Austin Mortgage Blog

Archive for September, 2009

Best bet is to be watchful of the market into the Friday Employment Report

Volatile trade in both stocks and MBS has markets moving once again.  Stocks were off over 100 points on higher than expected ADP jobs estimates and a sour Chicago Purchasing Managers report.  Mortgage backs opened to the down side, off 2/32’s for much of the morning.  That has all changed as stocks have now gone positive (up 16 points on the Dow) while mortgage backs are feeling the pressure, down 5/32’s.  Spreads between MBS and Treasuries have also widen, akin to throwing salt in the wound.  Best bet is to be watchful of the market into the Friday Employment Report.

The week ahead is shaping up to be a barn burner

The week ahead is shaping up to be a barn burner. Month end, Quarter end, and the Employment Report for September are just a few of the events that could rock our world.

• No news today but tomorrow will get the ball rolling with Case Shiller Home Prices and Consumer Confidence.
• Wednesday’s focus will be on the ADP employment report, posting estimates for Friday’s jobs data.
• On Thursday, Construction Spending and ISM Manufacturing will take center stage, only to give way to the all important Employment Report due out Friday at 7:30 am cst.
• We expect a volatile week in bonds, stocks, and Austin mortgage pricing.

Stocks are having a good morning, up 125 points on the continued momentum trade that has carried the market for weeks. Technical trading is in charge here as the fundaments just don’t stack up. S&P’s at 1100 (currently 1060) should put a cap on it. The 30 year bond has been on a terror lately as well. Incredible curve flattening as real money traders are buying duration, both for yield and for month end extension needs. 30 year bonds are currently up 23/32’s (yield 4.05%) while the 10 year note is only up 7/32’s (yield 3.30%). Despite improvement in stocks, the long end of the curve (10’s through 30’s) continues to hold their gains. The next target is 3.26% on the 10 year note (currently at 3.30%). We will need a sustained break below that yield mark to confirm any further upside (rally). Given the week ahead (Employment Report) odds are good that this level holds.

