Mortgage Rates May Fall Even Lower

How low can mortgage rates go?

It seems like mortgage interest rates keep falling to new lows, largely thanks to a struggling economy.

The 30-year fixed-rate mortgage fell to 3.56 percent with an average point of 0.7 for the week ending July 12, down from 3.62 percent the previous week, according to Freddie Mac. At the same time, the 15-year fixed-rate mortgage dropped to 2.86 percent with an average 0.7 point, down from 2.89 percent from the previous week. This time last year, the 30-year fixed-rate mortgage averaged 4.51 percent, and the 15-year was at 3.65 percent.

A poor jobs report for June helped decrease long-term Treasury bond yields and mortgage rates. Only 80,000 jobs were created, not enough to make a dent in the 8.2 percent unemployment rate.

Homebuyers and current homeowners, as well as mortgage professionals, are probably wondering if rates can drop even more. Homeowners may be wondering if they should put off their mortgage refinance in a bid to lock into an even lower interest rate.

Wait for Lower Rates?

Home buyers might be thinking about delaying a home purchase for another year a few more months to wait for a better rate. Perhaps they think home prices will go down even more, and they figure they’ll be able to buy a larger, better house if interest rates decline a bit more.

Here are some reasons why mortgage rates could drop even more.

Bond spreads. Mortgage rates are higher than usual when compared to Treasury bonds.

Mortgage rates, typically based on Treasury bond yields, are usually about a 1.7 percentage point higher than the 10-yield Treasury bond yield. But recently the difference between mortgage rates and those bond yields, or the spread, been has more than 2 percentage points higher.

The euro zone. The ongoing euro zone debacle, which shows no signs of ending, could prompt investors to put even more of their money into Treasuries. That would drive both Treasury yields and mortgage rates even lower. European leaders appear to be dedicated to austerity measures that have proven to be a failure.

Drastically slashing public spending and raising taxes in an effort to decrease countries’ debt have decreased government revenues and worsened recessions. Recession in Europe will probably be a drag on the U.S. economy, as Europeans will have less money to buy American goods.

Plus, financial markets will probably continue to fear that break up of the euro zone will create a financial crisis that spreads to this country. Many European banks are highly interconnected with the U.S. financial system, and our fragile economy remains vulnerable in this integrated financial landscape.

Quantitative easing. The Federal Reserve might pursue another round of quantitative easing, a so-called QE 3, in which it purchases large amounts of bonds in an effort to drive down interest rates. Although only a few Fed board members now advocate more easing, other members say they will support it if economic conditions worsen.

The Fed has already extended its Operation Twist – selling short-term bonds and buying long-term bonds in an effort to drive down long-term interest rates – through the end of the year.

China. A slowing Chinese economy could export more economic troubles. The signs of an approaching economic meltdown are clear, notes an article in the journal, Foreign Policy. Chinese businesses are obtaining fewer loans. Interest rates have been cut. Manufacturing output has tanked. Imports are flat, and GDP growth projections are down. Real-world signs, like fire sales of government property, falling pork prices, and wealthy Chinese moving their money overseas, and incidents of social unrest, are evidence of a faltering economy.

Consumers Benefiting from Low Interest Rates

While low home loan rates show the feebleness of the global economic recovery, homeowners benefit by being able to refinance at much lower rates. If home loan rates are not at record lows, they’ll probably stay pretty close. The average 30-year fixed has stayed below 4 percent for 16 weeks, while the average 15-year fixed has remained under 3 percent for seven weeks, according to Freddie Mac.

But then again, anything is possible. It’s possible that the world economy will unexpectedly rebound and euro zone leaders will suddenly agree on a comprehensive solution to their fiscal crisis. Instead of waiting for mortgage rates to drop even more, home buyers and homeowners should lock into a low mortgage rate when it’s in their best financial interest.

