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Market Comment for Week of January 3rd, 2011…

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MARKET COMMENT   Mortgage bond prices started the week in negative territory. Those losses were short-lived as trading was thin and choppy with continued large market swings. There were few data releases. The Treasury auctions showed relatively strong foreign demand for US debt instruments, which helped carry over to the mortgage bond market Wednesday afternoon. Weekly jobless claims came in better than expected which was not good for bonds early Thursday morning. Fortunately mortgage bonds ended the week positive by about 1/2 of a discount point. 

The employment report will be the most important release this week. This data will set the tone for trading this month. We ended last year with considerable volatility and this is expected to continue for some time. 

LOOKING AHEAD 

  • Construction Spending; Jan. 3; Consensus Estimate Up 0.2%; Low importance. An indication of economic strength. Significant weakness may lead to lower rates.
  • ISM Index; Jan. 3; Consensus Estimate 57; Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates.
  • Factory Orders; Jan. 4; Consensus Estimate Down 0.5%; Important. A measure of manufacturing sector strength. Weakness may lead to lower rates.
  • ADP Employment; Jan. 5; Consensus Estimate 75k; Important. An indication of employment. Weakness may bring lower rates.
  • Weekly Jobless Claims; Jan. 6; Consensus Estimate 400k; Important. An indication of employment. Higher claims may result in lower rates.
  • Employment; Jan. 7; Consensus Estimate 9.8%,  Payrolls +110k; Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates.
  • Consumer Credit; Jan. 7; Consensus Estimate Down $6.5b; Low importance. A significantly higher than expected figure may lead to lower mortgage interest 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 until the economy gains some stability, mortgage interest rates are likely to remain volatile. 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 rates jump off the lows from 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. 

Despite spikes near the end of 2010, 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. 

Source: Todd Kabel, US Bank; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

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National Outlook: Pending Home Sales Continue Recovery

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Pending home sales rose again in November, with the broad trend over the past five months indicating a gradual recovery into 2011, according to the NATIONAL ASSOCIATION OF REALTORS®. 

The Pending Home Sales Index, a forward-looking indicator, rose 3.5 percent to 92.2 based on contracts signed in November from a downwardly revised 89.1 in October. The index is 5.0 percent below a reading of 97.0 in November 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months. 

Lawrence Yun, NAR chief economist, said historically high housing affordability is boosting sales activity. “In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market,” he said. “But further gains are needed to reach normal levels of sales activity.” 

The PHSI in the Northeast increased 1.8 percent to 72.6 in November but is 6.2 percent below November 2009. In the Midwest the index declined 4.2 percent in November to 78.3 and is 7.7 percent below a year ago. Pending home sales in the South slipped 1.8 percent to an index of 91.4 and are 7.2 percent below November 2009. In the West the index jumped 18.2 percent to 123.3 and is 0.4 percent above a year ago. 

“If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume,” Yun said. “Credit remains tight, but if lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy.”

The 30-year fixed-rate mortgage is forecast to rise gradually to 5.3 percent around the end of 2011; at the same time, unemployment should drop to 9.2 percent. 

For perspective, Yun said that the U.S. has added 27 million people over the past 10 years. “However, the number of jobs is roughly the same as it was in 2000 when existing-home sales totaled 5.2 million, which appears to be a sustainable figure given the current level of employment,” he explained. “All the indicator trends are pointing to a gradual housing recovery,” Yun said. “Home price prospects will vary depending largely upon local job market conditions. The national median home price, however, is expected to remain stable even with a continuing flow of distressed properties coming onto the market, as long as there is a steady demand of financially healthy home buyers.” 

Existing-home sales are projected to rise about 8 percent to 5.2 million in 2011 from 4.8 million in 2010, with an additional gain of 4 percent in 2012. The median existing-home price could rise 0.6 percent to $173,700 in 2011 from $172,700 in 2010, which was essentially unchanged from 2009. 

“As we gradually work off the excess housing inventory, supply levels will eventually come more in-line with historic averages, and could allow home prices to rise modestly in the range of 2 to 3 percent in 2012,” Yun said. 

