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Housing Bright Spot: Construction Spending Rises
Construction Spending Rises
U.S. construction spending rose 0.3 percent in April as private residential construction increased at the fastest pace in six months. Overall construction spending was up 6.8 percent compared with April 2011.
Construction spending rose to an annual rate of $820.7 billion, the Commerce Department said on Friday, after an upwardly revised 0.3 percent increase in March.
Also on Friday, the Institute for Supply Management said its index of national factory activity slipped to 53.5 from 54.8 in April, just missing expectations for 53.9. But, while the pace of growth in U.S. manufacturing slowed modestly in May, according to the report, a gauge of new orders rose to its highest in over a year. A reading above 50 indicates expansion in the manufacturing sector.
What Happened to Rates Last Week?
Mortgage backed securities (MBS) gained +105 basis points from last Friday to the prior Friday which caused 30 year fixed mortgage rates to reach a new all-time low.
Mortgage rates moved lower throughout the week on heightened concerns over the banking issues in Spain and Italy as their bond yields soared to new all-time highs. This made the quality and safety of U.S. bonds very attractive to foreign investors. This added demand caused bond prices to increase and interest rates (which move in the opposite direction) to decrease.
Mortgage backed securities shot upward (causing mortgage rates to hit new all-time lows) on Friday in reaction to the much weaker than expected jobs data. The Unemployment Rate increased from 8.1% to 8.2%, but the real story was the big miss in the Non-Farm Payroll data. The market was expecting the economy to add around 150,000 new jobs but instead, it only added 69,000.
This much weaker than expected employment data caused a big-time buying spree of 10 year U.S. Treasuries and the higher yield paying Mortgage Backed Securities.
What to Watch Out For This Week:The following are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages.
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The Housing Market Update – What to Look for
Consumer Sentiment Jumps to Four Year High:
While historically low mortgage rates and attractive home prices are important to make the housing market attractive, it is actually how a consumers feels about the economy and their own situation that drives demand. U.S. consumer sentiment rose to its highest level in more than four years in May as Americans stayed optimistic about the job market, while higher income households expected to see bigger wage increases, a survey released on Friday showed. The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment rose to 79.3 from 76.4 in April, topping forecasts for 77.8 and an initial May reading of the same. It was the highest level since October 2007. Half of all consumers said the economy had improved during the past year, while buying plans for vehicles and household durables also improved. The gauge of buying plans rose to 132 from 126. It looks like a strong season for housing now that we have strong consumer sentiment and historically low rates and excellent home prices. |
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What Happened to Rates Last Week?
Mortgage backed securities (MBS) lost -18 basis points from last Friday to the prior Friday which caused 30 year fixed mortgage rates to increase slightly. |
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What to Watch Out For This Week:
The following are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages.
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National Home Values
Another year has passed, and while the last 5 of them have been rough for the housing market, we’ve now seen two consecutive quarters with most states showing incremental appreciation. Cause for celebration? Perhaps not, yet this is beginning to look like stabilization and that of course is the first step towards recovery.
What’s working in favor of prospective home buyers?
In a word – Affordability – Since 1963, it has cost an average of approximately 43% of “per capita” income to finance the cost of a median priced home (20% down payment and prevailing 30 year fixed rate mortgage). Right now it’s less than half that cost, and in many areas the monthly housing payments are less than an equivalent rental.
You can lock in your mortgage cost for life – Imagine if you could have locked in the price of gas back in 2001 when it was only about $1.50 per gallon or less? Think about that the next time you’re standing at the pump filling your tank with $4 gas. How smart would you feel if you knew your cost was forever lower? When it comes to a place to live, that same kind of opportunity is staring us in the face right now. Record low prices and record low rates are here now and plentiful. The beauty of a 30 year fixed rate loan is that it’s a 30 year fixed rate loan. If you lock it in now, it will never go up.
There is still uncertainty – yet there is also clarity that comes from knowing where things stand at present such as rates & prices. Above all else, the state of the market doesn’t change the fact that we need a place to live. Choosing to purchase is one of two options. The other one is to rent or to continue living with family if that’s where you are now.
The trouble is – renting amounts to little more than paying your landlord’s mortgage and in the end, there is nothing to show for that. Living at home gets old at the same rate as we do. The day comes when it’s time to leave and there’s never been a less expensive opportunity to do that than now. At some point, rates will rise and so too will prices. Being ahead of or behind that curve is all dependent on the action you choose to take today.
Here we go again.
Round and round we go.
The market is struggling to gain stability as market swings are the norm as of late. Mortgage bonds are now falling back off pushing rates higher.
Mortgage bond prices opened weaker this morning erasing the gains from yesterday afternoon but have recovered a bit near pricing to keep things in check.
Global equities brushed aside the Greek turmoil and posted gains overnight. US stock are higher with the DOW up over 40 points.
To repeat…. the roller coaster ride continues.
The data this morning was mixed. Factory orders up 0.3%, expected down 0.1%. Weekly jobless claims @ 397k, expected @ 400k, not rate friendly, Productivity up 3.1%, expected up 2.8%.