 

Mortgage Rates Continue to Rise; Fed Announcement Due Tomorrow

Bernanke’s comments, tax plans and Europe dominated last week; Fed meeting, inflation, manufacturing readings on the way

Last week, the markets for mortgage-backed securities were absolutely dominated by irregular economic events. Monday morning, mortgage rates looked like they might start to stabilize, as Federal Reserve Chairman Ben Bernanke’s interview on 60 Minutes assured traders that neither inflation nor long-term rates would be allowed to rise too rapidly. By the end of the day, though, sufficient doubts had arisen to bring that position into question.

Tuesday, that rally was officially over. The administration announced a tentative agreement with Republicans in Congress to extend the tax cuts currently due to expire December 31st. While still subject to substantial debate, the main effect of this announcement on markets for fixed-income securities like mortgages and Treasuries was in the huge increase in borrowing the US Treasury would need to do in order to fund the cuts. Markets had expected something to happen, perhaps at a cost between $400-500 billion, but the overall package weighed in at $700-800 billion, dwarfing prior expectations. In addition, much of the new borrowing would fund a cut to Social Security, or payroll tax withholding, which would effectively serve as a new stimulus package to the US economy.

Both the extra borrowing and the effective stimulus put extreme pressure on mortgage rates, and we saw the biggest one-day worsening in mortgage rates in many years on Tuesday. This continued affecting mortgage rates through the week’s end, as better-than-expected unemployment claims and a decrease in the trade deficit both contributed to opinions that the economy may be improving.

To be clear, it is unlikely much of anything would have happened in mortgage pricing, if it hadn’t been for the effects of the extraordinary events of Sunday and Tuesday. The other news for the week was of nominal value. This week, though, we will see substantially more interesting events, starting tomorrow with the announcement of the November PPI and the meeting of the Federal Reserve Open Markets Committee. Here’s the full calendar:

Monday:

  • No significant events

Tuesday:

  • Producer Price Index
  • Retail Sales
  • Fed Meeting Announcement

Wednesday:

  • Consumer Price Index
  • Empire Manufacturing Survey
  • Industrial Production

Thursday:

  • Jobless Claims
  • Philadelphia Fed Survey

Friday:

  • Quadruple witching hour (options expiration)

Clearly, the volume of rate sheet influential economic data this week is far beyond that seen last week. Rates could go either way this week; if the Fed offers some clarity on its policies, the inflation measure show muted price increases, and manufacturing data is on target, mortgage rates could actually improve. If any of these things doesn’t happen, mortgage rates will probably continue to worsen.

Average 30-year fixed rates have already risen about 1/2% from recent lows.  A recent blog post does an excellent job of explaining the effect of this on mortgage qualifications. Bottom line: higher rates are bad for the already beleaguered housing sector. We’ll find out soon whether rates will continue to rise, or if they’ll put the brakes on. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Mortgage Rates Jump Sharply, Stabilize at New Level; Still Near Historical Lows

Limited news allows pricing to stabilize; 30-year fixed rates have moved away from the 4.25%-4.375% 0 points range; Unemployment claims show continued trend towards improvement

Mortgage and Treasury markets spent most of last week coming to terms with a new pricing equilibrium that was sharply worse than that to which they had become accustomed. At the end of the week, though, mortgage markets appeared to be adjusting to the new equilibrium. While 10-year treasury rates worsened by as much as 45 basis points in yield over the course of the week, mortgage rates were only 22 basis points higher, at 4.39% for the 30-year fixed. Let’s examine that 23 bps or .23% difference in yield for both of those options.

Ordinarily, changes to rate on Treasury securities, especially the 10-year note, and mortgages, tend to be highly correlated. This is because the two are very similar securities. Even though most mortgages are written for 30 years, on average they pay off between 7 to 10 years due to refinancing or sale of the real estate. Why are the correlated? The 10-year Treasury has the explicit backing of the US Government, making it virtually immune to default risk. Mortgage-Backed Securities do not have this protection, meaning that investors purchasing them will require a higher return. This usually causes mortgage rates to average around 1.5% higher than comparable Treasury securities.

