Posts Tagged ‘julian hebron’

WeeklyBasis 6/12: Another New 2011 Rate Low

June 13th, 2011 by Julian Hebron

Rates set a new 2011 low Wednesday, June 8 then rose slightly as mortgage bonds sold off of overbought levels—rates rise when bond prices drop in a selloff. Still, rates ended the week very low as uncertain U.S. recovery drives investors into bonds.

Rates dropped early last week because: (1) a weak jobs report weighed on markets, (2) bonds liked the 10yr and 30yr Treasury auctions, (3) Bernanke said recovery is “frustratingly slow,” (4) jobless claims rose. Below is a preview of next week’s data and rationale for why rates should be even to slightly down.

It’s a big week for measuring the strength manufacturers and home builders, the mood of consumers, and the level of business and consumer inflation.

Consumer mood: Monday is May retail sales, Thursday is weekly jobless claims, and Friday is June consumer sentiment. Retail sales will likely be flat, and consumer sentiment may improve a bit as gas prices have come down. Net neutral for rates.

Manufacturing activity: May’s manufacturing surveys showed weaker activity and higher prices paid. Wednesday and Thursday are June New York and Philadelphia area manufacturing outlook surveys, and it’s unlikely that both surveys will show markedly increased activity and relief from rising prices. Bonds rise, rates drop.

Homebuilder activity: Wednesday is the June National Association of Homebuilders housing market index and Thursday is May housing starts and building permits. Theses numbers have been disappointing and no new evidence suggests a meaningful improvement. Bonds rise, rates drop.

Inflation: Tuesday and Wednesday are May Producer and Consumer Prices, and while the debate always rages that food and oil prices are an issue, bonds are unlikely to trade that belief next week, especially since oil dropped in May. Neutral to better for rates.

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 Julian D. Hebron
Vice President, Mortgage Consultant
RPM Mortgage
1400 Van Ness Avenue
San Francisco, CA 94109
office: 415.701.2638
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Rates Up On China Inflation Threats, Better U.S. Jobs Outlook

December 2nd, 2010 by Julian Hebron

Stocks are rallying and bonds are selling off on three events today that signal improving economic conditions and inflation pressure. Rates rise when bond prices drop in a selloff. Stocks are way up (Dow +228) and bonds are way down (3.5% 30yr FNMA -72 basis points) on better than expected jobs growth numbers from payroll provider ADP, very strong Chinese manufacturing data, and European central bank president Jean Claude Trichet saying that they’d step up crisis prevention measures as needed.

Trichet’s remarks are temporarily countering negative European sentiment that was causing U.S. mortgage bonds to rally. ADP signals an improving economic picture for now: ADP data showed private sector added 93,000 jobs in November, the 10th straight monthly gain, and the biggest monthly gain in 3 years—which means Friday’s official Bureau of Labor Statistics jobs report could also be better (although ADP is not a very reliable predictor of BLS data). China’s manufacturing strength is the latest reminder of inflationary pressure and imminent rate hikes for that region, which all global bond markets are wary of.

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WeeklyBasis: Give Thanks Rates Haven’t Risen More

November 22nd, 2010 by Julian Hebron

Rates rose .375% the week of November 8 and held this same level to end last week. As noted in the last WeeklyBasis, this means a borrower pays about $109 more per month on a $500,000 loan.

Rates have risen because mortgage bond markets were expecting the Fed to say on November 3 that they’d buy more mortgage bonds. But the Fed committed only to buying Treasuries, and mortgage bonds sold off as a result. When mortgage bond prices drop in a selloff, rates rise. Below is a preview of the short but incredibly volatile Thanksgiving rate week: the upward rate trend is likely to continue.

Tuesday’s three key reports and rate impacts:

(1) Second of three GDP readings for 3Q2010. The first reading showed the economy grew at 2% in 3Q vs. 1.7% from 2Q. If GDP goes up or even if the contribution of consumer expenditures goes up, rates will rise.

(2) October Existing Home Sales from the National Association of Realtors. The September report showed a 10% increase. This may be net neutral for rates because investors will hold out for November 30 Case Shiller home price report.

(3) Minutes from the November 3 Fed meeting are released where markets will see if there was any extra debate about mortgage rate support—if not, rates will rise.

Wednesday’s three key reports and rate impacts:

(1) The Fed’s favorite measure of inflation, Personal Consumption Expenditures Index, will give markets another October inflation reading. This follows last week’s readings where consumer (CPI) inflation was neutral and business (PPI) inflation was up. Rates will rise if PCE Index is higher.

(2) Personal Income & Spending: Another measure of wage inflation and consumer strength. Most likely net neutral for rates because wages probably won’t move notably.

