Happy New Year! Real Estate Update
MARKET COMMENT
Mortgage bond prices were higher last week which pushed mortgage interest rates lower. We started the week with some unfriendly data as the consumer confidence report was higher than expected. Fortunately, thin trading conditions amid the holidays, the shortened trading week, and jittery stocks all went well for MBS prices. Weekly jobless claims were higher than expected. Claims came in @ 381k compared to the expected 375k mark. Mortgage bonds ended the week better by approximately 1/2 of a discount point.
The employment data this week will likely result in some mortgage interest rate volatility.
LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
ISM Index Tuesday,
Jan. 3,
10:00 am, et 52.8 Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
Construction Spending Tuesday,
Jan. 3,
10:00 am, et Up 0.8% Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
Fed Minutes Tuesday,
Jan. 3,
2:00 pm, et None Important. Details of the last Fed meeting will be thoroughly analyzed.
Factory Orders Wednesday,
Jan. 4,
10:00 am, et Up 0.6% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
ADP Employment Thursday,
Jan. 5,
8:30 am, et 165k Important. An indication of employment. Weakness may bring lower rates.
Weekly Jobless Claims Thursday,
Jan. 5,
8:30 am, et 379k Important. An indication of employment. Higher claims may result in lower rates.
Employment Friday,
Jan. 6,
8:30 am, et 8.8%,
Payrolls +115k Very important. An increase in unemployment or weakness in payrolls may bring lower rates.
THE YEAR AHEAD
The future of the economy, recovery or additional weakness, will continue to be debated. There is no certainty in predictions. Data can be used to support both sides of the debate. What we can be certain of is the fact that mortgage interest rates are likely to remain volatile until the economy gains some stability. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a week of positive improvements. Of course even that maxim was tested the last few months of last year as market swings of 1/2 a discount point both up and down were often seen in very short spans of time.
It is possible for mortgage interest rates to push lower considering the Fed still wants to keep rates relatively low. However, we are in unprecedented times and we have seen rate volatility throughout last year. The Fed isn’t the only player in the financial markets and there are many others buying and selling securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain rate. Rates are determined by the supply and demand for mortgage-backed securities. However, the Fed is the major player in the market at this time and they do set the lead.
Despite volatility throughout 2011, the Fed kept rates low. The big unknown is how things will play out this year. Now is a great time to take advantage of mortgage interest rates at these still historically favorable levels
Real Estate Update
MARKET COMMENT
Mortgage bond prices were slightly lower last week, which pushed mortgage interest rates a little higher. Rates came under pressure early in the week as the DOW surged higher Tuesday. Rates came under further pressure as the European Central Bank opened a long term financing facility to help ease the credit crisis in the region. Leading economic indicators and University of Michigan consumer sentiment data both came in higher than expected. The debt auctions were generally average at best. Mortgage bonds ended the week worse by approximately 1/2 of a discount point.
LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
Consumer Confidence Tuesday,
Dec. 27,
10:00 am, et 56.2 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Weekly Jobless Claims Thursday,
Dec. 29,
8:30 am, et 362k Important. An indication of employment. Higher claims may result in lower rates.
Early Market Close Friday,
Dec. 30,
2pm, et - Important. Thin trading conditions are likely ahead of the extended holiday weekend.
LIQUIDITY
In years past a borrower would visit their local savings and loan to obtain a mortgage. The Loan Officer at the bank would approve the mortgage and fund it with cash reserves from the vault. This system worked well until the bank ran out of money to lend. Borrowers came to the S&L looking for a loan and were told to come back when a current mortgage paid off. What the bank needed was a way to sell the loans they made freeing up the capital to lend to new borrowers. This way they could lend the “same” money over and over, earning an income from servicing the loans and assisting the community by offering a near limitless pool of money.
To address this issue, FNMA and GNMA were established. The goal is to provide cheap mortgage money to prospective homeowners and a high quality bond for the investment community. The bond or Mortgage Backed Security (MBS) take mortgages with similar risk characteristics and pool them together. Investors in the MBS’s know ahead of time the return they are going to receive, much like a Certificate of Deposit. To ensure the performance of the bond, each mortgage is underwritten to specific guidelines.
