My Mind on Mortgages

Mortgage rates are priced better morning.  Before I get into commentary one housekeeping note: ‘Mortgage Rate Update’ will be on vacation tomorrow and returning on Monday.

Yesterday’s monetary policy statement + forecast has helped mortgage rates improve.

YESTERDAY'S FED ANNOUNCEMENT HAS HELPED MORTGAGE RATES IMPROVE

Following their 2-day open market committee meeting Fed officials announced that they expect short-term interest rates to remain low through 2014.  The markets had been expected confirmation of low rates through the end of 2013 or mid-2014.  the fact that the Fed announced a longer time frame leads investors to believe that the recovery may be slower than expected which helps long-term rates remain low.

In terms of economic data, the Commerce Department released a report showing that durable goods orders rose by 3.0% in December which was higher than expected.  In a separate report the Labor Department reported that the number of people filing for jobless benefits rose by less than expected.  Good news on the economy is generally bad news for mortgage rates but the Fed announcement is overshadowing these data points thus far.

Nothing new to report from Europe this morning.  Greek officials are resuming talks with creditors to try and achieve a steeper discount to its debt load.  Without a concession Greece may default on its debt as soon as March.

Current Outlook: neutral

Mortgage rates are unchanged this morning.

There is lots of noise scheduled for today but nothing that is expected to alter the course of mortgage rates.

Starting in Europe, Greek finance officials and private creditors are meeting in Paris to discuss next steps for the country’s debt crisis.  Greece needs private creditors to accept steeper discounts in order to remain solvent but thus far they haven’t reached a settlement.  Meanwhile, Portugal saw their bond yields rise and Germany saw theirs fall in new bond auctions.  Investors remain confident in the core European nations but nervous about the smaller ones.

In US housing news, the National Association of Realtors released its monthly pending home sales report which showed that on a year-over-year basis homes under contract rose by 5.6%.

THE NAR REPORTED PENDING HOMES SALES ROSE 5.6% YEAR-OVER-YEAR

There will be a lot of commentary today about the Fed’s monetary policy statement which will take place later today.  In their effort to improve transparency the Fed will broadcast their forecast for short-term interest rates.  Currently, the markets expect that the Fed will keep short-term rates low until the end of 2013 or mid 2014.  Unless their announcement deviates significantly I don’t believe that the announcement will impact mortgage rates.

I will remain neutral in my outlook.  There is still nothing that leads me to believe rates will move substantially higher or lower.

Current Outlook: neutral

Mortgage rates are unchanged this morning.

Starting in Europe, talks between Greek finance officials and private creditors have reportedly stalled.  Greece needs private creditors to accept deep cuts in order to qualify for another round of bailout relief and has yet to gain concessions.  Meanwhile, the International Monetary Fund is renewing warnings that if European leaders are unable to put in place policies to curb contagion that they foresee a severe recession lasting multiple years.  Although this level of uncertainty is scary on many levels it does help keep US mortgage rates low through the process call “flight-to-safety”.

Here in the US the Treasury kicks off its first of three auctions this week with $35 billion in 2-year notes.  It is widely expected that the sale will be met with sufficient demand which should help rates remain low.

PRESIDENT OBAMA'S STATE OF THE UNION IS NOT EXPECTED TO IMPACT THE MARKETS

The President will deliver the annual State of the Union address later tonight.  He is expected to speak about the economic fairness and energy production.  Its unlikely this will impact the markets since this is an election year.

Tomorrow the Federal Open Market Committee will convene a 2-day monetary policy meeting.  At this point the market is not expecting any change to monetary policy so the only factor that could impact rates are comments regarding the outlook on the economy.

Current Outlook: neutral

Mortgage rates are steady this morning after rising .125% last week.

European leaders are meeting today in Brussels to try and hash out fresh ideas for how to prevent financial catastrophe.  Meanwhile, the International Monetary Fund chief warned that if EU leaders are unable to generate effective policies it could result in, “a 1930s moment.”

ACCORDING TO IMF, EU LEADERS NEED TO COME UP WITH A PLAN TO AVOID A "1930s MOMENT."

The meat of the domestic economic calendar kicks off Wednesday when the Fed will deliver it monetary policy statement.  It’s widely expected they’ll leave existing policies in place but their comments about the economy could move the markets.

Mortgage rates will have to complete with $99 billion in new US Treasury supply which kicks off tomorrow when the Treasury will auction $35 billion in 2-year notes.

Rates have migrated .125% higher from a week ago but there is no reason to believe they’ll move sharply higher as the problems in Europe persist with no quick resolution in sight.  However, the US economy is showing signs of recovery so there is also not a compelling reason to believe rates will move lower.  I will maintain a neutral position.

Current Outlook: neutral

After another down day yesterday in the bond markets mortgage rates are worse again this morning.  The question now is whether or not rates will continue the path higher or stabilize and reverse lower?

Optimism regarding the outcome of the European Debt Crisis is the main culprit in pushing rates higher.  So far this year Spain, Italy, and France have managed to successfully auction off new rounds of debt.

OPTIMISM REGARDING THE EU DEBT CRISIS MAY BE SHORT LIVED.

Furthermore, rumors are that Greece has reached a deal with private creditors to accept even more of a discount to their debt holdings which would stave off a default.  A default would trigger credit default swap contracts (which act like insurance) and undermine the stability of the EU financial sector.