(3) October New Home Sales: As with Existing Sales, this number was up a lot, 6.6%, in September. This is probably net neutral for rates as this number eases off for October.

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WeeklyBasis: Alarm Bell, Rates Are Up .375%

November 14th, 2010 by Julian Hebron

Perhaps it’s early to ring alarm bells when rates are still in the 4s, but they’re up .375% since October 7-8, which means a borrower pays $116 more per month on a $500,000 loan.

Back then, mortgage bonds hit record price levels on rumors the Fed would announce billions more in mortgage bond buying to keep prices high and yields (or rates) low. But the actual Fed news on November 3 was that they’d only buy Treasuries and no mortgages. Buy the rumor, sell the news. Cliche for good reason: it’s exactly what happened.

That and mortgage bonds got spooked this week by hot Chinese inflation and a downgrade of U.S. debt by a top Chinese ratings firm. Here’s what they said about the Fed’s heavy bond buying to lower rates (known as Quantitative Easing): “in the long run, it will be proven to be a practice resembling drinking poison to quench thirst.

Cynical words on the U.S. devaluing the dollar by printing money to buy bonds. But whether one agrees with the Fed or not, let’s understand their theory: they think low rates will trigger economic growth and then inflation. Markets will react to that inflation long before the Fed does, bonds would sell off, and rates would rise.

The next inflation readings come Tuesday and Wednesday with business and consumer inflation respectively. We also have October retail sales Monday, key manufacturing activity reports Monday and Thursday, and housing reports Tuesday and Thursday. There will also be lots more quantitative easing chatter with eight public speeches throughout next week by senior members of the Fed’s rate policy committee.

So here’s an alarm bell for you: Markets trade while economists and Fed bigwigs chatter, and the record low rate trade may have already happened.

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WeeklyBasis: Is Economy Weak Enough For Rates To Go Even Lower?

August 30th, 2010 by Julian Hebron

Jumpy Rate Market Response To GDP & Home Sales Reports

Rates dropped 0.2% early last week then rose Friday to end the week even. The $109b in Treasury auctions throughout last week caused mortgage bonds to sell off slightly, and July’s record low New Home Sales (down 32.4% year-over-year) and Existing Home Sales (down 25.5% year-over-year) helped mortgages rally— rates rise on bond selloffs and drop on rallies. But then two factors caused a huge 59 basis point selloff Friday:

(1) The second of three 2Q2010 GDP readings showed the economy grew at 1.6% versus expectations of 1.4%. This was a big drop from both the first 2Q reading of 2.4% and the final 1Q reading of 3.7%. Normally economic weakness of this magnitude would cause a mortgage bond rally, bringing rates down. But the opposite happened because traders didn’t think the 1.6% number was weak enough.

(2) St. Louis Fed President and voting FOMC member James Bullard told CNBC that he thinks the Fed has “done as much as we’re going to do” in supporting the mortgage bond market. Remember: the Fed bought $1.25 trillion in mortgage bonds from January 2009 to March 2010, which has been the largest contributor to low rates since credit markets froze in 2007. Mortgage traders take Bullard’s comments seriously because, until now, Kansas City Fed president Thomas Hoenig has been the only FOMC member voting for tighter rate policies.

Rate Factors Week of August 30

Next week is packed with data: July consumer inflation, income and spending Monday; June S&P Case Shiller Home Prices, consumer confidence, and minutes from the August 10 Fed meeting Tuesday; payroll provider ADP’s jobs report Wednesday; June Pending Home Sales from the NAR Thursday; and the critical August BLS jobs report Friday.

After last week’s report that June-to-July Existing Homes Sales were down 27.2%, Robert Shiller (co-creator of the Case Shiller Home Price Index) said “this was the recording the month after the original closing deadline for the [homebuyer] tax credit, so it’s an anomalous month, but I do think that opinions about the market are weakening, and it may result in another decline in home prices going forward.”

Given the weight markets put on his Case Shiller Home Price Index, this Tuesday’s number should move mortgage bonds more than normal. As for Friday’s jobs report, estimates call for 105k job losses in August.

Weaker figures on next week’s data would normally help rates drop. But last week’s mortgage bond market reaction to the GDP figure shouldn’t be ignored: it was a very weak number but not weak enough in the mortgage traders’ eyes, so rates actually rose. Same goes for all data next week.

As discussed in the previous two WeeklyBasis reports, mortgage bonds are overbought, very jumpy, and looking for any little reason to sell off—which would push rates up.

