Austin Mortgage Blog

Archive for February, 2010

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

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.

Today’s Austin mortgage rates: the market trades well but your risk reward is starting to dwindle

Results of the 7 year note auction just hit the tape to yield 3.078% with 40.3% going to Indirect Bidders.  Direct Bidders stayed away, taking only 17.2%.  Bid to cover was a respectable 2.98 to 1 with only a .5bps tail.  Given it a B and close the book on this week’s financing.

Concerns about a Moody’s downgrade for Greece, Unemployment Claims jumping 22K, and Durable Goods (ex-transportation) falling .6% are not the makings of an economic recovery.  Stocks feel the pinch, down 156 points on the big board while the flight to quality trade is on in treasuries (10 year note up 14/32’s).  Mortgage backs have followed suit, up 5 to 6/32’s depending on the coupon.

Technically, the chart gapped higher leaving what we call an “island reversal” behind.  Bullish formation that typically leads to a full retracement (revisit the best levels set 2/8).  That area is only ½ point away in 10 year note trading and if achieved, could boost mortgage pricing by another .125% to .25%.  What I’m getting at here is that the market trades well but your risk reward is starting to dwindle.  Given the stiff resistance overhead, best to use the improved mortgage levels.  Take advantage.

A leading indicator for Austin home prices? Follow the rents!

The big question for home buyers and sellers today is: “Where are Austin home prices headed?” People want to know if now is a good time to buy or sell, or if they should wait. We all need to stay on top of trends in Austin, TX real estate values — so what’s a good way to analyze the situation?

Yale economist Robert Shiller states it bluntly:

“If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure.”

Shiller is the co-developer of the S&P Case/Shiller Home Price Indices that monthly track residential real estate values nationally and in 20 metro areas.

Traditionally, people have been willing to pay a modest premium to own a home rather than rent it. Recent studies report that in 1999 rents averaged 87% of the after-tax mortgage payment for houses and condos of similar size in the same neighborhood.

When home prices took off, this percentage changed. By mid-2006, rents had fallen to less than 60% of after-tax mortgage payments. In some markets, owners were paying twice as much as renters for a similar property in the same neighborhood. In a few places, owner monthly payments were three times average rents.

The 87% ratio of rent to ownership cost for 1999 is a good benchmark because it stayed around that level throughout the 1990′s and the steep rise in home prices hadn’t really begun.

With that as our guide, we can conclude that home prices at last appear to be stabilizing. By the end of October 2009, rents on average were up to 83% of ownership costs!

Conditions vary from market to market, so give me a call to discuss the Austin area. But with historically low Austin mortgage rates, plus the homebuyer tax credit, this could be a great time to be buying or selling….

The key here is neutral not bullish, telling us that continued upside (better mortgage pricing) will be a challenge

Results of the 5 year note auction (42 billion) just hit the tape at a yield of 2.395%.  40.3% were taken by Indirect bidders (good), 12.8% by Direct bidders (ok), 2.75 to 1 bid to cover ratio (average), yet the issue created a 1.5 bps tail (not so good).  Reasons for the auction to be on the sloppy side are 1) charts at stiff resistance and overbought 2) strong stocks (Dow plus 106) 3) Bernanke’s testimony touting “low mortgage rates for an extended period, no assets sales, and continued evaluation of security purchases”.

The latter is stock friendly and worrisome to bonds (inflation).  Earlier today, New Home Sales fell to a record low 309K units, off 11.2% in January.  Sales in the Northeast took the most beating, down over 35%.  Weather was certainly a factor so we are looking for a bit of recovery coming in Feb/March.  Technically, the rally we’ve seen the past couple of days has improved the charts, turning the trend to neutral from bearish.  The key here is neutral not bullish, telling us that continued upside (better mortgage pricing) will be a challenge.

Currently, the 10 year note is off 1/32^nd to yield 3.70%, mortgage backs unchanged, and stocks up over 100 on the big board.  Caution is advised.