New-home sales are estimated to rise 24 percent to 392,000 in 2011, but would remain well below historic averages, while housing starts are forecast to rise 21 percent to 716,000. 

Yun sees Gross Domestic Product growing 2.5 percent in 2011, and the Consumer Price Index rising 2.3 percent. 

Source: NAR (123010); blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Market Comment for Week of December 27, 2010…

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MARKET COMMENT   Mortgage bond prices started the week in positive territory. Unfortunately those gains were short-lived as trading was thin and choppy with continued large market swings. Most of the data was neutral. We received some positive news that inflation remained in check as the PCE core came in up 0.1% exactly as expected. As the economy improves inflation will become a focal point for investors. Mortgage bonds ended the week slightly positive by about a 1/8 of a discount point. 

Look for the possibility of volatility amid likely thin trading conditions and a shortened trading week. The bond market will close early Friday afternoon ahead of the New Year’s holiday. 

LOOKING AHEAD 

  • 2-year Treasury Note Auction; Dec. 27; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Consumer Confidence; Dec. 28; Consensus Estimate 56; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
  • 5-year Treasury Note Auction; Dec. 28; Important. $35 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • 7-year Treasury Note Auction; Dec. 29; Important. $29 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Weekly Jobless Claims; Dec. 30; Consensus Estimate 423k; Important. An indication of employment. Higher claims may result in lower rates.

FOREIGN DEMAND   China is the largest foreign holder of US debt and continues to debate future purchases. Recent talk from China indicates a desire to diversify. Many stories hit the wires last week indicating that diversification may take the form of European debt purchases. A Chinese spokesperson told reporters that the EU will “be one of the major markets for our (future) forex investment.” These remarks caused some weakness in the US debt market Thursday. The concerns were eventually calmed but uncertainties remain regarding the future of the entire US debt market. 

Global investors are constantly searching for opportunities that will provide the greatest return with the least amount of acceptable risk. That is one of the major problems with China investing in EU debt. While the higher rates of return are enticing, they are not without considerably higher risk. 

Investment products inherently all possess some sort of risk. As global financial markets struggled, many market participants searched for a safe haven in the US financial markets even with their shortcomings. 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 moved prices higher and interest rates lower. A reversal of this foreign demand has and may continue to result in future spikes in mortgage interest rates. 

Caution is the key heading into the auctions this week. There is a real possibility of wild market swings with thin trading conditions likely. Mortgage interest rates remain historically favorable. The future remains uncertain. Today’s rates are a given. Lower rates are not a given as is evident from the overall upward trend seen the past few months. 

Source: Todd Kabel, US Bank; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee

Existing-Home Sales Rise 5.6%

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Existing-home sales got back on an upward path in November, resuming a growth trend since bottoming in July, according to the National Association of REALTORS®. 

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums, and co-ops, rose 5.6 percent to a seasonally adjusted annual rate of 4.68 million in November from 4.43 million in October, but are 27.9 percent below the cyclical peak of 6.49 million in November 2009, which was the initial deadline for the first-time buyer tax credit. 

Lawrence Yun, NAR chief economist, is hopeful for 2011. “Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable,” he said. 

Yun added that home buyers are responding to improved affordability conditions. “The relationship recently between mortgage interest rates, home prices and family income has been the most favorable on record for buying a home since we started measuring in 1970,” he said. “Therefore, the market is recovering, and we should trend up to a healthy, sustainable level in 2011.” 

The national median existing-home price for all housing types was $170,600 in November, up 0.4 percent from November 2009. Distressed homes have been a fairly stable market share, accounting for 33 percent of sales in November; they were 34 percent in October and 33 percent in November 2009. 

Foreclosures, which accounted for two-thirds of the distressed sales share, sold at a median discount of 15 percent in November, while short sales were discounted 10 percent in comparison with traditional home sales. 

Inventory Drops 

Total housing inventory at the end of November fell 4.0 percent to 3.71 million existing homes available for sale, which represents a 9.5-month supply at the current sales pace, down from a 10.5-month supply in October. 

NAR President Ron Phipps said good buying opportunities will continue. “Traditionally there are far fewer buyers competing for properties at this time of the year, so serious buyers have a lot of opportunities during the winter months,” he said. “Buyers will enjoy favorable affordability conditions into the new year, although mortgage rates are expected to gradually rise as 2011 progresses.” 