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WeeklyBasis: Full Tilt Credit Boom, Part 2

August 23rd, 2010 by Julian Hebron

 

Rates are up about .125% following a mortgage bond selloff late last week, but rates are still at unprecedented lows. There was very little economic news last week, and the selloff (which pushes rates higher) came as bond markets traded on two main factors that will continue next week.

Rate Factors Week of August 23

These are all key reports that move bond markets, but they’ll be overshadowed by $109b in new Treasury bond auctions as follows: $7b in reopened 30yr TIPS Monday, $37b in 2yr notes Tuesday, $36b in 5yr notes Wednesday, and $29b in 7yr notes Thursday. This massive Treasury supply will disrupt bond markets and mortgage bonds may sell off, pushing rates higher.

How Long Can Low Rates Last?

Last week I explained (http://ow.ly/2rudZ) how government issues billions in new Treasury debt biweekly, why global markets have had such a big appetite for Treasury and mortgage debt over the past 18 months, and what might happen to rates if this bond rally reversed into a selloff.

A few days after those comments, Wharton finance professor Jeremy Siegel published a Wall Street Journal OpEd entitled The Great American Bond Bubble (http://ow.ly/2ru3P) discussing similar concerns about an overbought Treasury bond market. He thinks a bond market selloff is imminent, and presented estimated investment losses for bondholders.

But you don’t have to be a mortgage or Treasury bondholder to experience investment losses. The rate increase that comes from a bond selloff is, in essence, an investment loss for consumers seeking mortgages.

The fragile global economic climate still justifies investors seeking the safety of mortgage and Treasury bonds, but Siegel is not alone in his sentiment, and markets can shift violently. If the U.S. had a debt crisis like they’re having in Europe, it would cause huge mortgage and Treasury selloffs and sharp rate spikes.

But the more likely scenario is a correction off current price levels for mortgages and Treasuries, and even this would push mortgage rates up .25% to .5%.

For now though, it’s still a full tilt U.S. credit boom, so consumer rates are stunningly low. The rest is whether a homebuyer can negotiate the right deal on a home in an area with price stability.

Which brings us to the second rate factor for next week: bond markets realizing that their boom era can’t go on forever.

First is market calendar for the week beginning Monday, August 23. We have July’s Existing Home Sales (from the NAR) and New Home Sales (from the U.S. Census Bureau) Tuesday and Wednesday, then the second reading of 2Q2010 GDP and Consumer Sentiment on Friday.

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WeeklyBasis: How Bond Markets Affect Mortgage Rates

July 12th, 2010 by Julian Hebron

logo_greenRRATE SNAPSHOT
Conforming, Jumbo, and FHA rates ended last week at record lows again (see rates below), which makes a two-month streak of record lows. A significant rate spike is not expected in the near future, but it’s also not likely rates will stay this low. Here’s why rates could tick up next week.

HOW BOND MARKETS AFFECT MORTGAGE RATES
We will see June Retail Sales figures Wednesday, June business inflation figures Thursday, and June consumer inflation Friday. These reports are important, but will likely show continued tame inflation and tentative consumers, which won’t surprise rate markets.

So the biggest rate factor will be $69b in Treasury auctions as follows: $35b in 3yr notes Monday, $21b in 10yr notes Tuesday, $13b in 30yr bonds Wednesday. The Treasury Department auctions debt to raise money for ongoing government spending, mostly for stimulus plans implemented during the heat of the financial crisis of the past few years.

In the current unstable global investing landscape, Treasury securities are considered a safe, albeit low yielding, bet. Specifically the new issuance of 10yr and 30yr debt competes with 30yr mortgage bonds for investor dollars, and these long-dated mortgage bonds are what most rates are tied to. So if investors sell mortgage bonds to buy Treasuries, mortgage bond prices drop and rates rise.

Also, if the Treasury auctions aren’t well received, it can cause selloffs across all bond markets, including mortgages. Justifiably, the flood of Treasury debt into markets has caused oversupply concerns at different times in the past couple years, and rates rise as all bonds sell off. But while Europe has been in crisis much of this year (especially since early Q2), U.S. mortgage and Treasury securities are in favor.

This is the biggest reason rates are as low as they are.

But market favoritism can change quickly, especially given the run mortgages and Treasuries have already had.

Homebuyers and refinancers are well served to lock existing low rates as soon as they are ready to transact.

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.

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Mortgage Borrower Alert: As of June 1, Lenders Will Run Your Credit Twice During Loan Process

July 9th, 2010 by Julian Hebron

logo_greenREffective June 1, anyone looking to obtain a home purchase or refinance loan will most likely have their credit run twice during the loan process: once in the beginning pre-approval process like normal, and again prior to loan funding. This process will apply to most loan amounts up to $729,750 because of the recently announced Fannie Mae Loan Quality Initiative (see Undisclosed Liabilities Q&A top of page 3), which includes many new quality control measures lenders must follow when underwriting, approving, and funding loans—but this one is the most important to call out for consumers right now.