Good time to take advantage of better mortgage pricing

Case-Shiller 20 city home price index was the first to hit the tape, down 3.1% year on year and off 2.5% Q4.  The numbers were close to expectations with a few bright spots like Dallas, Washington DC, San Francisco, and San Diego showing year on year price appreciation.  David Blitzer, Chairman of the index committee at Standard and Poor’s, said the housing market is in better shape than it was a year ago and showing signs of stability.

Our next hurdle will be the removal of MBS purchases by the Fed and the elimination of the 8K tax credit.  Time will tell.

Consumer Confidence was up next, falling sharply by nearly 10 points to 46.0.  The present situation hit 27 year lows while future expectations fell to levels not seen since July 2009.  The weather could have been a factor but overall, the numbers are disappointing as consumers do not see their problems as temporary.

All of the above, combined with a drop in Germany’s consumer confidence has given our market a nice little pop.  Stocks are on the slide, down 65 on the big board but the 10 year note is plus 17/32’s on the day.  Mortgage backs are up 12/32’s on the 4.50% security.  We priced up 11/32’s, giving you the benefit of the market right out of the shoot.  The buying today has pushed the chart back through resistance but has not eliminated the bearish trend readings.  We like the price action which has put the market in a neutral bias, stopping the bearish bias of the past few days.  One thing to keep in mind is that auction supply started today and concludes on Thursday.

Given the souring economic data, we’d expect willing buyers of all three issues.  Good time to take advantage of better mortgage pricing.

Keep those home costs under control

These days, most people are trying to control their expenses a little more tightly. Often they don’t realize how much they’re paying to live in their homes. So let’s take a look at that home budget and see if we can’t do a better job of staying on top of the costs.

1. Your largest expense is probably your mortgage. These days mortgage rates are historically low, so you might be able to refinance and lower your monthly payment. Email or call and we’d be happy to let you know if that makes sense.

2. Another major expense is likely to be your homeowner’s insurance. Check in with your agent once a year to see if you’re getting the right coverage at the best price.

3. Next look at your real estate taxes. The higher the assessed value of your property, the higher your real estate taxes. So the next time your city or town does a reassessment, don’t be afraid to ask for an abatement if you think they’ve given your home too high a value. Do your homework. Look up the assessments for similar homes in your neighborhood. The records are public and usually available at the tax assessor’s office.

4. Recurring monthly expenses:

• If you pay for town water, town sewer  or a homeowners’ association, those are probably fixed expenses you can’t cut.
• But if you pay for private trash collection, snow removal, lawn and gardening services, periodically look around for cheaper rates. Even if  you’re happy with your current supplier, this information could help you get a better deal.
• Phone, internet and cable TV services should be reviewed at least once a year to see if competitors offer better prices.
• Energy costs. Oil companies should be reviewed once a year, before heating season begins. And if you think oil may be going up, pick a supplier who will lock in the price. In a growing number of areas, you can also find competing electric companies. Find out who has the best deal. If you heat and air condition with gas, ask your local gas company about special offers.

5. Maintenance and repairs. It is always cheaper to fix a problem as soon as it comes up, rather than letting it go. It costs very little to re-caulk around a bathtub, but if you ignore it, you could wind up replacing a wall. Put aside $500 to $1,000 a year to take care of minor repairs and maintenance.

6. Major improvements. If you have you heart set on updating a kitchen or bath, installing a deck, or even putting on a new addition, get a rough cost estimate and decide how many months from now you’d like to start. Divide the cost by the months and begin putting money away for it each month.

Your home is your biggest investment. But with a little effort you can make your home costs smaller.

Please contact us if we can be of help…. And have a great day!

We expect a larger bearish move (more selling/worsening mortgage pricing) in the days ahead

The first trading day of the week is off to a slow but positive start.  Although the 10 year note is down 2/32’s (yield 3.79%), mortgage backed security spreads have tighten, posting gains of 5/32’s on the day.  Stocks have been of little help, waffling on either side of unchanged all day.  No news this morning but the calendar will heat up as we move towards the end of the week.

