Mortgage Rates Continue to Bounce in a Tight Range
Posted 06-16-2010 at 08:16 AM by VictorBurek
Mortgage rates started the day yesterday holding steady near the best levels of 2010 despite the stock market opening much higher. Usually, when stocks move higher, the fixed income sector moves lower as market participants reallocate money from low risk, low yield bonds into higher risk, higher yielding stocks. As the day progressed and stocks continued to rally, mortgage backed securities could not hold off the pressure and they finally started to move lower right around the lunch hour. MBS prices continued to decline up to the closing bell which forced lenders to reprice for the worse increasing consumer borrowing costs.
The economic calendar was quite busy this morning…First out was the Weekly Mortgage Bankers Association Applications Index.
The Mortgage Bankers Association application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment which can increase disposable income and consumer spending (or give consumers a chance to pay down other debts like credit cards). A falling trend of purchase applications indicates a decline in home buying interest, a negative for the housing industry and the economy as a whole.
Since the homebuyer tax credit expired on April 30, purchase applications have declined sharply. This was to be expected though. On the other hand, a global stock market sell-off and “flight to safety” into risk averse assets like U.S. Treasuries has helped push mortgage rates almost as far as the record lows we witnessed last spring. Low mortgage rates have led more borrowers to consider a refinance so the MBA's refinance application index has greatly improved over the past month. Last week’s report was quite disappointing. Not only did purchase applications continue to plunge but we also saw a sharp decline in refinance activity leading many to believe those that could qualify for a refinance have already done so leaving very few home owners left in the pool of eligible borrowers. However, one bad report does not make a trend.
Today’s release gave us positive news on both fronts. In the week ending June 11, purchase applications rose 7.3%. This was the first increase in purchase applications since the end of the home buyer tax credit six weeks ago. Refinance activity posted a whopping 21.1% increase as near historic low mortgage rates have motivated those home owners who have not refinance their mortgage yet to take advantage of record low rates. If you’ve been considering a refinance, now continues to be a great opportunity with mortgage rates holding near all-time record lows.
Next was another report on housing with the release of Housing Starts and Building Permits also known as New Residential Construction from the Department of Commerce. Housing starts data estimates how much new residential real estate construction occurred in the previous month. New construction means digging has begun. Adding rooms or renovating old ones do not count, the builder must be constructing a new home. Building Permits data provides an estimate on the number of homes planning on being built…a forward looking indicator of economic momentum.
The report was very disappointing for the housing sector. Housing starts in May fell 10% to an annualized pace of 593,000 units, much worse than the 3.3% decline to 648,000 that was expected. Adding more bad news was the prior month’s data was revised lower from the first reported pace of 672,000 to only 659,000. Building permits declined 5.9% to an annualized pace of 574,000, also much lower than forecasted.
Released at the same time was the Producer Price Index. PPI measures the changes in prices that manufactures and wholesalers pay for goods during different stages of production. If businesses have to pay more for the materials they use to produce their widgets …they may be forced to pass along those additional costs to you…the consumer. During periods of bad economic conditions and high unemployment, producers find it difficult to pass along the higher prices to the end consumer. This makes consumer inflation reports of more importance than producer inflation. However; as stated before, inflation is one of the largest enemies of low interest rates so we must pay attention to any report on inflation as it can impact the markets.
Overall producer prices in May declined 0.3% less than the 0.5% decline that was expected. When you exclude food and energy, the core rate, producer prices rose 0.2% also higher than the 0.1% increase forecasted. Tomorrow we get the more important Consumer Price Index. Economists expect overall consumer prices to have fallen 0.2% last month while the core rate is expected to show a 0.1% increase. The Fed continues to state that inflation is of no immediate concern and today’s report continues to confirm that stance.
Our final economic data of the day came with the release of the Industrial Production report. This report gives Federal Reserve economists a measure of the strength of the national manufacturing sector by measuring output at U.S. factories, utilities and mines. Higher industrial production would be a positive economic indicator which would benefit the stock market at the expense of the fixed income sector and mortgage rates. Economists expected today’s release to show industrial production increasing +1.0% but the report was better than anticipated, registering a +1.2% month over month gain. The prior month’s data was revised lower from the first reported month over month gain of +0.8% to +0.7%.%.
It will be interesting to see how today folds out. Will market participants pay more attention to the very bad housing data or the positive manufacturing data? Following the release of all of today’s reports, MBS are moving higher in price and have regained most of yesterday’s losses. Whether we can hold onto these gains and improve further will more than likely be dictated by the stock lever. If stocks rally, I suspect mortgage rates will continue to come under pressure to move higher. If stocks sell off, mortgage rates should hold steady and maybe even improve.
Reports from fellow mortgage professionals indicate lender rate sheets to be improved over yesterday’s repriced ones, but still worse than what we had yesterday morning. The par 30 year conventional rate mortgage remains in the 4.50% to 4.75% range for well qualified consumers. To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. If you are looking for a 15 year term, you should expect par in the 4.00% to 4.25% range with similar costs but lower FICO score requirements.