However, I believe it’s a little too soon to put this issue in the rear-view mirror.  Many of the suspect European nations (i.e. Italy & Spain) have significant debts that need to be refinanced in the first quarter of this year.  If they have trouble attracting investors it would likely push interest rates lower in the US.  Furthermore, austerity cuts by EU nations are likely to slow economic growth in Europe which would also help rates remain low here in the US.

After being in a locking position for a few days I am shifting back to neutral.  However, borrowers should be cautious.  How much better are rates really going get?

Current Outlook: neutral

Mortgage rates are slightly worse today.

Much better than expected jobless claims numbers are pressuring stocks & interest rates higher this morning.

THE NUMBER OF FOLKS SEEKING GOV'MENT CHEESE DECLINED LAST WEEK

The weekly jobless claims figures released by the Labor Department showed that the number of people filing for unemployment benefits declined by 50,000 from the week before.  This is the largest one week decline since September of 2005.  Good news for the economy is often bad news for mortgage rates.

Also helping to pressure rates higher is an improvement to the outlook for Europe (although this is probably short lived).  Both France & Spain auctioned off debt today and were met with strong demand from investors one week after their credit ratings were downgraded.

I switched my outlook to locking two days ago and will maintain that bias today.

Current Outlook: locking bias

Mortgage rates are unchanged again today.

During times when major events like the European Debt Crisis are not in focus for the interest rate markets inflation is the primary driver (CLICK HERE to understand why).  This morning the Labor Department reported that wholesale prices rose by the sharpest annual clip since the middle of 2009.  Ordinarily this might scare interest rates higher but with all focus on Europe rates are not moving higher this AM.

Speaking of the European Debt Crisis Greece’s government is in talks with private creditors to negotiate a settlement which would pay approximately 32% of the face value of the debt.  If you’ll remember back to the early stages of Greece’s woes the “haircut” that creditors would accept has gradually increased from 40% to 68% today.  The EU inability to take coordinated decisive action at the outset of the crisis is becoming apparent now.

Meanwhile, the International Monetary Fund (IMF) announced that they are seeking an additional $500 billion from China, Japan, and oil exporting countries to help bolster their “bailout firepower”.

Domestic economic fundamentals continue to suggest that locking is the safest play but these reports are being overshadowed by anxiety over Europe.  I will maintain my locking bias.

Current Outlook: locking bias

A slew of better-than-expected foreign & domestic economic news is threatening to push mortgage rates higher this morning but thus far they haven’t budged.

Beginning in Europe, which remains the main focal point for interest rate markets, Spain, Greece, and the European Financial Stability Fund were all able to auction off debt securities with sufficient demand.  This is seen as a signal that investors are confident these countries will remain solvent…at least in the near-term.

Also in Europe, for the second month in a row economic expectations amongst Germans improved which is lending additional optimism in Europe.

Gross Domestic Product figures out of China showed that the world’s second biggest economy grew by 8.9% in the last quarter of 2011.  This was slower than the previous quarter but still higher than analysts had expected.

Here in the US a gauge of manufacturing activity in the New York Fed region grew by more than expected.

All in all the news was positive today which would ordinarily be bad for mortgage rates.  However, rates remain low possibly because of the long list of economic data due out the rest of this week.  Either way, I am recommending a locking bias.

Current Outlook: locking bias

Do you remember that HUGE increase you got in your pay-check last year when Congress implemented the payroll-tax cut as a way to stimulate the economy?  I ask that sarcastically.

THE TIME HAS COME TO PAY FOR THAT PAYROLL TAX CUT

The 2% cut in payroll taxes for employees equates to about $30 per week for a household making $80,000 per year.  Well, it’s time to pay the piper.  When Congress extended the payroll tax cut through the end of February they elected to pay for it via an indirect “tax “on conventional mortgages.

It’s difficult to measure the exact impact of this “tax” but according to THIS ARTICLE borrowers who take out a new conventional mortgage will accept an additional .125% to their interest rate or pay an additional .30%-.40% of the loan amount in closing costs.  Lenders are not publicly announcing when the increases will take effect but as of today many lenders we deal with have yet to implement the increase.  Although we can’t be certain of the future direction of mortgage rates it doesn’t seem like a bad idea to lock in ahead of this change.

Mortgage note rates are unchanged this morning but the accompanying closing costs are modestly lower so in fact rates have improved.

ACCORDING TO REPORTS S&P PLANS TO DOWNGRADE MUCH OF THE EURO-ZONE SOON

News broke this morning that Standard & Poor’s (S&P) plans to downgrade the credit rating of a number of European countries including France.  On the news interest rates in Europe have risen while yields here at home are benefit ting from a “flight-to-safety”.  Back in December S&P announced that it had put 15 Euro-zone countries on watch for a possible downgrade so I’m surprised that this morning’s announcement is drawing so much of the financial market’s attention.

Here in the US the Commerce Department announced that the trade gap widened in our economy by more than expected in December as Americans continued to pay a high price for gasoline and demand from Europe waned.  The inflationary pressure from imported goods remains tepid.  Bad news for the economy and low inflation are both positive signals for mortgage rates.

Now that mortgage rates have reverted back to all-time low levels we need to be careful because consumers will soon pay .25%-.50% higher in loan fee or .125% higher in interest rate when they take out a conventional mortgage.  Lawmakers chose to indirectly tax mortgages as a way to pay for the two-month extension of payroll tax cut and the aforementioned cost increase is the estimated impact.  Most lenders will be implementing this “tax” in the coming days.  I will shift my outlook to locking.

Current Outlook: locking bias