefitted as investors concerned about Greek debt contagion sought the relative safety of U.S. mortgage bonds. Investors will continue to watch Greece closely in the next few days. Rates will likely remain even next week, but there are two things that could push rates up:

(1) If markets perceive forthcoming Greece plans as good for stability, rates could rise a bit as bonds sell and stocks rally.

(2) The Fed will end a two-day rate policy meeting with a press conference Wednesday, and while their message of near-zero overnight rates won’t change, Bernanke may issue a more firm reminder that the Fed is done buying bonds when QE2 ends June 30. If so, rates could rise a bit as mortgage bond investors take some profit.

May’s existing and new home sales are Tuesday and Thursday, and there’s not much evidence to suggest material improvements that would push rates up.

Also the third of three 1Q2011 GDP readings is due Friday which shouldn’t be too much different from the revised-down second reading of 1.8% vs. 3.1% from 4Q2010. This will be neutral to better for rates.

Stay tuned, and hope you have a great week.

Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
cell: 415.250.1050
eFax: 415.701.2688
About: www.rpm-mtg.com/julian
Blog: www.TheBasisPoint.com
DRE #01376428, NMLS #313803

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