Austin Mortgage Blog

Business Economists See Fed Rate Hike in 6 Months

March 8, 2010

Most U.S. business economists expect the Federal Reserve to raise benchmark interest rates within six months by between a quarter and a half percentage point, according to a survey released on Monday.

A majority of economists in the National Association of Business Economists’ semiannual survey found the Fed’s current stance of rates near zero percent is appropriate. A growing number, however, believe the U.S. central bank’s policy’s are too stimulative, according to a poll of 203 members taken Feb. 4-22.

“A majority believes that a rise in interest rates is both likely and appropriate in the next several months,” said NABE President Lynn Reaser.

Click here to read the full article.

Austin Mortgage Market Update – For the week of March 8, 2010

For the week of March 8, 2010 – Vol. 8, Issue 10

>> Austin Mortgage Market Update INFO THAT HITS US WHERE WE LIVE Last week’s one housing report gave us the National Association of Realtors Pending Home Sales index, down 7.6% for January. But year over year, the NAR index is up 12.3%. Also, it’s now at 90.4 and a score of 100 equals the average level of contract activity for 2001, the base year, when activity was at a record high. So pending sales are still in pretty good territory. Meanwhile, a quarterly report from a builders group and a major bank revealed that home prices are at near record levels of affordability. In the last three months of 2009, a family making the median income of $64,000 a year could afford to buy 70.8% of all homes sold during that time! According to this report, a home is affordable if a family making the metro area’s median income would have to spend no more than 28% of their take-home pay for housing. Of course, there are variations in affordability around the US, but this is a great overall trend. Buyers, however, shouldn’t expect great affordability to last forever. According to a Freddie Mac index, in the last quarter of 2009 four out of nine regions showed home price gains! And the NAR’s monthly market forecast, out last Thursday, projected the median price of existing homes UP 2.8% for 2010 with the new home median price UP 2.0%. In addition, no one knows what will happen to mortgage rates once the Fed stops buying mortgage bonds at the end of this month. Smart buyers shouldn’t drag their feet, especially those wanting the tax credit, which requires a signed contract by April 30. >> Review of Last Week IN LIKE A LION… March came in and the markets roared, as the Dow clawed its way up to a 2.3% gain for the week that brought it to its highest level for the year. Investors were basically pleased with a slew of encouraging economic data that came in ahead of expectations, while credit market conditions continue to improve. That’s not to say there weren’t a few disappointments, starting with the dip in pending home sales covered above. ISM Manufacturing for February also came in below estimates, at 56.5, but, hey, that’s still comfortably above the 50 level that signals expansion. On the other hand, ISM Services bested expectations, reporting a 53.0, its best reading since 2007. Friday we had an employment report some experts feel shows an economy that’s poised to start adding jobs. Nonfarm payrolls were still down by 36,000 in February, but this was way better than expected. Even better than that, the unemployment rate held at 9.7%, avoiding an expected increase. And some observers feel the underlying data is pointing to job creation. We’ll see. For the week, the Dow headed UP 2.3% to 10566.20; the S&P 500 hiked UP 3.1%%, to 1138.69; while the Nasdaq soared UP 3.9%, to 2326.35. Bond prices came under a lot of pressure from the better than anticipated jobs report, a ton of supply coming next week and soaring stocks distracting investors from seeking a safe haven in bonds. But the FNMA 30-year 4.5% bond we watch held on, to end the week UP 10 basis points, closing at $101.19. Mortgage rates dipped a bit nationally, according to Freddie Mac’s weekly survey, and remain at very low levels. >> This Week’s Forecast HELLO AGAIN, CONSUMERS… It’s a fairly quiet week for economic news with the sole exception being the February Retail Sales reports on Friday. It’s been a business-led recovery so far, but the consumer is still a big part of the economy, so every month we all take a good hard look at Retail Sales. Friday we’ll also have Michigan consumer sentiment. And weekly unemployment numbers will continue to be an important focus. >> The Week’s Economic Indicator Calendar Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates. Economic Calendar for the Week of March 8 – March 12 Date Time (ET) Release For Consensus Prior Impact W Mar 10 10:30 Crude Inventories 3/6 NA 4.03M Moderate Th Mar 11 08:30 Initial Unemployment Claims 3/6 460K 469K Moderate Th Mar 11 08:30 Continuing Unemployment Claims 2/27 4.495M 4.500M Moderate Th Mar 11 08:30 Trade Balance Jan –$41.0B –$40.2B Moderate F Mar 12 08:30 Retail Sales Feb 0.2% 0.5% HIGH F Mar 12 08:30 Retail Sales ex-auto Feb 0.0% 0.6% HIGH F Mar 12 09:55 Univ. of Michigan Consumer Sentiment Index Mar 73.8 73.6 Moderate F Mar 12 10:00 Business Inventories Jan 0.2% –0.2% Moderate >> Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months The economy appears to be recovering, inflation remains in check and the Fed has said it expects to keep the rate down for an extended period of time. Economists do not expect a rate hike in the first half of the year. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same. Current Fed Funds Rate: 0%–0.25% After FOMC meeting on: Consensus Mar 16 0%–0.25% Apr 28 0%–0.25% Jun 23 0%–0.25% Probability of change from current policy: After FOMC meeting on: Consensus Mar 16 <1% Apr 28 <1% Jun 23 2%