Inside Lending: Austin Mortgage Market Update

>> Austin Mortgage Market Update INFO THAT HITS US WHERE WE LIVE Well, it had to happen. After a four-month winning streak, Existing Home Sales dropped in August by 2.7% to an annual sales pace of 5.10 million. This offsets the big sales increase we had in July but the overall trend is still up by 3.4% over a year ago and the supply of existing homes is now down to 8.5 months. Good news came from the Federal Housing Finance Agency, which monitors prices of homes financed with conforming mortgages. They reported prices UP 0.3% in July, their third straight monthly rise. The week ended with single-family New Home Sales for August UP 0.7%. This was slightly less than expected, but 30% above their January low. Best of all, the supply of unsold new homes, down five months in a row, is now at just 7.3 months! Mortgage applications for purchase loans were up 5.6% from the week before. Applications for government-backed purchase loans were at their highest level ever. It seems many first-time homebuyers are making sure they get that $8,000 tax credit before it expires on November 30! All this was happening as the average interest rate for prime borrowers went below 5% on 30-year fixed-rate mortgages for the first time since May. Average points inched up to 1.12 (including the origination fee) for 80% loan-to-value ratio loans. >> Review of Last Week TAKING A BREATHER… After a nice run up in prior weeks, the stock markets were down three days in a row, ending down for the week overall. But we have to point out that for the year, the Dow is still UP 10.1%, the S&P 500 is UP 15.6% and the tech-heavy Nasdaq is UP a whopping 32.6%! Pretty bullish performance. Problems worrying investors included the slip in Existing Home Sales covered above and Durable Goods Orders down 2.4% for August. That’s actually less problematic than it appears, since the decline came mostly from a 30% drop in volatile aircraft orders –– in July, aircraft were up 25%. The Fed did not raise the rate at their meeting (no surprise) and came out with an FOMC statement that observed “economic activity has picked up” and “activity in the housing sector has increased.” These indications of economic recovery were followed with the announcement the Fed would continue through the end of March 2010 their purchases of mortgage-backed securities, which help keep mortgage rates low. Initial claims for unemployment fell yet again last week, this time by 21,000, to 530,000. The four-week average of continuing claims dropped as well. Meanwhile, the Richmond Fed Index, which gauges manufacturing in the mid-Atlantic region, stayed at +14 in September, the fifth straight month it’s been positive. The week ended with the boost in New Home Sales mentioned above, plus University of Michigan Consumer Sentiment at 73.5 for September, its highest reading since January a year ago! For the week, the Dow ended down 1.6%, to 9665.19; the S&P 500 was off 2.2%, to 1044.38; while the Nasdaq fell 2.0%, to 2090.92. As usually happens when stock prices sink, bonds soar. The FNMA 30-year 4.5% bond we watch finished up strongly from the previous week’s $100.44 close, finishing at $101.12.It was no surprise that mortgage rates moved down a bit more, hitting levels they haven’t seen since last May, as noted above. >> This Week’s Forecast CONFIDENCE, SPENDING, JOBS… The week begins with Consumer Confidence and ends with the September Jobs Report. Along the way, on the day Q3 ends, we get the final number on Q2 GDP plus the Chicago PMI take on manufacturing in the Midwest.Thursday, we’ll be looking at Pending Home Sales, while the Fed will be focusing on the personal spending PCE number to keep an eye on inflation. >> 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 September 28 – October 2 Date Time (ET) Release For Consensus Prior Impact Tu Sep 29 09:00 Consumer Confidence Sep 57.0 54.1 Moderate W Sep 30 08:30 GDP–Final Q2 –1.2% –1.0% Moderate W Sep 30 09:45 Chicago PMI Index Sep 52.0 50.0 HIGH W Sep 30 10:30 Crude Inventories 9/25 NA 2.85M Moderate Th Oct 1 08:30 Initial Jobless Claims 9/26 535K 530K Moderate Th Oct 1 08:30 Personal Income Aug 0.1% 0.0% Moderate Th Oct 1 08:30 Personal Consumption Expenditures (PCE) Aug 1.1% 0.2% HIGH Th Oct 1 10:00 ISM Index Sep 54.0 52.9 Moderate Th Oct 1 10:00 Pending Home Sales Aug 1.0% 3.2% Moderate F Oct 2 08:30 Average Workweek Sep 33.1 33.1 HIGH F Oct 2 08:30 Hourly Earnings Sep 0.2% 0.3% HIGH F Oct 2 08:30 Nonfarm Payrolls Sep –180K –216K HIGH F Oct 2 08:30 Unemployment Rate Sep 9.8% 9.7% HIGH >> Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months. The FOMC statement coming out of last week’s meeting confirmed the Fed intends to keep the funds rate down for an extended period. That could change, of course, as the recovery builds or inflation picks up. 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 Nov 4 0%–0.25% Dec 15 0%–0.25% Jan 27 0%–0.25% Probability of change from current policy: After FOMC meeting on: Consensus Nov 4 2% Dec 15 4% Jan 27 12%

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Technically we have a bullish breakout and most studies favor continued upside (better Austin mortgage pricing)

“In my view, if policy makers insist on waiting until the level of real activity has plainly and substantially returned to normal – and the economy has returned to self-sustaining trend growth – they will almost certainly have waited too long”.

Hawkish remarks from Fed Governor Kevin Warsh has added a new wrinkle to yesterday’s friendlier than expected FOMC statement.  That op-ed piece, along with both bullish and bearish economic news, sent markets on a roller coaster ride for much of the day.  With the dust now settled, the 10 year note closed up 16/32’s (yield 3.32%), stocks finished down 42 points on the big board, and mortgage backed securities gained 6/32’s on the low rates (4.50% to 5.125%) and 2/32’s on rates from 5.25% on up.

Widening spreads between Treasuries and MBS along with a flatter yield curve were very much in vogue.  Matter of fact, the 30 year bond was up 45/32’s to yield 4.09%.  Although the market ended the day firmly to the upside, the high print (low yield) of last September continues to cap the market.