There are a couple of reasons why this spread tightened by 23 basis points last week. First, upfront fees, known as points, can help offset interest rate increases. Points increased to their highest level in 2010 last week, with borrowers paying an average of 0.9 points on their loans. Second, banks absorbed some of the pricing pressure, rather than passing it along to consumers. As mortgage pricing had improved in prior weeks, many lenders had passed only a portion of this improvement along to consumers; they have unwound these extra profits in the interest of maintaining a steady flow of business. Remember that many banks have increased their staff this year to keep up with the huge demand for refinances.

The net result was that, while mortgage pricing worsened last week, it could have been much worse at the retail level.

Apart from the market readjustment to the new economic situation, there were several other relevant points of economic data last week. The Producer Price Index and Consumer Price Index each confirmed concerns from the Federal Reserve that inflation is at too low a level to prevent deflation from being a legitimate argument in favor of the Quantitative Easing program. Numerous Fed officials, including Chairman Bernanke, and Boston Fed President Eric Rosengren here in Providence, spoke supporting the program, indicating that it has already had many of the desired effects. Expectations of inflation have increased by about 7/10ths% since the program’s announcement. The stock market has improved, and, until last week, interest rates were lower. These three effects were the primary goal of the program, which suggests it is having the desired effect in the economy, even if long-term results are still years away.

In other data, there was mixed news last week in manufacturing. While the Empire Fed index was sharply worse, the Philadelphia Fed Survey showed a much stronger manufacturing environment. Unemployment claims were up slightly, too.

This week has a lot of data in spite of being a very short week, due to the Thanksgiving holiday. The Treasury will also be raising $99 billion this week through auctions of 2-, 5- and 7-year notes. Here’s a rundown of the week’s events:

Monday:

  • $35 billion 2-year notes at 1:00 PM

Tuesday:

  • Preliminary reading on 3rd quarter GDP expectations – expected to revise Advance report up by about 0.4%
  • Existing home sales
  • FOMC minutes – should be very interesting considering QE II decision is contained there
  • 5-year note auction – $35 billion

Wednesday

  • Personal income and spending
  • Durable goods
  • Weekly unemployment claims
  • Consumer Sentiment
  • 7-year note auction – $29 billion

Tursday

  • Happy Thanksgiving!

Friday

  • No economic news, but markets open until 1:00 PM.

Clearly, this could be a very active week for what is traditionally a very short week. If recent data is accurate, it is likely some of this week’s reports will provide further support to the idea that the economy is doing better than expected. If that’s the case, the recent rise in mortgage rates is likely only the beginning. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Jobs Grow, Unemployment Flat, Fed Acts in a Busy Week

Election results have little effect on markets; Unemployment claims up to 457,000; Fed announces plan to purchase $600 billion in securities; Employers add 151,000 jobs, unemployment rate level at 9.6%

Last week brought more market-affecting news than any in recent weeks. On top of a long-anticipated meeting of the Federal Reserve Open Markets Committee, the week also contained any month’s most significant economic report, the Employment Situation, or Non-Farms Payrolls report. Let’s take a look at the effect these reports have had on mortgage rates.

Monday started the week off weaker for mortgage rates as the ISM services index showed manufacturing was stronger than expected. This sparked a wave of selling in mortgage and other fixed-income securities. Construction spending also exceeded expectations.  These reports were partially offset by a weaker result in personal income and expenditures, which indicated consumers simply had less money available to spend in October.

Tuesday was the quietest day of the week, although mortgage rates fell slightly on no news.

Wednesday was a doozy. Markets opened to a better-than-expected ADP private employment report that showed 43,000 jobs had been added by private employers in October, and suggesting that Friday’s Employment Situation report could exceed estimates, too. Markets also had to absorb the effects of the Republican victory in the House of Representatives, which is believed to be likely to induce gridlock in Washington. This should provide some stability to financial regulations, which have been somewhat volatile of late. Then, at 2:15, the Fed dropped its bombshell: $600 billion in additional security purchases over the next 9 months.

