Mortgage Market Guide Vol. 10 Issue 21

Last Week in Review: There was more drama out of Europe, plus some important inflation news.

It's all Greek to me. And last week, news out of Europe dominated the headlines...impacting our markets and home loan rates. Read on for details.

Last week there was news that the European Central Bank (ECB) stopped providing funding to some Greek banks, adding to the drama in the region. ECB President Mario Draghi backed the move saying that the ECB will not compromise "the integrity of our balance sheet" to bail out Greek banks and the recapitalization effort must come from the Greek government themselves.


What will be made of Greece? Will there be a "Grexit," with the country exiting the Euro? What's more, Spain looks like it will be in a recession throughout 2013 and that country is drowning in debt with Bond yields now approaching very lofty levels. When there is this much risk out in the market, Traders seek a safe haven like the US Dollar and US Bonds...and the drama and risk in Europe benefitted our Bonds (including Mortgage Bonds, to which home loan rates are tied) last week.


Here at home, inflation as measured by the Consumer Price Index (CPI) came in at 2.3% year-over-year. Remember, inflation hurts the value of fixed investments like Bonds (thus, hurting home loan rates)...so inflation staying in check is crucial when it comes to home loan rates remaining near record best levels. And while the year-over-year CPI reading was the lowest since February 2011, it's important to realize that there is a negative correlation between inflation and what Treasuries are yielding...and this negative correlation can't last forever. Investors will not continue to "lose" money to inflation by holding Treasuries. Either inflation has to moderate a lot OR the Bond Market has to adjust for inflation with prices moving lower. This will result in home loan rates moving higher. 


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

Forecast for the Week: Several important reports are ahead of the holiday weekend, with news on the housing market, durable goods, and consumer sentiment.

As you can see in the chart below, the drama in Europe helped Bonds and home loan rates reach record best levels. I'll be watching closely to see what happens this week.

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 below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on

 Chart: Fannie Mae 3.5% Mortgage Bond (Friday May 18, 2012)

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.

This week's economic calendar is light, but there are still some important reports to watch:

• Existing Home Sales and New Home Sales will be released on Tuesday and Wednesday, respectively. The data comes after last week's positive Housing Starts report.
• Weekly Initial Jobless Claims will be released on Thursday as usual.
• Also on Thursday we'll see the Durable Goods Report for April. This report measures orders for big ticket items that last for an extended time.
• Consumer Sentiment rounds out the week and will be delivered on Friday.

In addition to those reports, the markets may be impacted by the upcoming holiday weekend. That's because the week leading up to Memorial Day weekend usually sees low trading volumes – and by Friday afternoon, trading desks have pretty much cleared out. When volumes are low, markets can easily see some big swings

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.