Mortgage Rates Get Hammered

Yesterday was ugly. Mortgage backed securities opened lower and continued to fall the entire day. All lenders repriced worse multiple times as economic optimism has re-entered the markets. Stock markets around the world rallied as economic data was better than expected here and abroad which pulled money away from bonds and treasuries.

We have two economic data releases this morning. Out first was 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: +26,000 to 436,000 vs estimates of 423,000. Prior week was revised worse to show an additional 3,000 claims. Weekly claims are quite volatile so market participants track the 4 week moving average which fell 5,750 to 431,000.
- Continued Claims: +53,000 to 4.270million vs estimates of 4.217million.
- Extended and Emergency Benefits: -235,000 to 4.9million

Jobless claims are trending lower with the 4 week moving average falling to its lowest level since August 2008 indicating an improving jobs sector. Yesterday’s ADP report also showed more jobs created last month than expected.

Also out this morning was Pending Home Sales from the National Association of Realtors(NAR). This data shows the monthly change in the amount of existing homes, not new construction, in which a contract has been signed, but has not closed. This is a leading indicator of housing activity and economic momentum as consumers would have to feel pretty confident about their own finances to purchase a home. Additionally, when a home is purchased, there are many other items needed to furnish the home, this adds to consumer spending which benefits the overall economy. This report has a two month lag, so today’s data is for the month of October.

Today’s report gave us very positive news on housing. The Pending Home Sales index posted a record month over month increase of 10.4% following last month’s 1.8% dip. This was a much better than expected report as market participants were anticipating a 1% decline. Lawrence Yun, NAR’s chief economist said “The housing market clearly is in recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011”.

Lender rate sheets are worsened considerably from yesterday morning. The par 30 year conventional rate mortgage has risen to 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.

Mortgage rates took a beating yesterday thanks to optimism over a positive jobs report tomorrow. If you feel tomorrow’s employment data will show less than expected jobs created, floating will pay off. If you feel tomorrow’s data will be better than expected, you best lock today. On Monday, the estimates were calling for 140,000 jobs created but following yesterday’s ADP data, the consensus estimate has been increased to 168,000. I feel a better than expected report has already been baked into the markets and it will take a number greater than 180,000 for this sell off to continue. Anything less than that should allow us to at least hold onto the current price levels of bonds. As of 10:30am central, MBS are well off the lows and lenders may reprice; however, with employment data coming tomorrow they will be extremely slow passing along any improvements.