Using one standard deviation and a dart board, our bias is for 100k in job losses and a 9.9% unemployment rate

March 4, 2010

Let’s see what we have to deal with today; Sovereign debt problems in Greece continue to hold Euro zone hostage, massive short in our mortgage backed securities paper has traders scrambling, economic news such as Productivity, Factory Orders, Unemployment Claims, and Pending Home Sales, Treasury auction supply coming next week, and tomorrow’s weather skewed Employment Report due out at 7:30 am cst.  Just another day at the salt mine.

Weekly Unemployment Claims fell 27K to 469K as seasonal factors and the weather related snafu has everyone guessing is this real or Memorex.  The big picture points to the percentage of eligible people receiving unemployment benefits being 3.5%, well above the reading that creates jobs.  Seems to us that unemployment is stabilizing albeit at higher levels.  Not the makings of a vibrant economy.

Pending Home Sales looked like a Rottweiler as well, falling 7.6% in January.  Economists were looking for a plus 1.0% print.  Once again, the NAR Chief Lawrence Yun blames the weather for affecting home shopping.  Maybe we’ll get a clear read in July.  For the record, all regions were in the red with the West falling 13.2%.  Did it snow in California?

Factory Orders were up 1.7% with the ex-transportation up .1%.  A 15% gain in transportation orders did this trick for this number.  Maybe new accelerator parts for Toyota.  Productivity gains were off the chart, rising 6.9%.  The flip side was a drop in labor costs of 5.9%.  We are putting computers to work, not Joe the Plumber.  All of the above has flattened the yield curve with the 10 year note up 4/32’s and the bond plus 13/32’s.

One positive here is that until we work through this massive off sides market position in MBS, mortgage pricing will be supported, helping to keep pricing stable.  I’m going to give you our best guess on tomorrow’s jobs data.

Expectations for the February Employment Report are as follows;

1)      Non-Farm Payrolls – Minus 50K

2)      Unemployment – Rate 9.8%

3)      Hourly Earning – Plus .2 month on month

4)      Average Work Week – Minus .2

As we have been talking about, the weather is going to make a mess of the numbers.  We expect continued job losses in manufacturing, construction, and private services payrolls.  Construction should be hit the hardest, probably losing another 50K.  Consensus workers are a wild card as the government is expected to ramp up hiring, adding 1.2 million short term workers over time.

Using one standard deviation and a dart board, our bias is for 100k in job losses and a 9.9% unemployment rate.  JPMorgan has the call at minus 90K and 9.9%, Barclays at Minus 75K and 9.8%, Wells Fargo at minus 80k and 9.7%, and Credit Suisse the outlier at minus 125K and 9.9%.  If there is a miss, it will be towards more job losses than less.  You may recall that I wrote about John Ryding call that job losses would be minus 250K.  Don’t know if he is right but I do know he’s a pretty sharp dude.  What will the market do?  Most likely blow the numbers off due to distortions in the weather but trade nonetheless in a volatile fashion.  Once the dust settles, we would expect that pricing will be close to today’s levels “unless” the number is below expectations.