Technically we have a bullish breakout and most studies favor continued upside (better Austin mortgage pricing).  Even Elliot wave charts and Candlestick patterns have developed bullish trends, bringing almost all trading tools and time frames into harmony.  Trouble is, we do not get much “bang for the buck” in Austin mortgage pricing due to the widening spreads.  Hey, it’s a positive and bodes well for better mortgage levels into next week and it is Friday.  Can’t get much better than that.  We’ll give the market a little room to run into the early part of the week, taking  a neutral/bullish bias into month end.

Have a great weekend.

We could be seeing the beginning of a nice correction in stocks. That my friends would put a little more giddy up in our Austin mortgage pricing

TGIF.  Volatile times are abound this morning as Iran finally admits to an underground nuclear facility, Fed Governor Warsh talking about the Fed beginning the tightening cycle “soon” and being more aggressive than market expectations (Op-Ed WSJ), Europe placing tariffs on China, Durable Goods (those things expected to last 3 years or more) down 2.4%, well below market expectations, and New Home Sales up .7% to a 429K annual unit pace.

Cash seeking a return and/or shelter from our wicked world once again is running to Treasuries.  The trade however has been on both sides of unchanged due to all of the above.  Stocks have moved from red to green and back to red again, currently off 19 points on the Dow.  The 10 year note is up 5/32’s, trading at 3.35%.  That level is significant as referenced in yesterday’s Market Update.  Any close below 3.36% will shift the advantage to the bulls.  Given the “outside day down” on the S & P chart Wednesday, along with continued pressure yesterday and today, we could be seeing the beginning of a nice correction in stocks.

That my friends would put a little more giddy up in our Austin mortgage pricing.  For now, keep an eye on stocks and bonds!

Fed Extends MBS Purchase Program

Favorable news from the Fed, weaker than expected economic data, and strong demand for a record $112 billion in Treasury auctions helped mortgage markets this week. While the daily price movements were often large, mortgage rates ended the week just a little lower.

As expected, the Fed made no change in the fed funds rate on Wednesday. Although there was much disagreement about what the statement would say, in general it contained the minimum number of surprises. The Fed offered its most optimistic view on the economy since the recession began, yet officials believe that slack in the economy will keep inflation low. Fed officials continue to expect the fed funds rate to remain at exceptionally low levels “for an extended period.”

Of particular significance for the mortgage industry, the end date for the $1.25 trillion mortgage-backed securities (MBS) purchase program was moved from the end of this year to the end of the first quarter of next year. The total quantity of purchases will not change, and the Fed will gradually scale back the level of weekly purchases to minimize disruptions to mortgage markets. Investors had been concerned that the Fed statement might contain less favorable news, and mortgage rates improved after its release. Longer-term, the decrease in demand from the Fed is expected to move mortgage rates higher, and it might lead to greater daily volatility.

This week’s housing data was mixed. After four months of increases, August Existing Home Sales fell 3%. Inventories of unsold homes fell to an 8.5-month supply from a 9.3-month supply in July. First-time homebuyers accounted for 30% of total sales. August New Home Sales rose slightly, and inventories dropped moderately.

FOMC made no mention of an exit strategy, instead talking about keeping Austin mortgage rates low for an extended period of time

With the FOMC dust settled, a couple of points are worth mentioning.

First up, the FOMC made no mention of an exit strategy, instead talking about keeping Austin mortgage rates low for an extended period of time.

Number two was the statement about continuing the purchase of  Treasuries and MBS and extending the period until the end of Q1, allowing for a wind down period. Seems obvious that they are more concerned about housing and the economy versus inflation and deficits.  One reason for the accommodative policy may be the building inventory due to future delinquency and foreclosures, estimated to be 7 million units.  This is what we call “shadow inventory”, not yet on the books but in the pipeline nonetheless.  That number is huge, representing an entire year of sales.  We shall see.

Speaking of housing, Existing Home Sales hit the tape down 2.7%, well below the expected plus 3.0% figure. 31% of the sales were distressed homes and 30% were first time home buyers.  The 8K stimulus credit has helped to stabilize our industry.  If it expires, chances are good that a “double dip” housing recession would be in the cards.  We believe this gets worked out soon and extended through 2010.

