Market Comment for Week of August 8, 2011…

MARKET COMMENT  Mortgage bond prices rose last week, which pushed mortgage interest rates sharply lower. Rates found support from both weak stocks and flight-to-safety buying as the debt problems in Europe extended to Italy and Spain. The DOW Jones index had one of the worst weeks in recent memory, falling 512 points on Thursday alone. Global traders flocked to US Treasuries and mortgage backed securities driving the yield on the 10-year bond down to 2.44%. Mortgage bonds ended the week better by about 1/4% in interest rate.

The Fed meeting will be the most important event this week. The Treasury auctions also have the potential to result in market volatility depending on foreign demand.

LOOKING AHEAD

• Preliminary Q2 Productivity; Aug. 9; Consensus Estimate Up 4.0%; Important. A measure of output per hour. Improvement may lead to lower mortgage rates.
• 3-year Treasury Note Auction; Aug. 9; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Fed Meeting Adjourns; Aug. 9; Consensus Estimate No rate changes; Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting.
• 10-year Treasury Note Auction; Aug. 10; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Weekly Jobless Claims; Aug. 11; Consensus Estimate 450k; Important. An indication of employment. Higher claims may result in lower rates.
• Trade Data; Aug. 11; Consensus Estimate 49.2B deficit; Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
• 30-year Treasury Bond; Aug. 11; Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
• Retail Sales; Aug. 12; Consensus Estimate Up 0.1%; Important. A measure of consumer demand. Weakness may lead to lower mortgage rates.
• U of Michigan Consumer Sentiment; Aug. 12; Consensus Estimate 63.2; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

There is a Chinese proverb that states, “May you live in interesting times.” It is often argued that the word interesting is meant to be a synonym for turbulent or dangerous. This phrase hits the bull’s-eye given the current state of the financial markets. While stocks and bonds are swinging around wildly there is some good news. Interest rates for conforming and FHA/VA loans are historically very low.

Remember, low rates are not a given considering the uncertainty in the financial markets. Inflation, real or perceived, erodes the value of bonds causing bond prices to fall and rates to rise. The last thing the economy needs now is rising mortgage interest rates. If inflation emerges that very well may happen despite the continued Fed efforts to keep rates low. With so much uncertainty, a cautious approach to float lock decisions would be wise.

Source: Todd Kabel; F&M Mortgage; Blog distribution provided by Kenneth Bargers and Bargers Solutions, a proud member of Pilkerton Realtors, residential real estate services located in Nashville, Tennessee

Existing-Home Sales Rise 5.6%

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…

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 6, 2010…

MARKET COMMENT   Mortgage bond prices fell pushing mortgage interest rates higher last week. We started the week with some flight to quality buying as details of Ireland’s $113b bailout emerged. That was short-lived as stronger than expected consumer confidence, ADP employment, and construction spending data crushed the bond market mid-week causing interest rates to skyrocket. Fortunately the employment report Friday morning was bond friendly showing a higher than expected 9.8% unemployment rate and a weaker than expected payrolls increase. This helped the market recover about half of the weakness seen earlier in the week. Unfortunately for the week interest rates were worse by about 1/2 of a discount point. 

Look for the Treasury auctions to be a main focus this week. If foreign demand remains decent rates should stay in check.

 LOOKING AHEAD 

  • 3-year Treasury Note Auction; Dec. 7; Important. $32 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Consumer Credit; Dec. 7; Consensus Estimate Down $3b; Low importance. A significant increase may lead to lower mortgage interest rates.
  • 10-year Treasury Note Auction; Dec. 8; Important. $21 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • 30-year Treasury Bond Auction; Dec. 9; Important. $13 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
  • Trade Data; Dec. 10; Consensus Estimate $44b deficit; Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
  • U of Michigan Consumer Sentiment; Dec. 10; Consensus Estimate 72; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

CONSUMER SENTIMENT   In the US the consumer is often seen as the driving force of the economy. A large percentage of the total economic output is for personal use. Analysts attempt to predict the future spending patterns of consumers to gauge economic activity. 