Why Run Credit Twice?
The purpose of this guideline is to make sure that borrowers didn’t go out and open up new credit accounts while in process of being approved for their home purchase or refinance loan. Borrowers sometimes don’t tell their lenders about their non-mortgage activities, but going forward you should definitely let your lender know of any other credit card, car loan/lease, student loan, business loan, or any other type of credit application you might be processing while obtaining a home loan; you should also inform your lender of any current or planned credit card or other purchases you intend to make during the home loan processing period—if any new credit activity is revealed by this newly-required prior-to-funding credit report, the loan won’t fund because it will have to be re-underwritten and approved with whatever new debts or new credit accounts might show up on the new report. Read more.

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WeeklyBasis: Rates Can’t Possibly Go Lower, Right?

July 7th, 2010 by Julian Hebron

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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: 

WHY RATES ARE SO LOW

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.

RATE LOCK BIAS CONTINUES

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. 

DAILY CONSUMER-FRIENDLY COMMENTARY

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.

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WeeklyBasis: Primer On Fed Rate Strategy Before June 23 FOMC Meeting

June 21st, 2010 by Julian Hebron

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RATE SNAPSHOT
It’s quite surprising that rate volatility has been minimal for three weeks. As such, zero-point rates on 30yr fixed Conforming loans (up to $729k) held last week near record lows for a third straight week, and one-point rates on Jumbo loans (above $729k) remain steady in the low- to mid-5% range. Rates for each category below.

RATE FACTORS WEEK OF JUNE 21
Volatility could return with a full economic slate next week. Here’s the market moving data for the week, each noted with what impact it could have on rates:

We start with May Existing Home Sales Tuesday (rates neutral), a two-day Federal Open Market Committee meeting ending with a rate policy announcement Wednesday (rates neutral to higher), the third of three 1Q2010 GDP readings Friday (rates neutral to higher), $108b in 2yr, 5yr, and 7yr Treasury Note auctions Tuesday-Thursday (rates higher), and the House/Senate reconciliation of a massive finance reform bill will reach a critical stage as lawmakers look to finalize the bill for President Obama (rates neutral).

WHAT THE FED WILL SAY WEDNESDAY, JUNE 23
The Fed’s FOMC meeting announcement Wednesday will likely reveal the Fed’s intent to keep overnight bank-to-bank Fed Funds Rates at .25% and overnight Fed-to-bank Discount Rates at .75%. They may also confirm whether they’ll raise these overnight rates before they’d start selling the $1.25b in mortgage bonds they bought from January 1, 2009 to March 31, 2010.

And finally, we’ll see if any FOMC members come around to Kansas City Fed President Thomas Hoenig’s way of thinking. At every FOMC meeting this year, he’s voted to start gradually hiking rates to avoid more violent rate hikes later (more on this in next section).

The Fed selling mortgage bonds would directly and immediately cause mortgage rates to rise, while the Fed hiking overnight rates would have an indirect and slower hiking impact on mortgage rates. So when they decide the economy can handle higher rates they will hike overnight rates first. Then as the recovery strengthens, they’d start selling mortgage bonds. When those bond prices drop in a selloff, mortgage rates rise commensurately.

ARE FED RATES TOO LOW FOR TOO LONG?
The debate today is whether Bernanke’s Fed is keeping rates too low for too long. Greenspan’s Fed did the same thing with the Fed Funds Rate from January 201 (6.5%) to June 2004 (1%), and when they did start hiking off the 1% mark, it was gradual until Fed Funds reached 5.25% June 2006. It stayed there until the financial crisis picked up steam, then the Fed cut from 5.25% in September 2007 to .25% December 2008, and it’s been at .25% since then.

Greenspan took lots of heat for leaving rates too low for too long. Bernanke is perhaps better justified since this financial crisis and resulting global economic instability is much deeper than anything Greenspan faced. But we’ve also increased the money supply drastically to combat the crisis, so if the economy does show continued signs of improvement, inflation can spike quickly. Fed rate hikes and mortgage bond selloffs would follow, both causing mortgage and all other rates to spike.

Volatility is the byproduct of markets trading on every little sign that we’re finally ready to move out of an artificially low rate era. And that’s precisely why this WeeklyBasis opened by saying “it’s quite surprising” to see less volatility in recent weeks.

It’s also why consumers waiting for lower rates will be disappointed if they wait much longer.

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.

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