Mortgage Rates Hold Onto Gains Ahead of Employment Data

Lenders issued the most aggressive rate sheets of 2010 yesterday as weakness in stocks allowed mortgage backed securities to move to prices never seen before. Helping the rally in the fixed income sector was a much weaker than expected consumer confidence report. If consumers have less confidence in the direction of our economy, they are less likely to spend money which doesn’t benefit corporate profits and stocks but is helpful in keeping mortgage rates low. Since the price gains came prior to lenders issuing rate sheets, lenders held rates unchanged on the day.

Out early this morning was the weekly Mortgage Bankers Associations Application Survey. The MBA survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. Survey data gives economists a sample of consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications would imply consumers are seeking out lower monthly payments. If borrowers are able to qualify for lower payments, their disposable income would rise which could lead to increases in consumer spending (or give consumers a chance to pay down other debts like credit cards). A falling trend of purchase applications indicates consumer demand for new and existing homes is on the decline, a negative for the housing industry and the economy as a whole.

Since the end of the Home Buyer Tax Credit on April 30, purchase applications have plunged, but that was to be expected. On the other hand, the global economic recovery is being questioned by market participants which is causing a “flight to safety” into U.S. Treasuries and MBS. This has led to mortgage rates falling to historic low levels. As mortgage rates have declined, many more consumers are refinancing which can be seen by an increase in the refinance applications survey.

Today’s data offered no surprises. Purchase applications in the week ending June 25 are down 3.3% from the prior week while the refinance activity has posted a 12.6% increase. If you have been considering a refinance, now is the time to pull the trigger as mortgage rates are at levels never seen before.

The next data release on the day gives us a sneak peek into the health of the labor market ahead of the official government data, which is due out this Friday....the ADP Employment Report. Historically, the ADP report has varied greatly from the official report, however its accuracy has been improving more recently. The biggest difference between the two jobs report is the ADP numbers do not take into account government hiring, only the private sector. Since our economy is driven by consumer spending, higher unemployment would indicate less consumer demand and spending, a negative for corporate profits. Investors tend to sell stocks when unemployment is high in favor of the safety of risk free Treasuries.

Today’s release was very disappointing. The private sector added only 13,000 jobs last month, well short of the 60,000 that was expected. The prior month’s data was revised slightly higher from the first reported gain of 55,000 to 57,000. With the preview over, all eyes will be focused on the government report due out early Friday. It is expected to show a loss of 110,000 jobs and the unemployment rate moving higher from 9.7% to 9.8%.

Our final report on the day gives us a look into the strength of the manufacturing sector of our economy with the release of Chicago PMI. This data measures the strength of business conditions in the Chicago region. The Institute of Supply Management surveys both manufacturing and non-manufacturing firms, readings above 50 indicate an expanding conditions while readings below 50 indicate contraction. Last month’s report indicated business conditions easing but still well above the breakeven reading. May’s Chicago PMI came in at 59.7 down from Aprils 63.8 which was the highest reading in over 3 years. Today’s report registered a 59.1, in line with economists’ expectations but it is the second consecutive month of the survey showing business conditions declining.

Reports from fellow mortgage professionals indicate lender rate sheets to be similar to yesterday. The par 30 year conventional rate mortgage remains in the 4.375% to 4.625% range for well qualified consumers. There are a couple lenders offering 4.25% this morning, but you will have to pay a little more in costs. To secure a par 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.

Still favor locking. Mortgage rates are at the lowest level in history and I see no reason to risk floating.