During the past real estate boom underwriting guidelines were relaxed giving way to a whole new menu of mortgage products such as 100% financing. In addition, to streamline the influx of applications, income and asset verification took a back seat to a borrower with strong credit. With housing prices rising rapidly, the property could be sold to cover the note and foreclosure costs if this occurred. This cycle worked well until the price of houses moderated in 2006. Once the housing market began to cool and prices moderated, foreclosed homes were being sold for less than the notes. To add insult to injury, the loans underwritten to the looser guidelines did not perform as hoped. With the value of the collateral in question (falling home prices) and the future performance of the borrowers unknown, investors’ appetite for this risk waned. Unfortunately the liquidity issues associated with Alt A and subprime loans carried over to more secure AAA GNMA and FNMA loans. Sellers of AAA MBS’s found it more difficult to find buyers. Fortunately the Fed eventually stepped and purchased mortgage backed securities in an unprecedented effort to keep rates low, the housing market from crumbling, and the entire economy afloat. For all the criticism the Fed receives, these efforts have been successful so far.
How this all plays out in the long term is still up for debate. The one thing that is certain is that rates remain historically very favorable. Now is a great time to take advantage of these low mortgage interest rates
Real Estate Market Update
Mortgage bond prices were slightly higher last week but not enough for mortgage interest rates to see any considerable improvements. Rates came under pressure early in the week as the IMF looked to spend billions of Euros to help stem the debt concerns. Rates bounced back following the Fed meeting Tuesday and stayed relatively in check throughout the rest of the week with choppy but tight trading. The consumer and producer inflation data was mixed with core CPI data slightly higher than expected and core PPI data weaker than expected. The debt auctions generally showed strong foreign demand. Mortgage bonds ended the week better by approximately 1/8 of a discount point.
LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
Treasury Auctions Begin Monday,
Dec. 19,
1:15 pm, et None Important. There will be auctions Monday 2Y, Tuesday 5Y, and Wednesday 7Y.
Housing Starts Tuesday,
Dec. 20,
8:30 am, et 615k Important. A measure of housing sector strength. Weakness may lead to lower rates.
Existing Home Sales Wednesday,
Dec. 21,
10:00 am, et 4.9m Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Weekly Jobless Claims Thursday,
Dec. 22,
8:30 am, et 369k Important. An indication of employment. Higher claims may result in lower rates.
Q3 GDP Third Estimate Thursday,
Dec. 22,
8:30 am, et Up 1.9% Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment Thursday,
Dec. 22,
10:00 am, et 67.7 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Leading Economic Indicators Thursday,
Dec. 22,
10:00 am, et Up 0.5% Important. An indication of future economic activity. A smaller increase may lead to lower rates.
Durable Goods Orders Friday,
Dec. 23,
8:30 am, et Down 0.2% Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
Personal Income and Outlays Friday,
Dec. 23,
8:30 am, et Up 0.2%,
Up 0.1% Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
PCE Core Inflation Friday,
Dec. 23,
8:30 am, et Up 0.1% Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
New Home Sales Friday,
Dec. 23,
10:00 am, et 298k Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
FED STATEMENT
The Fed statement from the meeting last week indicated, “The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.” This is generally good news for mortgage interest rates in the short term as the Fed buying keeps MBS prices high and rates low. However, this is no guarantee that mortgage interest rates will continually push lower. The Fed noted they will “regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.” Rates are historically very favorable and financial conditions can change daily. Remember, the current rates are a given.
Real Estate Market Comment
Mortgage bond prices ended slightly higher last week, which pushed mortgage interest rates lower. The Euro debt crisis continued to take center stage. The European Central Bank cut rates in a move to help avoid another recession in the region. Economic activity in Europe slipped in recent months as the debt crisis expanded and solutions were fleeting. This global economic uncertainty sent flight to quality buying of US mortgage-backed securities. MBSs traded in a choppy but tight pattern throughout the week. Stocks were volatile but held most of the recent gains as the limited data was generally stock friendly. Mortgage bonds ended the week better by approximately 3/8 to 1/2 of a discount point.
LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
Treasury Auctions Begin Monday,
Dec. 12,
1:15 pm, et None Important. There will be auctions Monday 3Y, Tuesday 10Y, Wednesday 30Y, and Thursday 5Y TIPS.