Of particular  importance will be the Housing data on Wednesday and Thursday, followed by 4^th Qt. preliminary GDP on Friday.  The treasury auction calendar is in full swing with 126 billion up for grabs, starting tomorrow with 44 billion of 2 year notes.  The good news here is that all the paper is shorter in duration (2 year through 7 year) which should have better appeal to the investor community then the debacle 2 weeks ago.  Another key to market direction this week will be Sir Ben’s testimony before the Humphrey-Hawkins group on Wednesday and Thursday.

We expect him to manage his speech and question/answer period back to “core” Fed values, emphasizing low mortgage rates for and extended period and no assets sales until some sort of economic recovery is well underway.  The technical view of all this mumbo jumbo is to stay defensive, selling rallies into auction supply and Sir Ben.

Intraday charts have improved but the lack of strong gains and bearish readings on daily charts suggest that the market is corrective in nature.  If our work (and that of others ) is correct, we would expect a larger bearish move (more selling/worsening mortgage pricing) in the days ahead.  To avoid another leg down, we need to close below 3.74% on the 10 year note (end of day close).  Best to keep both hands on the wheel.

Related articles

• Economists See Firm Recovery In 2010, Job Creation In 1Q (blogs.wsj.com)
• Take Three: Will Congress Extend the Home Buyer Tax Credit? (blogs.wsj.com)
• Experts Talk Fed Exit Strategy, Trade, Greek Bailout (businessweek.com)

Austin Mortgage Market Update – For the week of February 22, 2010

For the week of February 22, 2010 – Vol. 8, Issue 8

>> Austin Mortgage Market Update INFO THAT HITS US WHERE WE LIVE Builders are jumping on the recovery bandwagon, as January Housing Starts beat consensus estimates, heading UP 2.8% to an annual rate of 591,000 units. Single-family starts are now 35.6% up from their low a year ago. Total new building permits dropped a tad in January, but single-family permits were up 0.4% for the month and UP 48.2% from a year ago. The trend indicates more improvement ahead. Permits for single-family homes are 7.4% higher than starts in states requiring building permits, well above the historical norm. Many observers feel home building is in the early stages of a serious rebound. Supporting this, the National Association of Home Builders reported builder confidence higher in February, going from 15 to 17 points, 8 points up from a year ago. Although the Fed will stop buying Mortgage Backed Securities (MBS) at the end of March, some analysts now feel this may not cause mortgage rates to rise much, if at all. That’s because Fannie Mae and Freddie Mac recently announced their plan to buy up to $200 billion in delinquent loans from their own MBS and pass-through pools. Friday the Mortgage Bankers Association reported the percentage of delinquent home loans shrank in Q4. MBA chief economist Jay Brinkmann feels that fewer new problem mortgages could be signaling the “beginning of the end” of the foreclosure crisis. Let’s hope so.  >> Review of Last Week UP UP UP UP… YUP, stocks went UP four days in a row, which constituted all the trading days there were in the holiday-shortened week. Investors seemed to be responding to a cessation of fears coming out of Europe, encouraging economic data, good corporate earnings and the news from the Fed. The minutes from the Fed’s January FOMC meeting stated economic conditions still warrant low interest rates, although their GDP growth estimate went from 3.0% to 3.2% for the year. Then Thursday, as reported in an Inside Lending Bulletin, the Fed raised its discount rate on emergency loans to banks by 0.25%, to 0.75%. The discount rate is not the Fed funds rate and the central bank said the increase does not “…signal any change in the outlook for the economy or for monetary policy….” Some analysts feel the Fed was just trying to appease inflation “hawks”. The irony was, the CPI inflation reading came in the next morning below consensus expectations, up a scant 0.2%! Earlier in the week, the PPI reading on wholesale inflation came in a little higher than expected, but this was balanced by the good news on housing starts, plus better-than-expected earnings from John Deere, Merck, Kraft, Hewlett-Packard and Wal-Mart. Equally encouraging, industrial production went UP 0.9% in January, putting it up at an 8.9% annual rate for the last six months. More evidence that manufacturing is at the heart of this recovery. For the week, the Dow was UP 3.0%, to 10402.35; the S&P 500 was UP 3.1%, to 1109.17; while the Nasdaq climbed UP 2.8%, to 2243.87. Stocks went up for the week, so can you guess which way bonds headed? Correct. The FNMA 30-year 4.5% bond we watch ended down 69 basis points, closing at $100.22. Mortgage rates, however, still held at their historically low levels. >> This Week’s Forecast HOMES, CONSUMERS, Q4 GDP… The week gives us more takes on housing, with New Home Sales on Wednesday and Existing Home Sales Friday. There are two looks at the consumer mindset as well, with Consumer Confidence on Tuesday and the University of Michigan Consumer Sentiment Index on Friday. Also Friday is the second GDP estimate for Q4, showing positive economic growth coming out of the recession. The week ends on another key manufacturing measure –the Chicago PMI. >> 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 February 22 – February 26 Date Time (ET) Release For Consensus Prior Impact Tu Feb 23 10:00 Consumer Confidence Feb 55.0 55.9 Moderate W Feb 24 10:00 New Home Sales Jan 355K 342K Moderate W Feb 24 10:30 Crude Inventories 2/19 NA 3.08M Moderate Th Feb 25 08:30 Initial Unemployment Claims 2/20 460K 473K Moderate Th Feb 25 08:30 Continuing Unemployment Claims 2/13 4.570M 4.563M Moderate Th Feb 25 08:30 Durable Goods Orders Jan 1.5% 0.3% Moderate F Feb 26 08:30 GDP – Second Estimate Q4 5.7% 5.7% Moderate F Feb 26 08:30 GDP Deflator – Second Estimate Q4 0.6% 0.6% Moderate F Feb 26 09:45 Chicago PMI Feb 59.0 61.5 HIGH F Feb 26 09:55 Univ. of Michigan Consumer Sentiment – Final Feb 74.0 73.7 Moderate F Feb 26 10:00 Existing Home Sales Jan 5.50M 5.45M HIGH >> Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months The Fed discount rate went up last week, but experts say that doesn’t mean the Fed funds rate is moving any time soon. Please also note that discount rate moves are made by the district banks, not the Fed. With jobs still lagging in the recovery, economists feel the Fed funds rate will stay where it is through June. 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 7%