I continue to favor locking all loans closing within the next 30 days. The only loans that I would recommend floating are ones that are a day away from a shorter lock period which offers slightly better pricing. Yesterday, stocks broke an important level of resistance indicating investor optimism is improving which could lead to an unwinding of the “flight to safety” trade which has pushed mortgage rates to the best level of 2010 and very near historic lows.
The economic calendar was quite busy this morning…First out was the Weekly Mortgage Bankers Association Applications Index.
The Mortgage Bankers Association application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment which can increase disposable income and consumer spending (or give consumers a chance to pay down other debts like credit cards). A falling trend of purchase applications indicates a decline in home buying interest, a negative for the housing industry and the economy as a whole.
Since the homebuyer tax credit expired on April 30, purchase applications have declined sharply. This was to be expected though. On the other hand, a global stock market sell-off and “flight to safety” into risk averse assets like U.S. Treasuries has helped push mortgage rates almost as far as the record lows we witnessed last spring. Low mortgage rates have led more borrowers to consider a refinance so the MBA's refinance application index has greatly improved over the past month. Last week’s report was quite disappointing. Not only did purchase applications continue to plunge but we also saw a sharp decline in refinance activity leading many to believe those that could qualify for a refinance have already done so leaving very few home owners left in the pool of eligible borrowers. However, one bad report does not make a trend.
Today’s release gave us positive news on both fronts. In the week ending June 11, purchase applications rose 7.3%. This was the first increase in purchase applications since the end of the home buyer tax credit six weeks ago. Refinance activity posted a whopping 21.1% increase as near historic low mortgage rates have motivated those home owners who have not refinance their mortgage yet to take advantage of record low rates. If you’ve been considering a refinance, now continues to be a great opportunity with mortgage rates holding near all-time record lows.
Next was another report on housing with the release of Housing Starts and Building Permits also known as New Residential Construction from the Department of Commerce. Housing starts data estimates how much new residential real estate construction occurred in the previous month. New construction means digging has begun. Adding rooms or renovating old ones do not count, the builder must be constructing a new home. Building Permits data provides an estimate on the number of homes planning on being built…a forward looking indicator of economic momentum.
The report was very disappointing for the housing sector. Housing starts in May fell 10% to an annualized pace of 593,000 units, much worse than the 3.3% decline to 648,000 that was expected. Adding more bad news was the prior month’s data was revised lower from the first reported pace of 672,000 to only 659,000. Building permits declined 5.9% to an annualized pace of 574,000, also much lower than forecasted.
Released at the same time was the Producer Price Index. PPI measures the changes in prices that manufactures and wholesalers pay for goods during different stages of production. If businesses have to pay more for the materials they use to produce their widgets …they may be forced to pass along those additional costs to you…the consumer. During periods of bad economic conditions and high unemployment, producers find it difficult to pass along the higher prices to the end consumer. This makes consumer inflation reports of more importance than producer inflation. However; as stated before, inflation is one of the largest enemies of low interest rates so we must pay attention to any report on inflation as it can impact the markets.
Overall producer prices in May declined 0.3% less than the 0.5% decline that was expected. When you exclude food and energy, the core rate, producer prices rose 0.2% also higher than the 0.1% increase forecasted. Tomorrow we get the more important Consumer Price Index. Economists expect overall consumer prices to have fallen 0.2% last month while the core rate is expected to show a 0.1% increase. The Fed continues to state that inflation is of no immediate concern and today’s report continues to confirm that stance.
Our final economic data of the day came with the release of the Industrial Production report. This report gives Federal Reserve economists a measure of the strength of the national manufacturing sector by measuring output at U.S. factories, utilities and mines. Higher industrial production would be a positive economic indicator which would benefit the stock market at the expense of the fixed income sector and mortgage rates. Economists expected today’s release to show industrial production increasing +1.0% but the report was better than anticipated, registering a +1.2% month over month gain. The prior month’s data was revised lower from the first reported month over month gain of +0.8% to +0.7%.%.
It will be interesting to see how today folds out. Will market participants pay more attention to the very bad housing data or the positive manufacturing data? Following the release of all of today’s reports, MBS are moving higher in price and have regained most of yesterday’s losses. Whether we can hold onto these gains and improve further will more than likely be dictated by the stock lever. If stocks rally, I suspect mortgage rates will continue to come under pressure to move higher. If stocks sell off, mortgage rates should hold steady and maybe even improve.
Reports from fellow mortgage professionals indicate lender rate sheets to be improved over yesterday’s repriced ones, but still worse than what we had yesterday morning. The par 30 year conventional rate mortgage remains in the 4.50% to 4.75% range for well qualified consumers. To secure a par interest rate on a conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. If you are looking for a 15 year term, you should expect par in the 4.00% to 4.25% range with similar costs but lower FICO score requirements.
I continue to favor locking all loans closing within the next 30 days. The only loans that I would recommend floating are ones that are a day away from a shorter lock period which offers slightly better pricing. Yesterday, stocks broke an important level of resistance indicating investor optimism is improving which could lead to an unwinding of the “flight to safety” trade which has pushed mortgage rates to the best level of 2010 and very near historic lows.
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