Let’s say we see a -25K or unchanged print.  We feel the market would interpret that to be much better than expected once you factor in the weather distortion.  Really, this one is a crap shoot.  Technically, we’re not getting much help as the 10 year note chart has formed a triangle pattern on the daily time frame.  We would need to close below 3.45% to turn this into a raging  bull (currently 3.61%) so not much help there.  Triangle patterns typically wind themselves up, tighter and tighter before a break out occurs.  Given the distance in basis points for a bullish outcome, we would side with a break out to higher yields/ worsening mortgage pricing to coincide with the ending of the short squeeze in the MBS market.  To put this in English and cut to the chase, be careful out in the days ahead.

Not sure how long this bid (buying frenzy) will go on but until it’s over, it will help our mortgage pricing

March 3, 2010

Yesterday, we talked about the effect FNMA and FHLMC will have on the market, supporting the price of mortgage backed securities as they buy the produce out of the market.  That’s why we see bonds trading in a narrow range, boxed in by the theory that you’re damned if you go long (own bonds) or good luck if you are short (selling bonds).  The same thing applied to MBS given the FNMA/FHLMC buyback program.

Currently, pricing reflects a low volume. The 10 year note is off 7/32’s (yield 3.64%), mortgage backs unchanged, and stocks up 20 something on the big board.  Earlier today, ADP reported their estimate for Friday’s payroll numbers would be job losses of 20K with a revision higher to 60K in job losses in January.  ADP reported that adverse weather plays a small part in their methodology but it is not unreasonable that Friday’s Bureau of Labor Statistics report could print much higher (job losses).

ISM Non-manufacturing Index was also released, up 2.5 points to 53.00  This was a little better than expected and the highest level seen since October 2007.  The employment component did the most to goose the index higher, rising 4.0 points.  Tells us that hiring in the servicing sector is improving.

For the most part, it’s a quiet trading day with treasuries and mortgage backed product being supported by the massive MBS short/accelerated pay down program going on.  Not sure how long this bid (buying frenzy) will go on but until it’s over, it will help our mortgage pricing.

Tomorrow is set up day before the Employment Report –  released Friday morning, 7:30 am cst.

Borrowers are best to take advantage of any price improvement by Thursday afternoon

March 2, 2010

The bond market seems to be defying gravity despite all kinds of reasons to trade towards higher yields.  One reason the Treasury market seems to have found support is that the SIFMA (Securities Industry and Financial Markets Association) is reporting 700 billion in fails to receive/deliver mortgage backed paper.  Throw in 70 billion that FNMA and FHLMC bought back in February (delinquent buyback program) and you have a number of investors scrambling to hedge up positions in fixed income portfolios.  On a go forward basis, FNMA and FHLMC are expected to buy back another 150 billion.  Accelerating prepayment speeds has also given the fast money types a reason to back MBS and flip to another asset class (treasuries) with a more predictable prepayment speed.  All of the above will make the set up into Friday’s payroll numbers a dicey affair.

Borrowers are best to take advantage of any price improvement by Thursday afternoon.  Technically, the buying looks suspect because it is not endorsed by any daily study turning bullish.  All are neutral, telling us that all we’re doing is rattling around in the range.

With the consensus call for job losses of 50K, a number of economists are talking about 100K in losses with John Ryding, chief economist at RDQ Economics, calling for losses of 250K

No news today but lots to talk about.  The market dipped at the open on higher European Stocks and the Euro zone working with Greece to save its soul.   Take a look at mortgage delinquencies, up 21% year on year.  The FDIC asset backed sale is somewhat of a puzzle.  Seems as though the timing is poor.  Fed President Hoenig is making hawkish comments that the Fed should not guarantee markets with an extended period of low rates – zero rates are not sustainable and extended low rates may cause problems later.  At the same time, he is sounding like a dove, commenting  that he is very worried about unemployment and the long term position of the U.S. economy, deficits, and excess reserves.

