Mortgage Rates Continue to Rally on Weak Data

Mortgage rates opened yesterday rallying ahead of important data on existing home sales. Once the report was released by the National Association of Realtors it indicated existing home sales plunging more than twice as much as was expected by economists. Despite the horrible data, mortgage rates couldn’t continue to rally as they came under pressure once the report was released. Around lunch time, mortgage backed securities were at the lows of the day which forced a few lenders to reprice for the worse; however, as the afternoon session began MBS managed to recapture the early morning losses closing where they began the day.

Much like yesterday, mortgage rates are rallying ahead of important data being released today. First out and of least significance was the release of the weekly Mortgage Bankers Associations Applications Survey.

The MBA loan applications survey covers over 50% of all US residential mortgage apps 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 could imply more consumers are seeking out lower monthly payments. If more homeowners are able to qualify for lower payments, their disposable income would increase which could lead to a rise 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, purchase applications have slumped but record low interest rates have helped refinance activity pick up. Today’s release indicated refinance applications increased 5.7% last week while purchase applications edged 0.6% higher.

But onto more important data… Durable Goods Orders was released this morning by the Department of Commerce. This data measures the number of new orders placed at U.S. factories for products that are expected to last at least three years. This would include items such as computers, appliances, and electronics. This report tells economists how busy factories will be in the months ahead. Increasing orders implies there is more potential for higher corporate revenues and profits. It could also imply that firms would need to hire additional staff to ensure they keep up with growing orders. This is a positive for the overall economy and stocks...but a negative for the fixed income sector/interest rates.

The report was much worse than expected as Durable Goods Orders only increased 0.3% when a 2.5% increase was expected. Helping to ease the horrible report was the prior month’s data was revised better from -1.0% to only -0.1% drop. When excluding transportations orders, orders plummeted 3.8% also much worse than the 0.5% INCREASE that was expected. This was the largest decline since January 2009.

Much like yesterday, MBS have had a muted reaction to the much worse than expected data. Bond traders must have seen this coming as MBS rallied prior to the data and have held steady since… but we have one more report coming, New Home Sales.

The Census Bureau considers a new home sold when the buyers sign the sales contract. The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction. This data is not as important as yesterday’s Existing Home Sales report as New Home Sales only make up about 10% of the housing market.

Since the end of the home buyer tax credit, new home sales have fallen with May’s report showing a massive 36.7% drop. On the other hand, June’s report showed a rebound of 23.6% but that was after the massive decline in May. Economists surveyed prior to today’s report expected New Home Sales to improve from June’s annualized pace of 330,000 to 340,000.

The report indicated new home sales for July fell 12.4% to a much worse than expected annualized pace of 276,000, the slowest pace on record. To make things even worse, June was revised lower from a 23.6% increase to only 12.1%. The median New Home price fell 4.8% to $204,000, the lowest since 2003. The report also showed the available supply of new homes on the market increased from 8 months to a 9.1 month supply.

Lastly, we have another supply of debt coming to the market at 1pm. The Department of Treasury will announce the results of today’s auction of $36billion of 5 year notes. Yesterday’s 2 year auction went okay and following the results treasury yields moved lower which helped MBS to move higher in price. The added supply of debt on the market can pressure rates higher today, especially if it is met with weak demand. Strong demand for our nation’s debt is one of several factors that have helped mortgage rates remain very low for quite some time.

Reports from fellow mortgage professionals indicate lender rate sheets to be improved from yesterday. The par 30 year conventional rate mortgage remains in the 4.25% to 4.50% range but we have several more lenders offering 4.125% this morning. 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(lender, title and government fees) including an estimated one point loan origination/discount/broker fee. If you have a Jumbo Loan you should expect a par interest rate around 5.125%. Jumbo loans have loan amounts that exceed the conventional loan limits of $417,000 in most states with some high costs states going up to $729,000.

With rates holding very near the best levels ever, I continue to favor locking all loans closing within 15 days but hold off on locking until end of day. Longer term closing should also consider locking and take advantage of the recent price gains. For mortgage rates to improve further we will need continued bad economic data for market participants to drive MBS prices higher which would allow lenders to offer better rates.