Mortgage Rates Hold Steady but Under Pressure
Posted 10-27-2010 at 08:29 AM by VictorBurek
Very slow day in the bond markets yesterday. Mortgage backed securities opened lower yesterday morning forcing lenders to slightly increase consumer borrowing costs on rate sheets. As the day progressed, MBS gradually moved lower throughout the day but the losses were not substantial enough to warrant reprices for the worse. However, MBS opened lower this morning which will force lenders to increase borrowing costs on rate sheets when they are issued.
We received a couple economic reports this morning. First was Durable Goods Orders. 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.
Today’s report from the Department of Commerce gave us mixed results. Durable orders for September rose 3.3%, much higher than the 2.0% that was expected. Augusts’ data was revised better from the first reported decline of 1.3% to only a 1% decline. The large increase in overall orders was due to a doubling in aircraft demand. When excluding transportations orders, the report came in much worse than expected at a 0.8% decline when a 0.5% gain was expected. The prior month’s data was revised from the first reported gain of 1.7% to 1.9%. Following this report, MBS have moved off the lows of the day.
Our final report on the day gave us another look at the strength of the housing sector with the release of 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. Since the end of the home buyer tax credit, home sales data has been quite disappointing. Last month’s report indicated New Home Sales moving off of record lows to an annualized pace of only 288,000 units which was just shy of the 290,000 that was expected.
Today’s release indicated New Home Sales for September rose more than expected by 6.6% to an annualized pace of 307,000 units for the second month in a row of increasing sales. Year over year, new home sales are down 21.5%. The median home price increased 3.3% from last year to $223,800. The available new homes on the market fell to 8 months worth from 8.6 in the prior month. Total amount of new homes on the market fell to 204,000, the fewest since 1968!
At 1pm, the Department of Treasury will announce the results of today’s auction of $35billion of 5 year notes. Yesterday’s 2 year auction went very well with strong demand but had minimal effect on bond pricing. If demand today remains strong, MBS should be able to hold ground or maybe improve some. However, if demand is weak interest rates will remain under pressure in the short term.
Early morning weakness in the bond market has resulted in worsened rate sheets this morning. The par 30 year conventional rate mortgage remains in the 4.125% to 4.375% range for well qualified borrowers. 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. For consumers with lower FICO scores or higher loan to values you should consider an FHA loan which offers similar rates but with higher costs.
I favor floating all loans as MBS are towards the bottom of our range. Lock the price highs, float the price lows. Additionally, it is highly expected the Fed announces Quantitative Easing Part Two in the next week which should at least help MBS rebound from the recent sell off over the last week or so. I am not convinced that this announcement will result in new record low interest rates, but should help lower rates from current levels.
We received a couple economic reports this morning. First was Durable Goods Orders. 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.
Today’s report from the Department of Commerce gave us mixed results. Durable orders for September rose 3.3%, much higher than the 2.0% that was expected. Augusts’ data was revised better from the first reported decline of 1.3% to only a 1% decline. The large increase in overall orders was due to a doubling in aircraft demand. When excluding transportations orders, the report came in much worse than expected at a 0.8% decline when a 0.5% gain was expected. The prior month’s data was revised from the first reported gain of 1.7% to 1.9%. Following this report, MBS have moved off the lows of the day.
Our final report on the day gave us another look at the strength of the housing sector with the release of 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. Since the end of the home buyer tax credit, home sales data has been quite disappointing. Last month’s report indicated New Home Sales moving off of record lows to an annualized pace of only 288,000 units which was just shy of the 290,000 that was expected.
Today’s release indicated New Home Sales for September rose more than expected by 6.6% to an annualized pace of 307,000 units for the second month in a row of increasing sales. Year over year, new home sales are down 21.5%. The median home price increased 3.3% from last year to $223,800. The available new homes on the market fell to 8 months worth from 8.6 in the prior month. Total amount of new homes on the market fell to 204,000, the fewest since 1968!
At 1pm, the Department of Treasury will announce the results of today’s auction of $35billion of 5 year notes. Yesterday’s 2 year auction went very well with strong demand but had minimal effect on bond pricing. If demand today remains strong, MBS should be able to hold ground or maybe improve some. However, if demand is weak interest rates will remain under pressure in the short term.
Early morning weakness in the bond market has resulted in worsened rate sheets this morning. The par 30 year conventional rate mortgage remains in the 4.125% to 4.375% range for well qualified borrowers. 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. For consumers with lower FICO scores or higher loan to values you should consider an FHA loan which offers similar rates but with higher costs.
I favor floating all loans as MBS are towards the bottom of our range. Lock the price highs, float the price lows. Additionally, it is highly expected the Fed announces Quantitative Easing Part Two in the next week which should at least help MBS rebound from the recent sell off over the last week or so. I am not convinced that this announcement will result in new record low interest rates, but should help lower rates from current levels.
Total Comments 0