Yesterday the Fed made no rate changes and indicated:
-Growth strengthened somewhat in Q3
-Vote was 9-1, Evans wanted additional policy accomodation
-Household spending increased
-Signs point to continued weakness in labor market, elevated unemployment
-REPEATS significant downside risk to economic growth, notes strains from GLOBAL financial markets
-Inflation moderated
-Repeats the conditions likely warrant exceptionally low Fed Funds Rate at least through mid 2013
-Expects inflation to settle in coming quarters
-Will continue to reinvest principal payments of mortgage debt back into mortgage-backed securities
We still have the EMPLOYMENT REPORT FRIDAY.
YO-YO Market
Mortgage bond prices closed slightly below the levels where daily pricing was set applying upward pressure to mortgage rates. Trade was volatile all day tied to the movement in stocks. Equity and bond prices were yo-yoing with each snippet of news out of Europe. Tomorrow brings weekly jobless claims and Q3 advanced GDP before lenders set pricing. Prepare yourself and your borrowers for a wild ride. Regardless of what happens in Europe stocks and bonds will most likely be EXTREMELY volatile.
REFINANCE UPDATE if your home is under water
This morning, FHFA announced their enhancements to the HARP refinancing program. Operational details of the plan are to be released on November 15. Only loans that were purchased or guaranteed by Fannie Mae or Freddie Mac on or before May 31, 2009 and have a current LTV over 80% are eligible. In addition, the loan must be current, no late payments in the last six months and no more than one late in the last 12 months. There are no restrictions on who may refinance these loans.
Program guidelines include:
- No limit on LTV, if new loan is a fixed rate loan (current LTV must be above 80%)
- Loans previously refinanced under HARP not allowed
- Certain agency fees will be waived if new loan is a shorter term loan
- Appraisals not required where Agency AVM is available
- Certain originator Reps and Warrants will be waived
Borrowers can determine if their loan is owned or guaranteed by Fannie or Freddie at http://www.fanniemae.com/loanlookup/ or http://www.freddiemac.com/corporate/
Buy the Ticket. Take the Ride.
Volatility dominated the capital markets today as Stock and Bonds flip flopped between negative and positive several times each with Stocks emerging as the winner when the trading day ended.
Fed Chairman Bernanke spoke on Capitol Hill today on the economy and said that the Fed would take necessary steps to grow the economy. The Dow was down 250 points at one point, then traded back to unchanged, then down 200 before closing up 150 points. Mortgage Bonds traded the opposite way of Stocks during the session but at one point Stocks and Bonds were both trading lower. But around 2:30 – 3:00pm ET, a report that EU finance ministers are looking at ways of coordinating to recapitalize European financial institutions pushed Stocks well into positive territory near the close.
Sell off.
Investors sold Bonds today and took some profits after the big surge in prices this week. Markets don’t go straight up or straight down so the move lower today wasn’t a big surprise and came without any gloom and doom headlines.
The 3.5% coupon fell 88bp to end at 102.78. Stock markets fluctuated between positive and negative several times during the session and ended with moderate gains but the Dow had its worst week since October 2008 down 6.4%…closing at 10,771.48 up 37.65. The S&P 500 fell 6.5% this week but managed to gain 6.87 to 1,136.43 while the Nasdaq was up 27.56 to 2,483.23 but down 5.3% for the week. The big news today was the record one day move for Gold as it had lost $100 to $1,641/oz before finishing at $1,653/oz down $88. Oil settled at $79.85/barrel down 66 cents falling 9.2% for the week. Next week economic data is plentiful and will give investors a broad look at the economy.
Let’s Twist Again, Like We Did Last Summer
How do you stimulate the economy without spending any money? You do the twist and shuffle. The Federal Reserve announced Wednesday that it would engage in a new policy known as “Operation Twist,” consisting of selling shorter-term Treasuries and using the proceeds to buy longer-term government bonds. The Mortgage Bond markets soared today after the surprise announcement from the Fed saying that it will be purchasing agency Mortgage Backed Securities from the principal payments from its holdings of agency debt and agency Mortgage Backed Securities in agency Mortgage Backed Securities. The move took players by surprise in a big way. The 3.5% coupon jumped 134bp to end at an all-time high of 103.00 The next few trading days will determine if we switch over to the 3% coupon, which finished at 99.81 up 134bp today.Stocks plunged after the Fed statement read that there are significant downside risks to the economy. The Dow lost 283.82, the Nasdaq fell 52.05 to 2,538.19 while the S&P 500 Index dropped 35.33. Oil in after hours trading was last seen at $84.83/barrel down $2.09. Weekly claims will be released tomorrow.
Market Volatility Continues
News out of Europe put a dent in the Bond rally and cut into Stock losses, though Bonds did have a positive day. The late day sentiment could carry over into tomorrow’s trading as the news comes out of Europe.
MARKET WRAP: The Bond markets rallied today after last week’s slide but the gains were cut after news from Europe said the IMF, EC and the ECB (Troika) may be close to a deal to bailout Greece. But Mortgage Bonds did end the day to the upside as the 3.5% coupon closed at 101.59 up 50bp, although below resistance. The Dow lost 108.08 to 11,401.01 but it was down 260 points during the session. The S&P 500 fell 11.92 to 1,204.09 while the Nasdaq dropped 9.48 to 2,612.83. There were no economic reports today. Oil settled at $85.70/barrel down $2.26. Tomorrow, Housing Starts and Building Permits will be released. The Fed will begin its 2-day meeting tomorrow.