Speaking of unemployment, Friday’s number could be as weird as it gets.  With the consensus call for job losses of 50K, a number of economists are talking about 100K in losses with John Ryding, chief economist at RDQ Economics, calling for losses of 250K.  Blame it on the weather.  With spreads so wide you could drive a truck through them, Friday’s print will be one volatile ride.  After being down as much as 7/32’s this morning. Mortgage backs have crept back a few 32’s.  Stocks have been up 30 to 40 points most of the day and the 10 year note now trades at 3.62%.  Honestly, most markets are as quiet as a church mouse! Call it neutral, treading water until the next headline breaks.

Austin mortgage pricing should remain relatively stable for most of the week and then worsen post Unemployment Report data on Friday

March 1, 2010

With February in the rear view mirror, bonds, notes, and mortgage backs are starting the new week/month off on the defensive side.  Although last week’s data (Housing, Consumer Confidence, etc.) did not paint a pretty picture of the economy, many are blaming the severe winter weather for skewing the numbers.  To that bias, traders are looking for a soft payroll number on Friday, say job losses of 50K and a 9.9% Unemployment Rate.

Looking at last week’s rally, most of the trade was on short covering which means that traders were not initiating new long positions (expecting the market to continue to rally).  We buy that argument and if correct, we would suggest that you “buy the rumor, sell the news”.  In English, this means that mortgage pricing should remain relatively stable for most of the week and then worsen post Unemployment Report data on Friday.  To be honest, the market is so volatile that any headline seems to lead us up or down by the nose.

Earlier today, Personal Income rose .1% while Spending rose .5%.  PI came in on the low side of estimates and PS was right on the screws.  Construction Spending was also on the docket, down .5%, in line with economist’s expectations.  Private and Public construction both fell while the Federal Government’s construction rose to an all time high of 30.7 billion.  Go figure.

Last up was the ISM report (Institute of Supply Management Manufacturing Index) which fell 1.9 points to 56.5.  The decline came from a drop in new orders and production.  Given the data, we would expect to see at least 15K in manufacturing layoffs in this Friday’s report.  Since this is the first day of March, it also means it’s the last month for the Fed to buy mortgage backed securities. The removal of this stimulus brings the question of “how much of the news is priced in”.  Fed Vice Chairman Donald Kohn said that any increase in rates is likely to be “modest” but added “that judgment is subject to considerable uncertainty”.  Thanks for the advice!

To be sure, we would advise a defensive bias for those clients locking an interest rate this month.  While a number of guru’s are talking about mortgage rates (by year end) being 5.75% to 6.25%, this month will be more critical that most. Someone will need to pick up where the Fed leaves off so be cautious.

Technically, the stall below the tough resistance level tested last week has created a neutral, inside day.  Important point here is that it is not a reversal, only a stall which is corrective in nature.  To get this market moving to the upside (rally) again, the 10 year note will need to close at or below 3.59%.  Currently, we are trading a 3.62% yield, off 8/32’s on the day.  Mortgage backs are off 5/32’s and stocks are plus 81 on the big board.