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 4.30 percent in November from a record low 4.23 percent in October; the rate was 4.88 percent in November 2009. 

“In the short term, mortgage interest rates should hover just above recent record lows, while home prices have generally stabilized following declines from 2007 through 2009,” Yun said. “Although mortgage interest rates have ticked up in recent weeks, overall conditions remain extremely favorable for buyers who can obtain credit.” 

A parallel NAR practitioner survey shows first-time buyers purchased 32 percent of homes in November, the same as in October, but are below a 51 percent share in November 2009 from the surge to beat the initial deadline for the first-time buyer tax credit. 

Investors accounted for 19 percent of transactions in November, also unchanged from October, but are up from 12 percent in November 2009; the balance of sales were to repeat buyers. All-cash sales were at 31 percent in November, up from 29 percent in October and 19 percent a year ago. “The elevated level of all-cash transactions continues to reflect tight credit market conditions,” Yun said. 

Single-Family Homes Sales Jump 

Single-family home sales rose 6.7 percent to a seasonally adjusted annual rate of 4.15 million in November from 3.89 million in October, but are 27.3 percent below a surge to a 5.71 million cyclical peak in November 2009. The median existing single-family home price was $171,300 in November, which is 1.2 percent above a year ago. 

Existing condominium and co-op sales declined 1.9 percent to a seasonally adjusted annual rate of 530,000 in November from 540,000 in October, and are 32.2 percent below the 782,000-unit tax credit rush one year ago. The median existing condo price was $165,300 in November, down 5.5 percent from November 2009. “At the current stage of the housing cycle, condos are offering better deals for bargain hunters,” Yun said. 

Here’s a look at how existing-home sales performed by region

  • Northeast: Existing-home sales in the Northeast rose 2.7 percent to an annual pace of 770,000 in November but are 33.0 percent below the cyclical peak in November 2009. The median price in the Northeast was $242,500, which is 9.2 percent higher than a year ago.
  • Midwest: Existing-home sales in the Midwest increased 6.4 percent in November to a level of 1.00 million but are 35.1 percent below the year-ago surge. The median price in the Midwest was $138,900, down 1.1 percent from November 2009.
  • South: In the South, existing-home sales rose 2.9 percent to an annual pace of 1.76 million in November but are 26.1 percent below the tax credit surge in November 2009. The median price in the South was $148,000, down 2.6 percent from a year ago.
  • West: Existing-home sales in the West jumped 11.7 percent to an annual level of 1.15 million in November but are 19.0 percent below the sales peak in November 2009. The median price in the West was $212,500, up 0.4 percent from a year ago.

Source: NAR (122210); blog distribution by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee.

Market Comment for Week of December 20, 2010…

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MARKET COMMENT   Mortgage bond prices got crushed the beginning of last week pushing rates significantly higher. Increased inflation fears tied to the Fed’s quantitative easing (QE2) and stronger than expected data led to an increase in mortgage interest rates. Retail sales and producer price data were higher than expected. Fortunately the bond market became so oversold that buyers emerged and mortgage bonds rebounded Thursday afternoon and Friday. Even with the bounce back we were still negative on the week by about 5/8 of a discount point. 

Look for the possibility of volatility amid likely thin trading conditions and a shortened trading week. The bond market will close early Thursday afternoon and will be closed the entire day Friday in observance of the Christmas Holiday. 

LOOKING AHEAD 

  • Q3 GDP third estimate; Dec. 22; Consensus Estimate Up 2.6%; Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
  • Existing Home Sales; Dec. 22; Consensus Estimate 4.65m; Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
  • Personal Income and Outlays; Dec. 23; Consensus Estimate Up 0.2%, Up 0.4%; Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
  • PCE Core Inflation; Dec. 23; Consensus Estimate Up 0.1%; Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
  • Durable Goods Orders; Dec. 23; Consensus Estimate Down 0.8%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
  • Weekly Jobless Claims; Dec. 23; Consensus Estimate 455k; Important. An indication of employment. Higher claims may result in lower rates
  • U of Michigan Consumer Sentiment; Dec. 23; Consensus Estimate 73.7; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
  • New Home Sales; Dec. 23; Consensus Estimate 300k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.

