After Touching New Lows, Mortgage Rates Under Pressure

At the open yesterday, mortgage rates were very aggressive with many lenders offering 4.125% as par for well qualified consumers. Lower rates were available if you are willing to pay extra discount points. As the day progressed, mortgage rates came under pressure and most lenders did reprice for the worse increasing consumer costs by about .25% of the loan.

The economic data picked up today with several releases. First out was the final revision to second quarter Gross Domestic Product.

GDP is the broadest measure of total economic activity. It reports on the output of every economic sector. It's basically our economic report card. A rapidly growing economy can lead to price inflation, one of the largest enemies of low rates. The bond market prefers stable growth while stocks generally enjoy a faster pace of economic expansion.

We receive three different assessments of GDP: the Advance Read, the Preliminary Release, and the Final Report. Today the Bureau of Economic Analysis released the Final Report. The Advance Read of quarter two GDP indicated a 2.4% rate. The Preliminary Release showed a revision lower to 1.6%. Economists expected today’s release to hold steady at 1.6% but the Final Report showed second quarter GDP coming in slightly better at a 1.7% annual growth rate.

Released at the same time was the weekly jobless claims. Released by the Department of Labor, this report provides three timely metrics on the health of the job market:

1. Initial Jobless Claims: totals the number of Americans who filed for first time unemployment benefits in the previous week
2. Continued Claims: totals the number of Americans who continue to file for benefits due to an inability to find a new job
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits

Since our economy is driven by consumer spending, market participants track employment data to get a sense of future economic momentum. Higher jobless claims imply less consumers have jobs and therefore less money to spend. This is a negative for the economy...but generally helpful in keeping consumer borrowing costs down.

Here are the results:

1. Initial Jobless Claims: -16,000 to 453,000 vs. estimates for a read of 460,000. This was the fourth consecutive week of declining claims. The prior week’s claims were revised worse to show 4,000 additional claims. Better Than Expected
2. Continued Claims: -83,000 to 4.457million vs. estimates for a read of 4.480 million. Better Than Expected
3. Extended and Emergency Benefits: -293,000 to 4.88million.

The final report on the docket today: Chicago Purchasing Managers Index. This data gives us a look into the strength of the manufacturing sector of our economy. It measures the strength of business conditions in the Chicago region. Index values over 50 imply the sector is growing. Index values below 50 imply the sector is contracting. In August, the Chicago PMI fell to 56.7 from 62.3 in July. Today’s release for September showed the Chicago PMI improving much more than expected to 60.7 (economists expected 56.0).

All of today’s data was better than expected resulting in stocks rallying while the bond market continues to be pressured lower. Lender rate sheets this morning are considerably worse than yesterday. The par 30 year conventional rate mortgage is in the 4.25% to 4.50% range for well qualified consumers but the lenders offering 4.125% yesterday are no longer doing so today.

Currently, mortgage backed securities are at the bottom of the range we have used to give lock/float recommendations. If you have been reading the blog and closing in the near term, you should be locked so you have nothing to worry about. If you are still floating, I feel you should continue to do so following the float the price lows, lock the price highs strategy…but stay in close contact with your mortgage professional. If MBS continue to move lower and fall below the range, it could get ugly quick.