The Michigan consumer sentiment index is one piece of data used to measure consumer attitudes. The index is derived from a telephone survey, which gathers information on consumer expectations of the overall economy. The preliminary report is released around the 10th of each month and then is revised throughout the remainder of the month. It is significant in that it provides a precursor into consumers’ willingness to spend in the months ahead. However, many analysts point out that willingness to spend does not always convert to actual expenditures. 

Despite economic uncertainty, liquidity issues, housing market weakness, and high energy costs, American consumers continue to spend. However, many analysts question whether consumers can continue to buoy the economy. The most recent sentiment data came in the highest level in 5 months. This week’s release will be eagerly anticipated. Look for any variation from estimates to cause mortgage interest rate volatility. Signs of eroding consumer confidence could lead to improvements in mortgage interest rates. However, stronger than expected figures could spike rates higher. 

Remember that mortgage interest rates remain historically favorable and are subject to change on a daily basis. Last week was a prime example of the volatility often associated with economic data releases. 

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 November 22, 2010…

MARKET COMMENT   Mortgage bond prices got crushed last week pushing rates considerably higher. Trading started negatively Monday when stronger than expected retail sales figures piled on top of the weakness seen the prior week. There was considerable profit taking as traders sold bonds. Tame inflation readings helped buffer some of the price increases and the Fed’s bond purchasing also helped but they were not enough to stem the negative trend of overall rising rates. For the week interest rates finished worse by about 1 1/2 discount points. 

The bond market will be closed Thursday for Thanksgiving. The market will also close at 2 pm ET Friday. This shortened trading week and the likely thin trading conditions could result in continued wild market swings. 

LOOKING AHEAD 

  • Q3 GDP second estimate; Nov. 23; Consensus Estimate 2.4%; Important. The aggregate measure of US economic production. Weakness may lead to lower rates.
  • Existing Home Sales; Nov. 23; Consensus Estimate 4.4m; Low importance. An indication of mortgage credit demand. Weakness decrease may lead to lower rates.
  • Personal Income and Outlays; Nov. 24; Consensus Estimate Up 0.5%, Up 0.5%;  Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.
  • PCE Core Inflation; Nov. 24; 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; Nov. 24; Consensus Estimate Down 0.3%; Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
  • U of Michigan Consumer Sentiment; Nov. 24; Consensus Estimate 69.4; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
  • New Home Sales; Nov. 24; Consensus Estimate 312k; Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.

MORE AUCTIONS   The US Treasury will auction $35 billion of 2Y notes, $35 billion of 5Y notes, and $29 billion of 7Y notes this week. US Treasury bonds do not directly dictate fixed mortgage interest rate pricing however they do have an indirect impact. Both Treasuries and mortgage bonds often track in the same direction but this is not always the case. There are many times that Treasuries and mortgage bonds move inversely. 

The markets usually focus on the foreign demand component of the auction results. Despite the overwhelming size of the US economy, foreign investors can still have an effect on moving the financial markets. When foreign economies struggle foreign investors often purchase US based investments including mortgage bonds. This increase in demand usually causes mortgage bond prices to rise and interest rates to fall. This flight to quality buying was one of the factors that helped mortgage interest rates remain historically low in years past. 

The Treasury auctions this week will be important in determining the current appetite of foreign investors for dollar denominated securities. If this week’s auctions are poorly bid mortgage bond prices could fall pressuring mortgage interest rates higher. 

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

Market Comment for Week of November 15, 2010…

MARKET COMMENT   Mortgage bond prices were lower for the week pushing mortgage interest rates higher. The Treasury auctions were mixed with generally decent foreign demand but rather lackluster overall results. The weekly jobless claims data came in lower than expected which was not bond friendly and pushed rates considerably higher Wednesday. The bond market was closed Thursday for the holiday, which likely contributed to the volatility with thin trading conditions surrounding shortened trading week. For the week interest rates finished worse by about 7/8 of a discount point. 

The retail sales data Monday will set the tone for trading this week. The inflation data on Tuesday and Wednesday have the greatest potential to move the financial markets. 