Mortgage rates had opened better on Wednesday, as the election results weighed more heavily than the other data, most of which would normally cause an increase in rates.  Substantial volatility came into play at 2:15 PM when the FOMC announced its decision. Initially, this caused a sharp increase in rates, however, most of that unwound later in the afternoon, and rates closed slightly better than they had opened.

Thursday was a quieter day, as traders digested the Fed announcement, along with Thursday’s higher-than-expected jobless claims. The net result was mortgage rates declined further. Mortgage aggregator Freddie Mac revealed the results of its mortgage rate survey, showing the 30-year fixed rate at an average of 4.24% with 0.8 points, very near record lows.

Friday was another huge day for mortgage rates. The jobs report showed a total of 151,000 jobs added in October, compared to expectations around 73,000. Further, private employers added 159,000 jobs, which is exactly what economists and the Fed have sought as a sign that the right part of the economy is working to relieve unemployment. While an additional 90,000 jobs were added through revisions to prior results, the unemployment rate remained unchanged at 9.6%.

Fixed-income markets sold off on Friday in reaction to this, as the jobs report was seen as a sign that the economy might be on the right track again. At the end of the day, mortgage rates for most situations had increased by about .125%. In spite of this, for the week, mortgage rates improved.

This week, data is substantially more sparse than last. Apart from Wednesday’s initial jobless claims (moved up from Thursday due to the holiday), and Friday’s consumer sentiment, there are few market-influential reports coming. This week’s Treasury auctions will be a strong indicator of the way ahead for rates, though, as how readily that supply of new securities is absorbed will reflect on the strength of the market. Here’s a full list of what to expect:

Monday:

  • 3-year note auction

Tuesday:

  • Retail sales
  • 10-year note auction

Wednesday:

  • Weekly unemployment claims – note moved from Thursday due to holiday
  • 30-year bond auction
  • Treasury budget

Thursday:

  • Markets closed for Veterans’ Day

Friday:

  • Consumer sentiment

Clearly this week will be busier than last week was. If the Treasury auctions are well-received, mortgage pricing should remain stable, however, weaker Treasury results could spell doom for the current low-rate environment. It is beginning to be a bit reckless to float all loans in process; loans less than 30 days to closing should be locked wherever realistic. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Markets Look to Federal Reserve for Direction – More Quantitative Easing Coming?

Mixed news in prior week leads to questions about recovery; Manufacturing, Consumer sentiment weak; Jobless claims continue improvement

There had been hopes that last week’s broader array of economic data might reveal some direction in the economy. Instead, the data was substantially mixed, leaving traders unsure of the direction of things to come. Because of this uncertainty, tomorrow’s meeting of the Federal Reserve Open Market Committee will be closely viewed to set the direction of future trades.

Early last week, there was news of slight growth in retail sales in August, as retailers reported 0.4% growth in sales. This result was slightly ahead of analyst expectations, and put some pressure on mortgage rates, although this was buffered by weaker results from European manufacturers, and by new banking regulation that may affect mortgage rates for some time to come. The Basel III talks, named for their host city in Switzerland, concluded, announcing that banks would be required to hold additional assets in reserve, boosting requirements to 7% of all assets, from a prior minimum of 2%. There has been some concern that this increase may cause banks to curtail lending, however, it should be pointed out that the new requirements will phase in over the course of the next 9 years – banks will have plenty of time to adjust.

On Wednesday, something unusual happened – concerned by the rising value of its currency, Japan acted in the international currency markets, buying dollars in the hope that it could lower the Yen’s value versus the dollar. The goal of this action is to keep Japanese exports affordable. Japan’s economy is hugely dependent on exports to grow, and, since May and June, the Yen has strengthened from 94 per dollar, to as low as 83 per dollar recently, a more than 10% effective increase in the price of Japanese goods in the US. Wednesday’s move caused the dollar to jump more than 2 yen, suggesting the move may have its desired effect.

