2010 was a mortgage banking year synonymous with the “perfect storm.”

• Double-dip recession fears,
• European debt crisis,
• rising unemployment, etc. etc. took the 10-year treasury note from 3.75% in January to 2.39% in October.

Texas mortgage rates dropped into the high 3’s to low 4’s and everyone and their brother wanted to refinance Austin mortgages. Those people that had a job and remained confident with their personal balance sheets, took a leap of faith and bought a new home at the highest affordability levels in history.  The Fed started operation “Quantitative Easing” and put 8k in every first time home buyers pot.  Life was good and it still is.

Investor sentiment changed course in late October, feeling more confident the economy, which was once in recession, is now making the transition from recovery to expansion. That sentiment, coupled with a fickle and illiquid holiday market, took the 10 year note on a ride to finish the year at 3.31% after printing 3.54% in December.

So what’s ahead in 2011? No one knows for sure.  We do know that treasury and mortgage pricing will be looking for clues.  Clues as to whether or not the economy is really expanding or needs more time to clear the mine fields.  Will the debt crisis in Euro land heal or blow up?  Will the employment picture in our country start to improve?  Answers to both will unfold as we move into the first quarter.  Our big picture outlook tends to follow the thinking of expansion within the economy but will be two steps forward and one step back.

Keep in mind that we have come though a time period that has seen historic financial devastation and the consequences that go with it. Think Fed and governmental regulation.  Getting back to even will take a lot longer than in previous recessions.  Patience will be a virtue, something few of us have.  The future will create opportunity.  Once the expansion can be trusted, consumer confidence will improve, employment will gain strength, and with 11 million housing units available to purchase (homeowners selling, foreclosures, etc), affordability will be great and consumers will start to see that they are not alone when making an offer on a home.

Time table on this recovery is optimistically 3^rdquarter 2011. Realistically, early 2012.  In the meantime, many mortgage lenders will struggle with changes in compliance and regulatory issues. Their costs will become a bigger concern as Uncle Sam forces them to conform.  Loan officer compensation will affect everyone and most certainly mortgage company balance sheets.  Fortunately, I work for PrimeLending, A PlainsCapital Company. PrimeLending is at the forefront of the mortgage industry and quite simply: PrimeLending allows me to provide the best rates, loan products, customer service, 30-day closings and more to my clients. This mortgage company enables me to make promises to clients and realtors and KEEP them.

As far as the market is concerned, the tactical bias is neutral to start the year. We feel with a new set of books, investors and traders alike will see yields have moved a little too far a little too fast.  This should give us a New Year’s rally or at least some stability in mortgage pricing.  10 year note yields should produce a short term range of 3.30% to 3.39% (currently at 3.35%).  Longer term will depend on a number of factors, the biggest being employment or the lack thereof.  We’ll get that party started with this Friday’s release of December 2010 figures.

Private sector jobs led the way, adding 154K to post the strongest reading since April.  Manufacturing was on the other side of the ledger, shedding 7K from the payrolls.  Market reaction was close to our call.  Matter of fact, our hats off the JPMorgan for their call at plus 110K.  RBS and PrimeLending came in second but will try harder!

Currently, the 10 year note is off 5/32’s.  Mortgage backs are off 12/32’s on the low note rates but higher rates are only off 5/32’s.  Not bad considering the positive news.  Reason here is the Fed is still the elephant in the room, looking to buy treasuries in the belly of the curve (5’s through 10’s), supporting the market.  Stocks liked the news but soon gave up the trade (currently down 2 points on the big board) as the dollar gained strength.

We see the market and the economy in a transition phase.  One that will continue to hold steady and improve, ever so slightly as time goes on.  The Fed, and their magic checkbook will see to that.  This country needs to see jobs growth of at least 250K per month just to break even.  That will take time allowing Austin mortgage rates to stay low into yearend and beyond.

After yesterday’s FOMC meeting, it became apparent that the Fed would pull out all the stops in an effort to get the economy and employment going again.  “Asset” purchases are all the rage as the government is once again the buyer of choice (treasuries).  Stocks love the idea of free money and a weakening dollars, boosting value in equities across the board.

Gold is up $40.00 as well, pricing in heightened expectations of inflation down the road.  Seems to me that the Chairman and the Prez met by the water cooler and the conversation when something like this.  “Ben, I’m in a tough spot here, my party just got its head handed to it and unemployment is nearly 10%, now I’m not telling you what to do but……… I need a game changer.  What you say we fire up the printing press and go on a buying spree.  Just a thought.”

In the news, Weekly Unemployment Claims jumped 20K to 457K while 3^rd Quarter Productivity rose 1.9%.  No one noticed as traders were too busy trying to buy bonds and stocks.  With the Employment Report for October due out at 7:30 am cst tomorrow, the prudent thing for Austin mortgage borrowers is to lock their Austin mortgage rates now.

Given that we are at the best levels in a month, your timing couldn’t be better in front of such a high profile release.  We’ll preview the Employment Report early this afternoon.

Technically, trading has been a whipsaw affair.  You will notice the downdraft yesterday (post FOMC) and the reversal this morning.  Typically a good indication the market has run its course in the short run, especially in front of the high profile data coming tomorrow.  Just the same, this baby is a bull and will be well supported into year-end given the Fed and their reloaded check book.  Call the market neutral/bullish.  Take advantage as the Employment trade is always volatile.

