Economic Data Pressures Consumer Borrowing Costs Higher

The bond market opened higher yesterday extending the gains from last week. This allowed lenders to pass along improved rate sheets when compared to Friday mornings’. As the day progressed, stocks rebounded from a much lower open pulling money away from bonds. This forced a few lenders to reprice for the worse increasing consumer borrowing costs by an .125 in discount.

The economic calendar was quite busy this morning.

First was Housing Starts & Building Permits from the Department of Commerce. Housing starts data estimates how much new residential real estate construction occurred in the previous month. Building Permits data provides an estimate on the number of homes planning on being built, a forward looking indicator of economic expansion. Recent reports on housing have been very disappointing, especially after the homebuyer tax credit expired in April.

Today’s report showed a modest improvement in July but still less than economists had expected. Housing Starts rose 1.7% to a annualized pace of 546,000 vs expectations of 565,000. This follows last month’s report which showed Housing Starts plunging 8.7% from the prior month. The improvement was led by multifamily starts which rebounded 32.6% from last month. Single family housing starts declined 4.2% after falling 1.7% in June. Building permits fell 3.1% to an annualized pace of 565,000 also short of economists’ expectations and to the lowest level in over a year. Single family building permits declined 1.2% to 416,000, the slowest pace since April 2009. On a year over year basis, permits are down 3.7%. Reports on housing continue to be disappointing indicating more headwinds ahead for this very troubled sector of our economy.

Released at the same time was the Producer Price Index which measures inflation at the producer level. PPI measures the monthly change in prices paid by manufactures and wholesalers for the goods they consume to produce their product. If businesses are paying more for the materials they use to produce their widgets, they may be forced to pass along those additional costs to the consumer. During periods of bad economic conditions and high unemployment, producers find it difficult to pass along the higher costs to the end consumer. This makes tracking consumer prices more important than producer prices.

This report gives us two measure on inflation… the overall and the core. The core rate strips out food and energy due to their monthly volatility. The overall Producer Price Index rose 0.2% matching economists’ expectations. Year over year, overall producer prices are up 4.1%. The core level, on the other hand, rose more than expected by 0.3%. Economists had only expected a 0.1% increase. Year over year, core producer prices are up 1.5%. Despite the higher core level, this report continues to show that inflation is in check which should allow the Fed to maintain the current accommodative stance on monetary policy. Additionally, the higher producer prices helps to ease the concerns of deflation which can be a bigger problem than inflation.

Our final economic data of the day was the release of the Fed's 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 is a positive economic indicator so improvements benefit the stock market...at the expense of mortgage rates. Economists were calling for Industrial Output to increase at a month over month rate of 0.5%. The report was much better than expected, registering a month over month gain of +1.0%. The prior month’s data was revised worse from +0.1% to -0.1%.

Following the release of all of today’s data, market participants are more focused on the positive Industrial Production report than the weak housing data. Stocks are posting gains at the open which is pressuring mortgage backed securities lower.

The best execution 30 year fixed conventional mortgage rates remain in the 4.25% to 4.50% range for well qualified consumers. We still have a few small independent mortgage bankers and brokers offering 4.125% but less than yesterday. 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 seeking a 15 year term, you should expect a rate in the 3.75% to 4.00% range with similar costs but lower FICO score requirements.