The spike in Austin mortgage rates and worsening prices will be worked into the system until we find a new MBS buyer/buyers to replace Uncle Sam

New day, same story.  Mortgage backed securities are getting a dose of the “new normal”.  The point here is that the Fed has been buying MBS for the past 14 months, starting at an average of 100 billion a month and then tapering off to 50 billion a month.  Within this process, they (Fed) has bought the majority of the new issue MBS and now owns 20% of outstanding MBS paper.  That part of this Quantitative Easing process will end soon (end of March).  That said, the street is being overwhelmed with mortgage paper by originators, servicers, and portfolio types that make this their business.

The spike in Austin mortgage rates and worsening prices will be worked into the system until we find a new MBS buyer/buyers to replace Uncle Sam.  The other part of this market “two step” happened yesterday after the stock market closed.  That’s when the Fed raised the Discount Rate.  For the record, the Discount Rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from the Federal Reserve Bank lending facility, the discount window. Usually, these loans are extended to commercial banks, etc. for a short period of time.  The move was technical in nature but does start the ground work for monetary policy changes to remove Quantitative Easing measures put in place over a year ago.

Earlier today, CPI, inflation at the consumer level, hit the tape plus .2% with the core index (ex-food and energy) down .1%.  The print was better than expected and points to inflation well under control.  Market action was positive for the 10 year note and MBS post CPI with mortgage backs unchanged to up a tick or two.  That mini rally quickly faded as mortgage players entered the market, selling on the reality of my opening few lines.  Currently, the 10 year note is off 1/32^nd to yield 3.81%, mortgage backs are off 7/32’s, and stocks are plus 36 points on the big board.

The next 30 days are going to be tricky as volatility and the changing dynamics will be difficult to handicap.  Given what we know, you should error on the conservative side, locking your interest rate sooner than later.  Once this period of adjustment is priced in the system, we expect mortgage pricing to rebound (get better) as MBS product will look attractive on a yield basis and the overall economic picture will still be a concern.