WR Starkey Mortgage News Market Comment - Week of November 16th, 2009 Mortgage bond prices rose last week pushing mortgage interest rates lower. The Fed spent another $45 billion buying mortgage bonds between November 5th and the 11th. For all the criticism the Fed receives for the handling of the economy, they do deserve credit for keeping mortgage interest rates low throughout this year. How it all plays out in the long term is uncertain. The record Treasury auctions continued to be absorbed in trading without any major problems. For the week, interest rates improved by about 7/8ths of a discount point. The consumer price index data Wednesday will be the most important release this week. Producer price index data along with retail sales data will set the tone for the start of the week. Inflation indications would likely hurt mortgage interest rates but signs of tame inflation could help rates improve. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Retail Sales Monday, Nov. 16, 2009 Up 0.9% Important. A measure of consumer demand. A smaller than expected increase may lead to lower rates. Business Inventories Monday, Nov. 16, 2009 Down 0.6% Low importance. An indication of stored-up capacity. A significantly large increase may lead to lower rates. Producer Price Index Tuesday, Nov. 17, 2009 Up 0.5%, Core up 0.1% Important. An indication of inflationary pressures at the producer level. Weaker figures may lead to lower rates. Industrial Production Tuesday, Nov. 17, 2009 Up 0.3% Important. A measure of manufacturing sector strength. A lower than expected increase may lead to lower rates. Capacity Utilization Tuesday, Nov. 17, 2009 70.8% Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. Housing Starts Wednesday, Nov. 18, 2009 Up 1.5% Important. A measure of housing sector strength. Weakness may lead to lower rates. Consumer Price Index Wednesday, Nov. 18, 2009 Up 0.2%, Core up 0.1% Important. A measure of inflation at the consumer level. Weaker figures may lead to lower rates. Leading Economic Indicators Thursday, Nov. 19, 2009 Up 0.4% Important. An indication of future economic activity. A smaller increase may lead to lower rates. Tax Credit Extension The housing market received some good news when Congress recently acted on the pleas of housing sector professionals and extended the $8000 first time homebuyer tax credit. In addition, the program was expanded to include move-up buyers with a $6500 tax credit. The program now runs through April of next year. Prior to the extension the program was set to eclipse at the end of November. Even with the positive measure there is still some criticism the program does nothing to address the foreclosure problems that continue to plague the housing market. Unfortunately the cost to extend the credit is around $1 billion per month. This has politicians from both sides of the isle concerned. The new and move-up buyer incentives coupled with historically low interest rates make now a great time to purchase a home. Low rates also make it favorable for many current homeowners to refinance. Market Comment - Week of November 9th, 2009 Mortgage bond prices were near unchanged for the week amid very choppy trading conditions. Stronger than expected factory orders and ISM Index data were generally not bond friendly and attributed to higher rates in the middle of the week. Fortunately the Fed indicated the continued desire to keep rates low for an extended period. In addition, higher than expected unemployment and more payroll losses than expected helped mortgage bonds rally Friday. For the week, interest rates finished near unchanged. The record debt auctions Monday, Tuesday, and Thursday will once again take center stage as the Veterans holiday Wednesday splits the trading week in half. Strong foreign demand remains necessary for interest rates to stay relatively low. The trade data Friday will also be important. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis 3-year Treasury Note Auction Monday, Nov. 9, 2009 None Important. $40 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. 10-year Treasury Note Auction Tuesday, Nov. 10, 2009 None Important. $25 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. Veterans Day Wednesday, Nov. 11, 2009 None Important. Shortened trading week may lead to mortgage interest rate volatility. 30-year Treasury Bond Auction Thursday, Nov. 12, 2009 None Important. $16 billion of bonds will be auctioned. Strong demand may lead to lower mortgage rates. Trade Data Friday, Nov. 13, 2009 $31.9 billion Important. Affects the value of the dollar. A falling deficit may strengthen the dollar and lead to lower rates. U of Michigan Consumer Sentiment Friday, Nov. 13, 2009 71.8 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. Trading This Week Market conditions that often lead to mortgage interest rate volatility are thin trading and shortened trading weeks. If very few market participants are buying and selling bonds, the potential for short-term volatility is escalated. A large buyer or seller can execute trading orders that, without additional traders to buffer out the extreme buying or selling, can lead to swift market movements. In addition, shortened trading weeks have the potential to compress a week's worth of trading into fewer days. Bond traders often take defensive positions ahead of weekends and holidays to guard against unforeseen events that could possibly jeopardize their investments. This positioning can be beneficial or detrimental to mortgage interest rates. If investors sell stocks and buy mortgage-backed securities, mortgage interest rates will improve. However, if investors sell mortgage-backed securities and hold cash positions, mortgage interest rates will rise. Holidays can often result in volatility as trading resumes following the extended close. The Fed continues to state the goal of low interest rates for some time. It is hard to argue they have not been effective with that goal so far this year. That doesn't mean we haven't and won't see any interest rate volatility. Recent history attests to spikes and drops in rates throughout the year even