Austin Mortgage Blog

Best advice is to use any rally to lock your interest rate in!

March 12, 2010

Retail Sales jumped .3% and .8% ex-autos, well above economists’ expectations.  Gains in food, beverages, and gasoline station receipts led the way.  Auto sales pulled down the headline print, falling 2.0%.  Traffic was higher for most Retail Stores as well, with notable gains in women’s apparel outlets like Ann Taylor.

Given the wicked weather in February, the numbers are impressive but suspect.  Is the consumer coming out of a two-year shell or is it just time to replace some items that have simply worn out?  Time will tell.  If you’re looking to Consumer Sentiment for the answer, look again.  The index fell in this morning’s release, down 1.1 points to 72.5.  Both current conditions and future expectations fell with the latter down only slightly.  The index is moving sideways, a mirror image of our employment situation.  As employment goes, so will our feelings about how fat your wallet is.  Reaction to all of the above has been somewhat of a whipsaw.

Post Retail Sales, treasuries and mortgage backs fell like a rock with the 10 year note down 14/32’s at one time.  Mortgage backs were off 11/32’s at the same time.  Stocks as one would expect, were up 20 something and looking to breakout of upper part of the range on S & P’s (1150).  Once Consumer Confidence was released, traders threw cold water on stocks and our fixed income paper started a comeback.  Currently, the 10 year note is up 1/32^nd but mortgage backs are still off 7/32’s (we priced down 8/32’s).  Technically, the early selling triggered a new bearish trend (higher interest rates) but 10 year notes and 30 year bonds remain neutral on this study.  Given the volatile trading conditions, a bullish divergence has come into play with the chart now working on an outside day up (bullish formation).

Given the trading dynamics of late, we expect any rally to be muted.  Over the past week or so, I’ve talked about the triangle formation on the 10 year note daily chart.  Looking at that chart below, you can see how the formation is “winding itself” tighter and tighter and will eventually “breakout” into a major trend move.  3.89% and 3.43% mark the extremes (currently trading 3.72%).  Until this happens, we expect the market to be range bound between the two extremes.  Given the stabilization in the economy and slowly improving data, the higher percentage odds will be towards higher yields.  Time frame on this is tough to call with our most likely guess being the second half of the year.

With so many variables to consider – employment, sovereign debt, political rang lings’, and on and on – managing interest rate risk and helping our borrowers with their decisions on Austin mortgage rates is very hard to handicap.  Best advice is to use any rally to lock your interest rate in!

We’ll try to wrap it up for the week later today.

Quiet Week for Austin Mortgage Markets

During a very light week for economic news, the economic data and Treasury auctions contained few surprises and produced little reaction in mortgage markets. Mortgage rates ended the week nearly unchanged.

In early 2009, the Fed embarked on a $1.25 trillion mortgage-backed securities (MBS) purchase program to help keep mortgage rates low and stimulate the economy. The amount purchased varied from week to week, reaching a peak of $33.2 billion in the week of March 25, 2009. The Fed has been gradually reducing the size of its purchases at a pace consistent with a March 31 conclusion of the program, and the most recent weekly purchases have been down to around $10 billion.

As the date nears, the big question is what will happen when the MBS purchase program ends. This program is unprecedented, making the outcome difficult to predict, and forecasts vary widely. Estimates for the impact on mortgage rates from the conclusion of the program vary from an increase of one percent to no change. Those who predict higher mortgage rates point to a basic change in the fundamental supply and demand. The added demand from the Fed was widely credited with moving rates lower, and a decrease in demand would typically push rates higher. However, other economists argue that investors respond only to unexpected news. In this view, since the Fed has telegraphed the end of the program for months, there should be little reaction around March 31. The Fed itself has indicated that they expect a modest increase in Austin mortgage rates due to the end of the program.

Week Ahead

The big story next week will be Tuesday’s Fed meeting. No change in the fed funds rate is expected, but any surprises in the Fed’s statement could produce a large reaction. The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Thursday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production, an important indicator of economic activity, will be released on Monday. Housing Starts are scheduled for Tuesday. Import Prices, Leading Indicators, and Philly Fed will round out a busy week.

Best to take advantage of current mortgage pricing with such low odds of improvement in the cards

March 11, 2010

Market action today has been like watching paint dry.  Up a tick, down a tick, just not much volatility.  Earlier today, Weekly Unemployment Claims fell 6K to 462K.  Continuing Claims went the other way, up 37K to 4.558 million.  Both prints were close to economists’ expectations.  At high noon, the Treasury auctioned 13 billion of 30 year bonds.  The issue flew off the shelves at a yield of 4.679% with 23.6% going to Indirect Bidders and 29.6% taken by Direct Bidders.  The direct bid was huge, showing tremendous interest by domestic investors.  Bid to cover came in at 2.89% compared to an average of 2.51% (very good) but the best part was that the auction was taken at a yield that was under the yield trading at deadline (4.71%).  Traders call this “bidding through the screen” or a “bullet auction”.  Overall, give it an A.

Even with the great auction, nothing happened with pricing on 2 year through 10 year notes.  The 30 year bond has all the action, going from down 2/32’s to up 14/32’s in a nanno second (flatter yield curve).  Currently, both the 10 year note and mortgage backed securities are off 1/32^nd.   Technically, strong auctions this week have not rallied the market but have kept prices above major support, the 40 day moving average, and above the daily trend line.

The problems for bond bulls is that almost all daily oscillators show little upside potential (not much chance of a rally).  Mortgage backs do however have added support with traders and FNMA/FHLMC continuing to buy back positions.  Looks like a tug of war that no one wins.  Best to take advantage of current mortgage pricing with such low odds of improvement in the cards.  Currently, we’re trading 3.73% with the extremes at 4.62% and 2.0%.  Lots of room to run (either way) as the economic picture changes.

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.