Meanwhile, on Wednesday, the Federal Reserve Bank of New York announced the results of its monthly business conditions survey, revealing weaker conditions than expected in the Empire State. Meanwhile, a separate report on manufacturing output showed meager 0.2% growth in August, and revised July’s report downwards by 0.4%. With this data already in hand, it was not surprising that the Philadelphia Federal Reserve Bank’s business conditions index showed continued weakness on Thursday, with the second consecutive negative reading at -0.7. On this survey, a positive result is viewed as supporting growth, while a negative result suggests declines may happen.

Elsewhere on Thursday, weekly unemployment claims fell to 450,000 from the prior week’s revised 453,000, the 4th consecutive weekly decline. Claims had peaked 500,000 per week mid-August, while claims have remained above 450,000 for most of the past 2 years. Economists generally view 450,000 weekly claims as consistent with stable employment, but the level needs to decline further, to 400,000 weekly claims, before it can truly be expected that we will see meaningful growth in employment. Still traders looked to this data as encouraging on Thursday.

One final report on Thursday was the monthly Producer Price Index, a measure of inflation at the wholesale level, that is, what prices are businesses paying for the intermediate goods they need to make the final products we buy. The PPI showed some increase in prices, 0.4% overall, but only 0.1% after stripping out more volatile food and energy prices. Food, and especially energy, tend to see more variability in pricing as we can see looking at the price of gas every day, and there were substantial increases in August. Still, at 0.1% core inflation, this rate is low enough that the Fed will be able to do what it feels necessary without fears of sparking excess inflation.

On Friday, we learned that consumers also saw a slight bounce in prices of goods in August, but no change net of food and energy. The Consumer Price Index increased 0.3% overall, but was flat after food and energy cost increases were excluded. This confirmed Thursday’s PPI results and showed that inflation is negligible. Meanwhile, the University of Michigan reported its monthly survey of consumer sentiment, and the results were worse than expected – 66.6 versus an expectation of 70 compared to the prior report’s 68.9 result. Friday’s 66.6 result was the lowest in over a year.

What did traders do in light of all this mixed news? For some reason, they bought stocks. Since August 31st, the Dow Jones Industrial Average has increased by over 600 points to sit just over 10,600. The buying pressure has taken some focus off of fixed income investments, such as Treasury bonds and Mortgage-Backed Securities.

In the coming week, we get a substantial quantity of economic news, which could have meaningful impact on mortgage pricing, highlighted by the Fed meeting on Tuesday. Here’s what we’re looking at:

Monday:

  • 3- and 6-month T-Bill auctions
  • Housing Market Index

Tuesday:

  • Housing Starts
  • Fed Meeting
  • 4-week and 52-week T-bills

Wednesday:

  • FHFA house price index

Thursday:

  • Weekly Jobless Claims
  • Paul Volcker speaks
  • Treasury announces next week’s auctions
  • Existing home sales
  • Leading indicators

Friday:

  • Durable goods orders
  • New home sales

As you can see, this week brings a substantial volume of information, especially about housing markets. Anecdotal information I’ve seen recently from Realtors suggests that this week’s housing market data could at best be mixed, with some likelihood of downright poor data. The key to the direction of mortgage rates, though, is the Fed meeting.

At its last meeting, The Federal Reserve enacted a small degree of “quantitative easing“, that is, buying or selling securities on the open market without a specific interest rate target in mind. There is some sentiment among traders that the Fed may move again at its meeting tomorrow, possibly broadening the degree of its activity to keep interest rates artificially low. If it moves again, the Fed could cause a new run towards record low mortgage rates. If it doesn’t, I look to the housing data to define the market’s direction this week. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Bernanke Speaks, and Markets React Strongly

GDP growth revised downwards; Mortgage rates touch new low; Durable goods orders weak; Fed ready to support economy, if it feels the need

For homeowners and mortgage originators Federal Reserve Chairman Ben Bernanke’s words at the Jackson Hole Economic Symposium Friday were a bit unsettling, to say the least. Before we delve into the details of his comments, let’s look at the economic data that caused him to say it.