Weekly Unemployment Claims were also released, falling 21k to 530K. Continuing Claims also dropped, off 123K from the previous week.  Nothing huge here as the numbers were probably skewed by the Labor Day holiday.

Stocks seem to be looking over their shoulder, off 55 points on the big board.  Seems like everyone expects consolidation due to a lack of fundamental reasons to own them at this level.  We’re waiting to see who blinks first.  Bonds, notes, and MBS are the benefactor of scared money running into safe haven investments (treasuries).  As we speak, the 10 year note is up 8/32’s (yield 3.38%) and MBS up 4/32’s.  For your reference, the 10 year note will need to close at 3.36% or below to extend the rally.  That could be a tough order (without a stock market collapse).

No change in rates, longer term inflation in check, and low level of interest rates for an extended period of time

No change in rates, longer term inflation in check, and low level of interest rates for an extended period of time.  They will also continue to buy Treasuries and MBS.  Market are volatile but holding, albeit at lower levels.   MBS off 9/32’s

PRESS RELEASE  - FOMC

Release Date: September 23, 2009

For immediate release

Information received since the Federal Open Market Committee met in August suggests that

economic activity has picked up following its severe downturn.  Conditions in financial markets

have improved further, and activity in the housing sector has increased.  Household spending

seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth,

lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and

staffing, though at a slower pace; they continue to make progress in bringing inventory stocks

into better alignment with sales.  Although economic activity is likely to remain weak for a time,

the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal

and monetary stimulus, and market forces will support a strengthening of economic growth and a

gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term

inflation expectations stable, the Committee expects that inflation will remain subdued for some

time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to

promote economic recovery and to preserve price stability.  The Committee will maintain the

target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic

conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended

period.  To provide support to mortgage lending and housing markets and to improve overall

conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of

agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will

gradually slow the pace of these purchases in order to promote a smooth transition in markets and

anticipates that they will be executed by the end of the first quarter of 2010.  As previously

announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be

completed by the end of October 2009.  The Committee will continue to evaluate the timing and

overall amounts of its purchases of securities in light of the evolving economic outlook and

conditions in financial markets.  The Federal Reserve is monitoring the size and composition of

its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C.

Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M.

Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

40 billion of 5 year notes hit the auction block with a not so hot response

40 billion of 5 year notes hit the auction block with a not so hot response.  Indirect bidding wasn’t bad at 48% but the issue produced a 3 bps tail.  Give this one a C.  The lack luster auction gave traders a reason to go palms out (turn sellers), taking the 10 year note down 12/32’s in a nano second.  Mortgage backs followed suit, falling 8/32’s in the same time period.  Market jitters are in play as the Fed is 45 minutes away.  Buckle up!

Fed is walking a tight rope, trying to sound confident and optimistic while still keeping the training wheels on the economy

Today is all about the Fed Open Market Committee.  We believe there is a zero chance that they raise short term interest rates, given rising unemployment and the fragile yet stabilizing state of the economy.  The policy statement is another matter and one that we need to watch closely.  The salient points that will draw attention are as follows;

1. Overall state of the economy
2. Continued purchase of MBS and Treasuries
3. Unemployment Concerns
4. Exit strategy

Number 4 is the one we want to watch out for.  Rumor mill bantering is talking about the Fed using “Reverse Repos” to drain dollars out of the system, taking away excess reserves.  In general, this exercise is nothing new if explained in the proper context to the market.  If it is labeled a policy change, the market will feel that this is the beginning of a shift in policy, one towards tightening/removal of accommodation.  English translation would means higher interest rates.  This kind of shift would cause forced selling in both bonds and stocks and not treat us mortgage types well.  We believe it is a little too early in the recovery cycle for this type of policy change, given our current level of unemployment along with a number of other fragile components of the economy.  No doubt the Fed is walking a tight rope, trying to sound confident and optimistic while still keeping the training wheels on the economy.  Pre-FOMC trade is quiet with both stocks and bonds slightly to the downside (Stocks off 20, MBS off 2/32’s).  The fireworks will hit the screen at 1:15 pm cst so buckle up!