Retail Sales Tuesday,
Dec. 13,
8:30 am, et Up 0.6% Important. A measure of consumer demand. A smaller than expected increase may lead to lower rates.
Business Inventories Tuesday,
Dec. 13,
10:00 am, et Up 0.2% Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
Fed Meeting Adjourns Tuesday,
Dec. 13,
2:15 pm, et No rate changes Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
Weekly Jobless Claims Thursday,
Dec. 15,
8:30 am, et 379k Important. An indication of employment. Higher claims may result in lower rates.
Producer Price Index Thursday,
Dec. 15,
8:30 am, et Unchanged,
Core up 0.1% Important. An indication of inflationary pressures at the producer level. Lower figures may lead to lower rates.
Industrial Production Thursday,
Dec. 15,
9:15 am, et Up 0.6% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
Capacity Utilization Thursday,
Dec. 15,
9:15 am, et 77.4% Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
Philadelphia Fed Survey Thursday,
Dec. 15,
10:00 am, et 2.4 Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
Consumer Price Index Friday,
Dec.16,
8:30 am, et Unchanged,
Core up 0.1% Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates.
RETAIL SALES
Retail sales data is the first indication of weakness or strength in consumer spending released each month. The Bureau of the Census of the US Department of Commerce provides information on how much the consumer spends on the purchase of goods. This data provides the consumption part of the gross domestic product. Retail sales data represents merchandise sold for cash or credit by retailers. Durable goods, such as autos, make up 35% of the figure. The balance consists of non-durables such as gasoline, restaurants, and general merchandise. There are several drawbacks to the report. The data covers purchases of goods only, not services. It is also not adjusted for inflation and is extremely volatile. Economists are concerned that the current economic uncertainty will continue to curtail consumer-spending habits especially heading into the holiday season.
Real Estate Market Update
MARKET COMMENT
Mortgage bond prices ended lower last week, which pushed mortgage interest rates slightly higher. The producer price index and core rate both came in lower than expected and helped rates improve earlier in the week. Unfortunately, retail sales beat expectations which countered the PPI data. Poor auctions in France and Spain fanned the Euro debt concerns which helped rates a bit. However, housing starts showed a surprise increase and weekly jobless claims were lower than expected Thursday which didn’t help rates. Positive stocks Friday morning also made it tough for rates to push lower. Mortgage interest rates rose by approximately 1/8 of a discount point for the week.
LOOKING AHEAD
Economic
Indicator Release
Date and Time Consensus
Estimate Analysis
2-year Treasury Note Auction Monday,
Nov. 21,
1:15 pm, et None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q3 GDP Second Estimate Tuesday,
Nov. 22,
8:30 am, et Up 2.5% Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
Fed Minutes Tuesday,
Nov. 22,
2:00 pm, et None Important. Details of the last Fed meeting will be thoroughly analyzed.
5-year Treasury Note Auction Tuesday,
Nov. 22,
1:15 pm, et None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Weekly Jobless Claims Wednesday,
Nov. 23,
8:30 am, et 390k Important. An indication of employment. Higher claims may result in lower rates.
Personal Income and Outlays Wednesday,
Nov. 23,
8:30 am, et Up 0.1%,
Up 0.3% Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
PCE Core Inflation Wednesday,
Nov. 23,
8:30 am, et Up 0.1% Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
Durable Goods Orders Wednesday,
Nov. 23,
8:30 am, et Down 0.2% Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
U of Michigan Consumer Sentiment Wednesday,
Nov. 23,
10:00 am, et 63 Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
7-year Treasury Note Auction Wednesday,
Nov. 23,
1:15 pm, et None Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
QUALITY
Investors are constantly searching for opportunities that will provide the greatest return with the least amount of acceptable risk. Investment products inherently all possess some sort of risk. As foreign financial markets struggled recently, many market participants withdrew their funds and searched for a safe haven in the US financial markets. With the backing of the US Government, investors viewed the US Treasury and mortgage bond markets as less risky investment opportunities amid global economic uncertainty. This resulted in an increased demand for US investments, such as the mortgage-backed securities that affect mortgage interest rates. Increased demand for mortgage bonds drove the prices higher and interest rates lower. Whether or not the trend will continue is still debated. A cautious approach to lock decisions is wise to take advantage of mortgage interest rates at these historically favorable levels.