Several pieces of new information came out this week that point to continued weakness in the economy. The Commerce Department offered its revised estimate of 2nd quarter GDP, showing somewhat weaker than expected growth, principally depressed by a surge in import sales. In calculating GDP, results for other categories of economic activity, like personal spending, business investment, and government spending, are reduced by the effect of imported goods. In the 2nd quarter, the effect of imports was one of the largest in recent years, reducing GDP by 3.7% in the 2nd quarter.

In part, this surge in exports may be due to effects of the sharp drop in value of the Euro compared to the US dollar in the spring of 2010. As European currency saw its value decrease in response to the debt crises faced by Greece, among other countries, the US dollar’s value surged, making European goods much cheaper relative to their US counterparts. Looking forward to the 3rd quarter, it is less likely that this factor will have as much impact.

Meanwhile, though, the bigger factor that worries economists is the employment situation. In the long term, the only way that the economy can sustain growth, is by adding jobs. Every week, we get a peek at one aspect of this situation, the weekly unemployment claims report. Last week, the report showed claims had dipped from the prior week’s 504,000 claims to 473,000. While the decrease was welcomed, the level of unemployment claims is still too high to indicate the strong growth in employment that would reflect solid economic growth. A decrease in weekly claims to 450,000, and, preferably, to 400,000 would be more indicative of that situation.

Mortgage rates once again hit a new record low, with the 30-year fixed mortgage hitting 4.36%. This is the lowest rate on records that go back over 40 years. In spite of the low rates, there are still many homeowners and potential home buyers who are not taking advantage of the opportunity. Some are unable due decreases in home values, others due to tighter underwriting standards, and still others because of concerns about jobs. There are special opportunities to help those whose values have declined, including allowing refinancing up to 125% of the homes value. Until the employment situation and underwriting ease, it is likely the other groups will remain on the sidelines.

Speaking of employment, there is no shortage of economic news regarding that category this week. Because the 1st Friday in September is this Friday, we will get the monthly employment situation report, among many others. Here’s the full calendar:

Monday

  • Personal Income and Outlays

Tuesday

  • Consumer Confidence
  • FOMC Minutes
  • Case-Schiller Housing Price Index

Wednesday

  • ISM Manufacturing Index
  • ADP Employment Report
  • Construction Spending

Thursday

  • Weekly Unemployment Claims
  • Pending Home Sales
  • Factory Orders

Friday

  • Employment Situation Report

Of these reports, the data coming Wednesday, Thursday, and Friday is by far the most influential to mortgage rates. With the volume of data, there could be some sharp moves in either direction, as traders react to the results of the employment picture.

How does this reflect on Fed Chair Bernanke’s comments last Friday? I believe that markets overreacted to his comments Friday, for two reasons: first, markets were seeking any sign at all that stocks shouldn’t continue to sink, and they got it, pushing most markets up over 1.5%, and dialing up treasury yields by 15 basis points; second, because we were still in the tail end of summer on Friday, there were still a large number of traders on the sidelines. Ultimately, mortgage pricing will worsen, but not given the current poor data available. If stronger data comes along this week, there could be a meaningful worsening of prices, but all signs point to weak additions to private payrolls, which should keep mortgage pricing high for an extended period.

Last week, we opened with news about poor performance of the Japanese economy compared to competitors. Today, Japan has taken action to shore up its position, announcing it would take more action to lower interest rates, and . Will it work? Only time can tell, but I do hope the Federal Reserve will learn from Japan’s recent history, and will help us avoid the same fate. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

Poor Data Lead to Fed Action; Quiet Week Ahead

Federal Reserve to reinvest principal payments on MBS investments into Treasuries; Tepid growth in Japan’s economy to drive Monday’s market activity

For several weeks now, we have seen mounting evidence that the economic recovery is not as strong as hoped. Rising unemployment claims, weaker than expected GDP growth, and poor consumer confidence combined to cause the Federal Reserve Open Markets Committee to add yet another to its surprising moves during the current downturn. The Fed’s primary policy tool, the Fed Funds Rate, has been stuck at a range between 0.00% and 0.25% since December, 2008.

