Mortgage Rates Hold Steady but Come Under Pressure

Mortgage backed securities opened higher and held steady for most of yesterday, but late in the day they did come under pressure giving back some of the earlier gains. Lenders passed along improved rate sheets yesterday morning and issued no reprices on the day. No surprises came from the FOMC statement which offered a long road ahead recovery outlook. At the open this morning, the downward pressure is continuing thanks to positive economic data out of Germany and easing of tensions between North and South Korea.

The economic calendar is extremely busy this morning. At 8:30am we received three reports, Durable Goods Orders, Personal Income and Outlays and Jobless Claims.

Durable Goods Orders 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.

Today’s report from the Department of Commerce indicated Durable Orders for October fell 3.3%, much worse than the no change that was expected. Septembers’ data was revised better from the first reported increase of 3.5% to 5.00%. When excluding transportations orders, the report also came in much worse than expected at a 2.7% decline when a 0.6% gain was expected. The prior month’s data was also revised from the first reported decline of 0.4% to +1.3%. The revisions to the prior month are helping to offset this very bad forward looking report.

Personal Income and Outlays provides market watchers with a view into the strength of consumers by tracking what Americans earn and what they spend. A stronger consumer benefits the stock market while a weaker consumer helps keep mortgage rates low.

This data contains three separate reads on the health of consumers.

1. Personal Income: the monthly change in income that households receive from all sources (before taxes).
2. Personal Outlays (consumer spending): the monthly change in the amount of money consumers are spending on durable and non-durable goods and services.
3. Personal Savings Rate: the monthly change in the amount of money consumers are saving instead of spending

From the Bureau of Economic Analysis:

1. Personal Income: Increased 0.5% in August, beating estimates of only a .4% increase.
2. Personal Outlays: Increased 0.4% in August, just short of the 0.5% increase that was expected.
3. Personal Savings: Rose to 5.7%, from 5.6% in September. Higher savings rate might indicate less consumer confidence in the economy.

This data also provides a read on consumer level price inflation: the PCE price index. The overall PCE index rose 0.2% in October following a 0.1% rise in the prior month. The core rate, which strips out food and energy prices due to their volatility, came in unchanged matching expectations and the prior month. Year over year, overall PCE index fell from +1.4% in September to +1.3% in October. The core rate fell to a record low +0.9% from +1.2% last month. It looks like deflation continues to be a larger threat then inflation and illustrates the need for QEII.

Next came the weekly Jobless Claims. From the Department of Labor, this report tracks the number of Americans that filed for first time unemployment benefits in the prior week. Since our economy is driven by consumer spending, higher jobless claims indicates consumers will have less money to spend which is bad for corporate profits and stocks but generally helpful in keeping interest rates low. Recent reports have shown a steady decline in jobless claims which indicates a improving jobs sector.

This report gives us three measures of unemployment claims:

- Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week
- Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job
- Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now collecting extended and emergency benefits which can last as long as 99 weeks

Here are the results:

- Initial Jobless Claims: -34,000 to 407,000 vs estimates of 435,000. This is lowest amount of initial claims since July 2008 indicating the labor market is improving.
- Continued Claims: -113,000 to 4.182million vs estimates of 4.28million.
- Extended and Emergency Benefits: -262,000 to 4.66million

Next came Consumer Sentiment. The Reuter’s/University of Michigan’s Consumer Center surveys 500 households on their attitudes on the economy and personal financial status. Market participants track consumer attitudes to gauge future economic momentum. An optimistic consumer is more likely to spend, this benefits stock markets. A pessimistic consumer is more likely to save, which supports low yields in the bond market. Low yields in the bond market allow lenders to keep mortgage rates low.

We receive two readings each month on Consumer Sentiment, a preliminary reading at the beginning of the month and a final reading. Today’s report is the final look at November. Economists were expecting an uptick in sentiment to 69.5 from the 69.3 preliminary reading. Today’s report indicated final Consumer Sentiment for November came in at a better than expected 71.6.

Our final report on this holiday shortened week was 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. Last month’s report indicated New Home Sales moving off of record lows to an annualized pace of 314,000 for the second month in a row of increasing sales.

Today’s release indicated New Home Sales for October fell more than expected by 8.1% to an annualized pace of 283,000 units vs concensus estimates of 310,000. Year over year, new home sales are down 21.5%. The median sell price fell to $194,900, the lowest since October 2003! The available new homes on the market rose to a 8.6 months’ worth from 7.9 last month.

Finally, the Department of Treasury will announce the results of today’s auction of $29billion of 7 year notes. Yesterday’s 5 year auction was okay and didn’t have much if any impact on the markets.

Lender rate sheets are worse this morning due to early morning weakness with MBS and the upcoming holiday. The par 30 year conventional rate mortgage remains in the 4.25% to 4.50% range for well qualified consumers. If you are seeking a 15 year term, par continues to hold in the 3.625% to 3.875% range. To secure a par interest rate you must be willing to pay all closing costs including an estimated one point loan origination/discount/broker fee. You may elect to pay less in costs but you will have to accept a higher interest rate.

All U.S. markets will be closed tomorrow in observance of Thanksgiving. The markets will reopen on Friday for a short session closing at 2pm. With the short session on Friday and with many market participants being on vacation, lenders tend to be conservative with pricing thus I favor floating all loans today through next week. My next update will come on Monday. I hope you and your family have a safe Thanksgiving Holiday.