LOOKING AHEAD 

  • Retail Sales; Nov. 15; Consensus Estimate Up 0.6%; Important. A measure of consumer demand. A smaller than expected increase may lead to lower mortgage rates.
  • Business Inventories; Nov. 15; Consensus Estimate Up 0.6%; Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates.
  • Producer Price Index; Nov. 16; Consensus Estimate Up 0.7%, Core up 0.1%; Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates.
  • Industrial Production; Nov. 16; Consensus Estimate Up 0.3%; Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates.
  • Capacity Utilization; Nov. 16; Consensus Estimate 75%; Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates.
  • Consumer Price Index; Nov. 17; Consensus Estimate Up 0.3%, Core up 0.1%; Important. A measure of inflation at the consumer level. Lower than expected increases may lead to lower rates.
  • Housing Starts; Nov. 17; Consensus Estimate 605k; Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates.
  • Leading Economic Indicators; Nov. 18; Consensus Estimate Up 0.5%; Important. An indication of future economic activity. A smaller increase may lead to lower rates.
  • Philadelphia Fed Survey; Nov. 18; Consensus Estimate 2.0; Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.

LOW RATES   Mortgage interest rates remain near historic lows. Borrowers that choose to float in this environment expose themselves to an upside risk in mortgage interest rates. The Fed has specifically stated, “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” This means the Fed believes inflation levels should increase. Inflation, real or perceived, generally erodes the value of fixed income securities causing prices to fall and rates to rise. If the Fed has its way it is very possible to see mortgage interest rates increase. However, there are no certainties even with the Fed’s stated goals. The Fed does not directly dictate mortgage interest rates but its activities have an indirect effect on rates. 

Recent history attests to spikes and drops in rates on almost a weekly basis. Last week was a prime example. A cautious approach to interest rate exposure is prudent. 

Source: Courtesy of Todd Kabel, US Bank, Nashville, Tennessee

Market Comment for Week of November 8, 2010…

MARKET COMMENT   Mortgage bond prices were slightly positive for the week amid very choppy trading conditions. We started on a positive note for bonds with lower than expected PCE inflation data. Unfortunately a steep sell off emerged Monday afternoon as we headed into the elections and the Fed meeting. The Fed kept rates in check Wednesday as expected and announced continued quantitative easing. Unfortunately the payrolls figure of the employment report was stronger than expected Friday morning, which erased a lot of the gains seen earlier in the week. For the week interest rates finished better by about 1/8 to 1/4. 

The Treasury will auction $72 billion of securities this week. Strong foreign demand remains necessary for interest rates to stay low. The Veterans holiday Thursday splits the trading week. 

LOOKING AHEAD 

  • 3-year Treasury Note Auction; Nov. 8; Important. $32 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • 10-year Treasury Note Auction; Nov. 9; Important. $24 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates.
  • Weekly jobless claims; Nov. 10; Consensus Estimate 460k; Important. An indication of unemployment. Higher figure may lead to lower mortgage rates.
  • Trade Data; Nov. 10; Consensus Estimate $46b deficit; Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates.
  • 30-year Treasury Bond Auction; Nov. 10; Important. $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates.
  • U of Michigan Consumer Sentiment; Nov. 12; Consensus Estimate 67; Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.

TRADING THIS WEEK   Market conditions that often lead to mortgage interest rate volatility are thin trading and shortened trading weeks. If very few market participants are buying and selling bonds, the potential for short-term volatility is escalated. A large buyer or seller can execute trading orders that, without additional traders to buffer out the extreme buying or selling, can lead to swift market movements. In addition, shortened trading weeks have the potential to compress a week’s worth of trading into fewer days. Bond traders often take defensive positions ahead of weekends and holidays to guard against unforeseen events that could possibly jeopardize their investments. This positioning can be beneficial or detrimental to mortgage interest rates. If investors sell stocks and buy mortgage-backed securities, mortgage interest rates will improve. However, if investors sell mortgage-backed securities and hold cash positions, mortgage interest rates will rise. 

Holidays can often result in volatility as trading resumes following the extended close. The Fed continues to state the goal of low interest rates for some time. It is hard to argue they have not been effective with that goal. That doesn’t mean we haven’t and won’t see any interest rate volatility. The Fed also noted recently that inflation is below their preferred levels. Recent history attests to spikes and drops in rates throughout the year. 

This week could result in market swings that are favorable or negative in nature. A cautious approach to interest rate exposure is prudent considering the heightened possibility for mortgage interest rate volatility. 

Source: Courtesy of Todd Kabel, US Bank, Nashville, Tennessee