Since then, regulators have come up with several never-before-attempted mechanisms to bolster the economy and stabilize the banking system, among them:

  • $1.25 trillion purchases of mortgage-backed securities
  • Paying interest to banks on reserves held by the Fed
  • Creating a system to allow asset backed loans like car loans and business equipment loans
  • Term deposit facility to manage bank reserves

Recently, though, the Fed has become worried that the current low interest rate environment is causing the unwinding of some of its actions. With mortgage rates currently averaging 4.44% on the 30-year fixed, demand for refinances is extremely high. Many of the loans currently getting refinanced are of a very recent vintage, some less than a year old. The Fed bought its mortgage-backed securities between November 2008 and March 2010, meaning that the majority of the loans in that pool of holdings were originated between September 2008 and January 2010.

Now those refinances are causing the MBS on the Fed’s balance sheet to be retired more rapidly than expected, and that is quite worrisome. When a loan is prepaid, funds are deducted from the bank providing the refinance, and passed to the bank getting paid off, which then passes those funds to investors holding mortgage-backed securities. Normally, this is fine, because those investors will simply reinvest the funds in new MBS or other securities.

The Federal Reserve, however, needs to have a policy in place to allow it to invest funds in open markets. Because it hasn’t had such a policy, funds it has received from those prepayments have lingered in the Fed’s coffers, and this is having the effect of reducing the money supply available to lend, making loans harder to obtain. On Tuesday, the FOMC announced it would use funds received from prepayments on its MBS holdings to purchase Treasury securities on the open market, effectively allowing it to return those funds into the financial system.

Markets reacted strongly to this on Tuesday and again on Wednesday, pushing treasury yields down by 12 basis points. Mortgage pricing improved, but not to the same degree, as traders sought the extra safety offered by the government backed securities. The 10-year Treasury currently yields just under 2.70%. Some analysts suggest that it could fall as low as 2.50%, which would cause further improvements in mortgage rates.

In the weak ahead, there is actually a very small amount of data coming, most of it weekly data. Specifically, we’ll hear on the following:

Monday

  • Empire State Manufacturing Index
  • Housing Market Index

Tuesday

  • Producer Price Index
  • Housing Starts
  • Industrial Production

Wednesday

  • Purchase Mortgage Applications

Thursday

  • Unemployment Claims

Friday

  • Nothing

All-in-all, this is a pretty light week compared to some of what we’ve seen lately. It is more likely that mortgage and treasury rates will be driven by activity in the stock market this week by a factor often referred to as the stock lever. Essentially, this phenomenon is like a see-saw: when stock prices go up, bond prices go down, and vice-versa. I suspect that it will be in full force this week in the absence of much significant data.

Monday’s market activity will start with the effects of yesterday’s report on economic growth in Japan. Japan’s economy grew a mere 0.1% in the 2nd quarter, suggesting that its economy is faltering. Part of this should come as no surprise; a substantial portion of Japan’s economic activity comes from exporting to the US, and US consumers are limiting their spending. I suspect this will cause mortgage pricing to improve today.

If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

Related articles:

Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.


Economic Recovery Slowing, When Will Jobs Growth Start?

GDP growth shrinks to 2.4%; Bright spots: New home sales, 4.54% 30-year fixed mortgage; Challenges: Durable goods orders, Consumer confidence; Jobs to define coming week

The headline everyone will remember from last week is the disappointing 2nd quarter Gross Domestic Product result announced Friday, showing a 2.4% annualized growth rate. This marked a decline form an upwardly revised 3.7% growth in the 1st quarter, and missed analyst expectations. Earlier this month, analysts had predicted that growth might hit 4.5%, but poor results from recent consumer confidence and unemployment claims surveys forced them to lower those predictions. Ultimately those estimates had been lowered to 2.5%, so the 2.4% result wasn’t as much of a surprise.