Austin Mortgage Market Update – For the week of March 1, 2010

For the week of March 1, 2010 – Vol. 8, Issue 9

>> Austin Mortgage Market Update INFO THAT HITS US WHERE WE LIVE New home sales fell 11.2% in January to a record low level. Existing home sales weren’t very pretty either, down 7.2%, though they’re UP 11.5% over a year ago. Let’s remember that last Fall we all thought the tax credit was going away at the end of November. Many sales got pushed into October and November, causing sales drops the next two months. But the median new home price is down just 2.4% year over year and the average price is now UP 3.7%. For an existing home, the median price is unchanged from a year ago and the average price is UP 2.6%. More evidence home prices are stabilizing, with some analysts expecting modest gains for the year. Supporting this, the Case-Shiller home price index was UP 0.3% in December, its seventh straight monthly rise. Even more interesting was the news that this has actually been a very good decade for home prices. From January 2000 to December 2009, prices were UP 46%, making residential real estate a clearly profitable investment. And that’s not even factoring in the mortgage interest and real estate tax deductions homeowners get! Finally, we’ve reported that the Fed will stop buying mortgage bonds at the end of this month and experts feared rates may edge up. Now analysts say mortgage rates might not move much at all. This stems from the fairly calm market reaction to last week’s hike of the Fed’s discount lending rate (which is NOT the key Fed funds rate). Seeing little or no move in today’s low mortgage rates is good news for the near term. >> Review of Last Week MINOR SLIP… Another volatile week on Wall Street, as investors drove stock prices down two days, then up two days, with all three major indexes slipping just slightly for the week. Things got off to a weak economic start with Consumer Confidence dropping sharply in February, much like the temporary drop in January 1996 when, curiously, there was another big blizzard on the East Coast. Folks didn’t much like the drop in new home sales either, but good news did come with the Richmond Fed Index, which showed that manufacturing in the mid-Atlantic region went from -2 in January to +2 in February. Then there was Fed Chairman Ben Bernanke’s monetary policy report to Congress, which he serves up every six months. Bernanke assured everyone rates will remain low, a message loved by investors. The up-and-down news continued with durable goods UP a solid 3.0% for January, showing business is investing in equipment, usually a precursor to their investing in jobs. Not just yet, though, as weekly unemployment claims edged up a tad. Then Friday we had the blockbuster news that real GDP for Q4 was revised UP to a 5.9% annual growth rate. People who still can’t see a recovery should also look at the Chicago PMI. This gauge of Midwest manufacturing hit a five-year high of 62.6 for February. For the week, the Dow was down 0.7%, to 10325.26; the S&P 500 was down 0.4%, to 1104.49; while the Nasdaq skidded down 0.3%, to 2238.26. Bonds ended the week pretty nicely as investors sought safety in a week featuring strong Treasury auctions. The FNMA 30-year 4.5% bond we watch ended UP 87 basis points, closing at $101.09. As a national average, mortgage rates inched up a little, but still remain at very low levels. >> This Week’s Forecast INFLATION, MANUFACTURING, HOMES, JOBS… This week has everything! We start off with PCE, the Fed’s favorite reading on inflation, followed by the ISM take on the state of manufacturing, a sector that’s been leading the recovery. Thursday, Pending Home Sales looks to the near future of the housing market. Then the week ends with the all-important February jobs report. We will be looking for some encouraging signs on that front. >> The Week’s Economic Indicator Calendar Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates. Economic Calendar for the Week of March 1 – March 5 Date Time (ET) Release For Consensus Prior Impact M Mar 1 08:30 Personal Income Jan 0.4% 0.4% Moderate M Mar 1 08:30 Personal Consumption Expenditures (PCE) Jan 0.4% 0.2% HIGH M Mar 1 08:30 Core PCE Jan 0.1% 0.1% HIGH M Mar 1 10:00 ISM Index Feb 57.8 58.4 HIGH W Mar 3 10:00 ISM Services Index Feb 51.0 50.5 Moderate W Mar 3 10:30 Crude Inventories 2/26 NA 3.03M Moderate Th Mar 4 08:30 Initial Unemployment Claims 2/27 475K 496K Moderate Th Mar 4 08:30 Continuing Unemployment Claims 2/13 NA 4.617M Moderate Th Mar 4 08:30 Productivity – Rev. Q4 6.2% 6.2% Moderate Th Mar 4 10:00 Pending Home Sales Jan 1.7% 1.0% Moderate F Mar 5 08:30 Average Workweek Feb 33.7 33.9 HIGH F Mar 5 08:30 Hourly Earnings Feb 0.2% 0.2% HIGH F Mar 5 08:30 Nonfarm Payrolls Feb -20K -20K HIGH F Mar 5 08:30 Unemployment Rate Feb 9.8% 9.7% HIGH >> Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months In Congressional testimony last week, Fed Chairman Bernanke recited his familiar mantra that interest rates should stay low for “an extended period of time.” Now very few economists feel the Fed funds rate will rise during the first half of this year. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same. Current Fed Funds Rate: 0%–0.25% After FOMC meeting on: Consensus Mar 16 0%–0.25% Apr 28 0%–0.25% Jun 23 0%–0.25% Probability of change from current policy: After FOMC meeting on: Consensus Mar 16 <1% Apr 28 <1% Jun 23 3%