with the Fed pumping $1.25 trillion in mortgage bonds. The big unknown remains when and how the Fed will exit the market without severe disruptions. Fed officials admit the future remains uncertain. This week could result in market swings that are favorable or negative in nature. Considering the heightened possibility for mortgage interest rate volatility, a cautious approach to interest rate exposure is prudent. Market Comment - Week of November 2nd, 2009 Mortgage bond prices rose last week pushing mortgage interest rates lower. Rates spiked higher Monday morning as stocks surged and the Treasury auctions loomed. Fortunately, foreign demand for the notes was solid, helping to keep mortgage rates low. The stock markets remained volatile all week with the Dow Jones index swinging by triple digits both up and down. For the week, interest rates improved by about 1/4 of a discount point. The Fed meeting on Wednesday will be the most important event this week. Productivity and employment figures are likely to move the market. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis ISM Index Monday, Nov. 2, 2009 53.0 Important. A measure of manufacturer sentiment. Weakness may lead to lower mortgage rates. Factory Orders Tuesday, Nov. 3, 2009 Up 1.0% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. ADP Employment Wednesday, Nov. 4, 2009 Down 190k Important. An indication of unemployment. A larger decrease in payrolls may bring lower rates. Fed Meeting Adjourns Wednesday, Nov. 4, 2009 No rate change Important. Few expect the Fed to change rates, but some volatility may surround the adjournment of this meeting. Preliminary Q3 Productivity Thursday, Nov. 5, 2009 Up 5.8% Important. A measure of output per hour. Improvement may lead to lower mortgage rates. Employment Friday, Nov. 6, 2009 Unemp. @ 9.9%, Payrolls -166k Very important. An increase in unemployment or a large decrease in payrolls may bring lower rates Volatility Likely The likeliness of mortgage interest rate volatility this week is very high considering the abundance of important economic releases. Each piece of data has the ability to cause volatility in the financial markets. Floating ahead of the data exposes a person to a tremendous amount of risk. It is possible for interest rates to improve if the data shows weakness in the economy with few price pressures. However, any surprises will likely be bad for mortgage interest rates. Governmental actions in addition to the economic data continue to weigh upon the financial markets. We are really in uncharted territory here with the wobbly underpinnings of the economy. Credit remains tight, as lending has become more stringent. However, there still remain funds available. Real estate transactions continue to take place despite perceptions to the contrary. The important thing to remember is that even the Treasury officials trying to shore the economy do not know exactly what the future holds. With this in mind, be cautious during these times of economic uncertainty and be ready to lock in the event interest rates start to spike higher. Market Comment - Week of October 26, 2009 Mortgage bond prices ended the week nearly unchanged despite considerable market volatility. Trading was up and down all week. Rates improved the first portion of the week as stocks fell below key psychological levels. Unfortunately a reversal the middle portion of the week eroded the earlier improvements. Data was mixed with tame inflation readings but generally stronger than expected economic activity. For the week, interest rates were near unchanged. The Treasury auctions will take center stage again this week. If there is strong foreign demand it will likely spill over to the mortgage bond market. Weak auctions will likely result in mortgage interest rate increases. Employment cost index data will also be carefully watched. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis 2-year Treasury Note Auction Tuesday, Oct. 27, 2009 None Important. $44 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. New Home Sales Wednesday, Oct. 28, 2009 Up 2.6% Important. An indication of economic strength and credit demand. Weakness may lead to lower rates. 5-year Treasury Note Auction Wednesday, Oct. 28, 2009 None Important. $41 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. Q3 Advance GDP Thursday, Oct. 29, 2009 Up 3.1% Very important. The aggregate measure of US economic production. Weakness may lead to lower rates. 7-year Treasury Note Auction Thursday, Oct. 29, 2009 None Important. $31 billion of notes will be auctioned. Strong demand may lead to lower mortgage rates. Personal Income and Outlays Friday, Oct. 30, 2009 Unchanged, Down 0.4% Important. A measure of consumers' ability to spend. Weakness may lead to lower mortgage rates. Q3 Employment Cost Index Friday, Oct. 30, 2009 Up 0.5% Very important. A measure of wage inflation. Weakness may lead to lower rates. U of Michigan Consumer Sentiment Friday, Oct. 30, 2009 70.0 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates Existing Home Sales Last week's existing home sales data shocked the market with a stronger than expected increase. Sales rose 9.4%, considerably stronger than the expected 5.5% increase. Some analysts attribute the surge in sales to the $8000 tax credit that is currently set to expire at the end of November. Lower home prices and historically low mortgage interest rates also factored into the increase. From a national perspective this is a positive report. However, the fact that some major metropolitan areas of the country failed to see improvements is an example of the axiom that real estate is local. There is still uncertainty regarding the future state of the economy. Mortgage rates are great. Take advantage of them while that remains the case. Market Comment - Week of October 19th, 2009 Mortgage bond prices fell sharply last week driving mortgage rates higher. Rates were under pressure from better than expected economic news and rising stocks. Retail sales, weekly jobless claims, and industrial production data were all better than expected. The improved economic outlook had investors flocking to buy stocks, which helped the Dow Jones index to close over 10,000. For the week, interest rates rose nearly 7/8 of a discount point. The producer price index data to be released Tuesday will be the most important data this week. Any signs of inflation will generally not bode well for mortgage bonds. The Fed "Beige Book" will factor into trading this week. Stock strength and dollar valuation will play a pivotal role in mortgage interest rates as well. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Housing Starts Tuesday, Oct. 20, 2009 Up 1.5% Important. A measure of housing sector strength. Weakness may lead to lower rates. Producer Price Index Tuesday, Oct. 20, 2009 Up 0.1%, Core up 0.1% Important. An indication of inflationary pressures at the producer level. Decreases may lead to lower rates. Fed "Beige Book" Wednesday, Oct. 21, 2009 None Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates. Leading Economic Indicators Thursday, Oct. 22, 2009 Up 0.8% Important. An indication of future economic activity. A smaller increase may lead to lower rates. Existing Home Sales Friday, Oct. 23, 2009 Up 5.5% Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates. Housing Starts Housing starts data is a leading indicator of the state of our economy. This report, provided by the Bureau of the Census, takes into account data from both single-family homes and multi-family dwellings. Building permits are also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since all locations are not required to have a building permit. Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Consumers tend to hold off on the purchase of new homes, new cars, and other big-ticket items if they are worried about the future of the economy. Housing is an important part of our economy. Continued declines in housing starts can lead to continued economic slowdown and essentially a deeper recession. On the other hand, increases in housing starts could signal a possible reversal. From the opposite perspective, changes in interest rates often lead to changes in housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. Just the opposite happens when rates drop and is one of the additional reasons the Fed is trying to keep rates low. Low mortgage rates affect both home sales and housing starts. The housing market across the country is a vital component in sustaining the economy. For some time homeowners generally saw an increase in the value of their homes. Unfortunately now that has all changed. The softening of the housing market tied to credit concerns continues to have many worried. Most economists believe more pain is headed our way from the housing sector. There is still uncertainty regarding the future state of the economy. Mortgage bonds have been volatile and improvements are not a given despite the recent Fed efforts to purchase mortgage bonds. The good news is that mortgage interest rates remain historically low. Be cautious. Market Comment - Week of October 12th, 2009 Mortgage bond prices fell last week pushing mortgage interest rates higher. The Treasury auctions were mixed with the 3 and 10-year auctions showing decent foreign demand. Unfortunately the 30-year auction was a huge disappointment and caused mortgage interest rates to worsen Thursday. The fear of future rate hikes sent mortgage bonds lower Friday pushing mortgage interest rates higher. For the week, interest rates rose by about 1/2 of a discount point. The consumer price index will be the most important release this week. Any signs of inflation will generally not bode well for mortgage bonds. Retail sales and the Fed minutes are also likely to factor into trading this week. Any surprises may lead to mortgage interest rate volatility. -------------------------------------------------------------------------------- Economic Factors Economic Indicator Release Date Time Consensus Estimate Analysis Retail Sales Wednesday, Oct. 14, 2009 Down 2.0% Important. A measure of consumer demand. Weakness may lead to lower mortgage rates. Business Inventories Wednesday, Oct. 14, 2009 Down 0.8% Low importance. An indication of stored-up capacity. A significantly larger increase may lead to lower rates. Fed Minutes Wednesday, Oct. 14, 2009 None Important. Details of the last Fed meeting will be thoroughly analyzed. Consumer Price Index Thursday, Oct. 15, 2009 Up 0.2%, Core up 0.1% Important. A measure of inflation at the consumer level. Lower figures may lead to lower rates. Philadelphia Fed Survey Thursday, Oct. 15, 2009 None Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates. Industrial Production Friday, Oct. 16, 2009 Up 0.1% Important. A measure of manufacturing sector strength. Weakness may lead to lower rates. Capacity Utilization Friday, Oct. 16, 2009 69.7% Important. A figure above 85% is viewed as inflationary. Weakness may lead to lower rates. U of Michigan Consumer Sentiment Friday, Oct. 16, 2009 73.5 Important. An indication of consumers' willingness to spend. Weakness may lead to lower mortgage rates. Tax Credit A slew of professionals tied to the housing sector made eager pleas to Congress last week requesting the $8000 first time homebuyer tax credit be extended. The benefit was part of the stimulus plan and is set to expire the end of November. The White House indicated the program "helped the economy" and led to "quite a bit of success" and noted consideration of extending the program. There are additional proposals in the Senate to not only extend the program but also to increase the tax credit and remove the first time homebuyer qualification. Unfortunately the cost to extend the credit is around $1 billion per month. This has politicians from both sides of the isle concerned. The House voted Thursday to extend the credit for American service members another 12 months. Both parties have members pushing for the extension to apply to all purchasers. Analysts indicate some sort of extension is very likely. Last week was a great example of the danger of thinking rates would always improve. The good news is that despite last week's bounce higher, rates still remain historically favorable.