New home construction showed better results than expected, in spite of a sharp drop in new home sales in May. While sales turned around in June, the level is still around half the average over most of the last 30 years. One factor that may add support to home sales in the 3rd quarter is historically low mortgage rates. According to Freddie Mac, the 30-year fixed rate mortgage averaged 4.54% in the latest week, a new record low level in the history of that survey. Mortgage rates have been helped recently by weak economic news, and it’s likely that these low levels will continue for some time.

Day-to-day fluctuations in mortgage rates are driven by changes in pricing of mortgage-backed securities, which are in turn influenced by economic data, and affected by fluctuations in stock market and Treasury pricing. Long term trends in mortgage rates are more affected by Federal Reserve monetary policy and market expectations of that policy. The Fed uses monetary policy as a means to control the amount of money in the economy, and the primary tool of monetary policy is the Fed funds rate. The Fed funds rate is a target rate set by the Federal Reserve Open Market Committee, and then implemented through open markets operations of the Fed, in which the Fed buys or sells Treasury securities so that the desired interest rate will be achieved. At any given time, the Fed holds close to $1 trillion in Treasury securities for this purpose.

At present, the Fed funds rate, a target interest rate for short term loans between banks, has been stuck at the ultra-low level of 0.00 to 0.25% since December of 2008. The FOMC meets every six weeks to determine its next step, with the next meeting scheduled for August 10th. At more recent Fed meetings, the consensus has grown darker, and even the more hawkish members of the committee, those who had been most adamant about increasing interest rates to stave off inflation, have softened their stances. Market consensus currently suggests a belief that the FOMC will not raise the Fed funds rate until sometime in the 1st or 2nd quarter of 2011. This is why recent negative economic news has allowed markets to allow data to pull mortgage rates lower.

Specifically, last week, we saw news about two important components of the economy.

Durable goods orders were reported, showing a decline of 1% in June. Economists had been expecting an increase of 1%, however, I believe their estimates were incorrectly based on recent order information from aircraft manufacturer Boeing, one of the biggest US makers of durable goods. It’s not that Boeing isn’t bringing in the orders. They are. The problem with the data is the timing of those orders. Boeing recently received a bevy of orders at the Farnborough Airshow, however, that show took place in July, meaning that those orders would have no impact on June’s Durable Goods orders.  I suspect that July will show a significant “rebound” in durables orders because of this.

Also, consumer confidence and consumer sentiment reports recently have taken some wind from markets sails. Consumer spending represents between 65-70% of overall GDP, and lately, consumers haven’t been spending. Consumer sentiment on all available reports has fallen over the last few months, meaning that consumers are keeping a very tight reign on their wallets.

Why are consumers worried? In a word: Jobs. Consumers are not seeing any improvement in the availability of work in the US, which is currently saddled with 9.5% unemployment, and further workers who have given up on finding a job. 300,000 or 400,000 Americans run out of unemployment benefits each week without finding work, hence why consumers are afraid to spend.

We’ll find out exactly where the employment market stands this week, with three important reports on Jobs. On Wednesday, payroll company ADP brings the results of its monthly private employment survey for July. On Thursday, we’ll learn how many filed for unemployment benefits in the past week. Finally, Friday, we’ll get what is often the most interest-rate-influential economic report of the month, the Bureau of Labor Statistics’ Payrolls and Unemployment Rate surveys. In addition, there are other important reports:

Monday:

  • Construction spending
  • Manufacturing data

Tuesday:

  • Personal income and spending
  • Pending home sales

Wednesday:

  • ADP employment

Thursday:

  • Unemployment claims

Friday:

  • Unemployment rate
  • Jobs report

There is some risk to floating loans at the moment, especially if we get an unexpected positive surprise in employment later this week. On the flip side of this, though, is the slew of recent marginal data in this area. It just doesn’t look like employers added that many jobs last month, based on the negative consumer sentiment and the high degree of unemployment claims filed. There are substantial rewards to floating, in that recent data suggests the economy may not have hit bottom yet, and that could lead to even lower interest rates.

If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great week!

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Last Week’s Report

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.