GAS PRICES   With gasoline prices hovering around the $3/gallon mark and oil prices in the upper $80/barrel range the fear of continued energy price increases is ever present. Oil prices remain high amid a slight rebound in the US economy and increased global demand. Many foreign nations blame the rising prices on a weaker US dollar. Higher energy costs are generally viewed as evidence of inflation. Inflation erodes the value of fixed income investments such as mortgage bonds causing prices to fall and rates to rise.

The markets seem convinced that the demand for oil will continue to grow as economies recover across the globe. However, these predictions are not a given. OPEC increased output in the third quarter but prices continued to rise. The world economies are still struggling and a spike in energy prices could lead to severe economic turmoil. However, predictions are tenuous at best, the future is uncertain, and market sentiment changes daily. 

The important thing to remember is that rates remain historically favorable. Now is a great time to avoid the uncertainty surrounding continued market volatility and the possibility of higher mortgage interest rates. 

Source: Todd Kabel, US Bank; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee.

Market Comment for Week of December 13, 2010…

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MARKET COMMENT   Mortgage bond prices got crushed last week pushing mortgage interest rates significantly higher. News that tax cuts would be extended sent stocks higher Tuesday at the expense of bonds. Market participants remained concerned about the cost of the tax cuts. We saw a slight reprieve Thursday afternoon following a strong 30-year Treasury bond auction. However, this was short-lived and Friday brought more losses for bonds, as consumer sentiment data was stronger than expected. Unfortunately interest rates were worse by about a full discount point for the week. 

Look for the inflation data and the Fed meeting to take center stage this week. Producer inflation estimates are higher than the prior month. Inflation, real or perceived, generally erodes the value of fixed income investments causing prices to fall and rates to rise. 

LOOKING AHEAD 

  • Producer Price Index; Dec. 14; Consensus Estimate Up 0.5%, Core up 0.3%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
  • Retail Sales; Dec. 14; Consensus Estimate Up 0.8%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
  • Business Inventories; Dec. 14; Consensus Estimate Up 0.6%; Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
  • Consumer Price Index; Dec. 15; Consensus Estimate Up 0.2%, Core up 0.1%; Important. A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.
  • Industrial Production; Dec. 15; Consensus Estimate Up 0.3%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
  • Capacity Utilization; Dec. 15; Consensus Estimate 75%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
  • Housing Starts; Dec. 16; Consensus Estimate 540k; Important. A measure of housing sector strength. Weakness may lead to lower rates.
  • Philadelphia Fed Survey; Dec. 16; Consensus Estimate 14 Moderately; Important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
  • Leading Economic Indicators; Dec. 17; Consensus Estimate Up 1.2%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.

VOLATILITY LIKELY   The likeliness of mortgage interest rate volatility this week is very high considering the abundance of important economic releases. 

Each piece of data has the ability to cause volatility in the financial markets. Floating ahead of the data exposes a person to a tremendous amount of risk. It is possible for interest rates to improve if the data shows weakness in the economy with few price pressures. However, any surprises will likely be bad for mortgage interest rates. 

We are really in uncharted territory here with the huge market swings as of late. The important thing is to remain cautious during these times of uncertainty. 

Source: Todd Kabel, US Bank; blog distribution by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee.

Purchase Applications Rose for Third Week (120810)

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Applications for mortgages to purchase homes rose 1.8 percent last week compared to the previous week on a seasonally adjusted basis. On an unadjusted basis, purchase applications rose 21.3 percent compared to the previous week, which included Thanksgiving. Applications were up 12 percent compared to the same week a year ago. 

This is the third week that applications to purchase homes have increased, reaching the highest level since early May. 

The average contract interest rate for 30-year fixed-rate mortgages increased to 4.66 percent from 4.56 percent, while 15-year fixed-rate mortgages increased to 3.98 percent from 3.91 percent. 

Source: Mortgage Bankers Association (12/08/2010; blog distribution provided by Kenneth Bargers and Bargers Solutions residential real estate services located in Nashville, Tennessee.

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