Since we as tax payers own AIG, you should be interested to know that they just announced a Q4 loss of 8.9 BILLION

February 26, 2010

While sovereign debt is still an issue (Greece), consider that we have our own bottle of Grecian formula right here at AIG.  Since we as tax payers own the company, you should be interested to know that they just announced a Q4 loss of 8.9 BILLION.  AIG said they will need additional government (tax payer) support to meet obligations in the future.  Why not give them 1 hour to get out, put a chain link fence around the building, and bring in a truck load of pit bulls to protect the place from the former employees?  When did we decide that failure needs to be rewarded?

Coming off the soap box, let’s look at the early day economic data. GDP, 4^th Qtr revised, rose by .2% to 5.9%.  Inside the numbers, consumer spending fell to 1.7%, leaving the only reason for overall improvement directly linked to inventory building.  That has a finite time frame.  Next up, Chicago Purchasing Managers index rose to 62.6 from last month’s 61.5.  The trouble here is that the only part of the index to show improvement were order backlogs, fitting when you see how inventory rebuilding has bumped GDP.

Final revision for U of Michigan’s Consumer Sentiment tallied 73.6 from 73.7.  Not much here as they revise this number a dozen times before putting out the final.  Last but not least was January Existing Home Sales.  The index fell 7.2% to 5.05 million units annualized.  The print was well below economist’s expectations and blamed partially on the unusually stinky weather across the country.

All of the above has given the last day of the week/month a low volume trade.  Stocks hovering on either side of unchanged while the 10 year is up a dozen.  Mortgage backs have had a nice day, up 5 to 6/32’s depending on the coupon.  We like the market however feel that it is a little toppy and due a small correction.  This probably comes early next week once the new month begins.  Short term we say “go on, take the money and run”.  Longer term, our bias is for a double dip recession of sorts and one more chance to refinance.

Best to get your info together now and be ready.  Have a great weekend.

Weak Data Moves Austin Mortgage Rates Lower

After several weeks of focus on Fed actions and events in foreign markets, domestic economic data was the primary influence on mortgage markets this week. Weaker than expected results from the data helped Austin mortgage rates, which ended the week lower.

While it is rarely a big market mover, this week’s Consumer Confidence report shocked investors. The index declined to 46.0, far below the consensus forecast of 55.0, and the lowest level in nine months. Consumers are clearly worried about the labor market, and an increase in Jobless Claims in recent weeks has amplified the issue. The decline in confidence has potentially negative consequences for the economy. Consumer spending accounts for about 70% of economic activity, and this data raises concerns about the level of future spending. Also, home sales suffer during periods of low consumer confidence, and the housing data released this week reflected consumer insecurity. Of course, slower economic growth is favorable for Austin mortgage rates, which fell after the report came out.

In contrast to the weakness seen in many of the consumer-driven economic reports, the manufacturing sector has been demonstrating strong performance in recent months. Fourth quarter Gross Domestic Product (GDP), the broadest measure of economic activity, rose at a brisk 5.9% annual rate, largely due to a pickup in manufacturing. The added boost from manufacturing may be temporary, however. During the financial crisis, companies drew down inventories as much as possible to conserve capital. As the economy has shown improvement, companies have been increasing inventories closer to pre-crisis levels. When the inventory rebuilding is complete, manufacturing is expected to return to more normal levels.

Week Ahead

The biggest economic event next week will be the important Employment report on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Early estimates are for a decrease of about -20K jobs in February. Before the employment data, Personal Income and the ISM manufacturing index will be released on Monday. ISM Services and the Fed’s Beige Book will be released on Wednesday. Pending Home Sales, a leading indicator for the housing market, will come out on Thursday. Productivity, Construction Spending and Factory Orders will round out the schedule. In addition, the Treasury will announce the size of upcoming auctions on Thursday.