Monday, May 14, 2012

Mortgage Market Guide Vol. 10 Issue 20

Last Week in Review: Bonds and home loan rates improved to record levels — find out why.

Survey says? Last week’s economic report calendar may have been light, but some important surveys revealed key data to note. Read on for the details...and how home loan rates fared.

As you can see in the chart, the National Association of Realtors (NAR) said that of the 146 Metro cities surveyed, home prices rose in 74 of them in Q1 2012. This is up from 29 cities that saw an increase in home prices in Q4 2011. In addition, the NAR also said that inventories for existing homes fell 22% since this time last year and are down 41% since the peak in mid-2007. While the housing market has a long way to go, this report was a nice step in the right direction.

There was also news from the National Federation of Independent Business, which said that its small business optimism index gained 2% in April as the survey revealed that companies have increased plans for hiring and investing in the future. While companies added new employees at a slower pace in April than in March, the index rose to 94.5 — the highest level since February of 2011. Overall, though, the report showed that our economy is improving but is still fragile. The state of our economy is part of the reason for the improvement in Bonds (and home loan rates, which are tied to Mortgage Bonds) of late.

Another big reason that Bonds and home loan rates have been improving is the fresh round of uncertainty out of Europe. France elected a new president, and this change of the guard represents the ninth EuroZone leader swap since the financial crisis began. Greece is also back in the news and their citizens are not taking to the austerity measures either. The New Democracy government, a pro-bailout party, is having trouble gathering the support to rule the government. This has sparked some safe haven trading into our Bonds, as investors see our Bonds as a safe place for their money.

The bottom line is that now continues to be a great time to purchase or refinance a home, as home loan rates remain near historic lows. Let me know if I can answer any questions at all for you or your clients.

Forecast for the Week: A full slate of economic reports is ahead, with news on inflation, the housing market, manufacturing and more.

As you can see in the chart below, Bonds and home loan rates reached record best levels last week. I’ll be monitoring the markets closely this week to see what happens next.

Chart: Fannie Mae 3.5% Mortgage Bond (Friday May 11, 2012)

With earnings season behind us, investors will be deluged with a slew of economic reports that will touch on many segments of the U.S. economy: 
  • Retail Sales will be released on Tuesday. This report gives the markets some insight to how consumer spending is holding up.
  • Also on Tuesday, the Consumer Price Index (CPI) will report on inflation at the consumer level. Last week’s Producer Price Index showed that inflation at the wholesale level has moderated, thanks to lower energy prices. Will CPI follow suit?
  • Manufacturing from the New York Empire and Philadelphia Fed Index will also be released Tuesday and Thursday, respectively.
  • Housing Starts and Building Permits data will be delivered on Wednesday.
  • Last — but not least — will be the Weekly Initial Jobless Claims numbers on Thursday. Last week's data was the lowest in a month.
In addition to those reports, European headlines will continue to dominate the news as the debt woes in that region plague the global economies. Also, the minutes from the Fed's April meeting of the Federal Open Market Committee will be released and this could move the markets. 

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart above shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.

When you see these Bond prices moving higher, it means home loan rates are improving — and when they are moving lower, home loan rates are getting worse.

To go one step further — a red “candle” means that MBS worsened during the day, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning. 

View: Did you know that bad news can be good for home loan rates? Be sure to read the article below.

Why Bad News Can Be Good for Home Loan Rates

It may seem odd that negative economic news can actually be good for home loan rates, but there's a pretty simple explanation for this phenomenon. Here’s a concise explanation you can share with your clients or you can use to gain a better understanding yourself.

First, we need to remember that big money managers who are in search of higher returns avoid holding onto cash by investing in both Stocks and Bonds.

Second, we need to dispel the myth about how home loan rates are determined. Despite what it may sound like in news stories covering the Federal Reserve’s meeting, home loan rates are based on the performance of mortgage-backed securities — which are a type of Bond.

When we put those two points together, we see that whenever the economy is on fire and there are good economic news reports, investors tend to put more money into Stocks. That’s because Stocks offer higher returns, even though they are generally more risky. To put money into Stocks, however, investors must remove some of their money from less-risky Bonds. The result is a decreased demand in Bonds that causes Bond prices to worsen, which causes home loan rates to go higher.

Inversely, when the economy is sluggish and economic reports are negative, money managers tend to take money out of higher-risk Stocks to put it into less-risky Bonds. As demand for Bonds increase, Bond pricing improves and home loan rates go down.

So while it may seem odd that home loan rates improve when economic news is sluggish, it actually makes sense when you look at the big picture.

If you have any questions about how the economic news is impacting home loan rates, please just call or email. I’m always happy to chat about what’s happening in the markets and what it means to home loan rates. 

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