With the 10 year note now trading at 3.09%, a level not seen since last April, many are talking about our market being “bubble-ishous”.  The other contingent thinks bond prices are just “insane”.  With the 10 year yield at levels not seen since 2008 and 1962, one would think that a correct is imminent.  Quite possible but not a given.  Technically, our chart work makes a case for 2.92% to 2.78% on the 10 year note.  All depends on stocks and the economy.  Even the FOMC “downgraded” the economy to underperform.

Early buying today has started to show signs of a new bullish trend, endorsed by almost every oscillator.  The key to a new trend will be a close below 3.09% on the 10 year note.  This will activate a break of the major double top which has been in place for over a year.  “If” this happens, the next target will be 2.88%.  Not to throw cold water on the bulls but we think this market is a little long in the tooth, pricing in as much bad news as one could imagine.

Not to say we will not see lower Austin mortgage rates and better pricing but for that to come to fruition, we’ll need a major catalyst.  Something like a stock market rout or collapse of Greece.  In English, the smart money will bet against this, at least for a corrective trade that could take the 10 year note back to 3.25%.  Pricing was struck with MBS unchanged, now down 5/32’s. Trigger fingers are getting twitchy.

With Austin mortgage rates at or near historic lows, best bet is to take a little off the table before the market “potentially” picks your pocket. Careful out there.

Continuing Claims rose as well, up 88K on the week. CPI, inflation at the consumer level fell .2% with the core index up .1%. Just like PPI, nothing in the cards here to rattle the Fed. Philly Fed was also on tap, falling like a rock from 21.4 to 8. Employment indicators within the index did the damage, falling 1.7 points.

Last but not least, Leading Indicators rose .4% in May. Nothing special here as this index is widely treated as “rear view mirror” data and typically kicked to the curb. Overall, what is starting to take shape is a weakening situation in both housing and employment, coupled with falling consumer confidence. The BP mess doesn’t help either as the sickening scene from continued oil flowing does nothing for one’s psyche.

Market’s are red hot for bond bulls and woe is me for stock holders. Dow off 50 points has led the 10 year note higher by 20/32’s (yield 3.21%). Mortgage backs are plus 11/32’s, having a nice day as well. Technically, prices are nearing the best levels of the year (3.14% yield). Bulls will need to close below that level (3.13% or lower) to break out of the triangle pattern we’ve had in place since May. Daily oscillators however are bearish so overall, we do not have all time frames in harmony.

In English, it will become more and more difficult to improve Austin mortgage pricing/ lower yields without new fuel (catalyst). At the same time, the economic fundaments do not support higher Austin mortgage rates or worsening mortgage pricing. So, expect Austin mortgage rates to stay low for some time to come. Stay tuned for tomorrow.

For the week of May 3, 2010 – Vol. 8, Issue 18

>> Review of Last Week

IT’S ALL GREEK TO WALL STREET… The stock market ended down after a volatile week whose off-putting news ranged from Greece to Washington to the Gulf of Mexico. Greek bonds were downgraded to junk, while Portugal and Spain got downgrades too. Goldman Sachs execs were grilled in Washington, then Friday came news of a federal criminal probe into the firm. Finally, energy stocks got hammered following a terrible oil spill in the Gulf of Mexico.

In spite of these unfortunate events, the economy continued to offer up signs of recovery. On Tuesday, following the Case-Shiller annual home price INCREASE reported above, we got a big boost in the Conference Board’s consumer confidence number for April. The 57.9 reading put it at its highest level since August 2008. The week ended with a great Chicago PMI measure of Midwest manufacturing. Then Advanced Q1 GDP came in UP 3.2%, marking the third straight quarter of economic growth, with that all-important consumer spending UP 3.6%!

Things weren’t too shabby on the corporate earnings front either. Of the 170 S&P 500 companies reporting Q1 results, 130 of them beat earnings-per-share estimates. Even better, 106 of these companies topped revenue expectations, showing that strong earnings performance didn’t just come from belt-tightening.

For the week, the Dow ended down 1.7%, to 11008.61; the S&P 500 was down 2.5%, to 1186.69; and the Nasdaq was off 2.7%, to 2461.19.

Down-sliding stocks and off-putting news at home and abroad sent investors scurrying to bonds which sent prices up even after Friday’s positive economic reads. The FNMA 30-year 4.5% bond we watch closed UP 75 basis points for the week, ending at $100.84. National average mortgage rates are holding steady, still at historically low levels, according to Freddie Mac’s weekly survey.

>> This Week’s Forecast

INCOME, INFLATION, JOBS… A slight gain in Personal Income is expected today, along with a tick up in the PCE inflation measure. ISM Manufacturing and ISM Services numbers should show those sectors continuing to expand. Tuesday, March Pending Home Sales will be interesting, as we’ll see if lots of people signed contracts to get in on the tax credit. The week’s biggie is Friday’s April Employment Report. Jobs should continue to be added at a modest pace, although the monthly increase in workforce will probably keep the Unemployment Rate level. 

>> 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 May 3 – May 7

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Coming out of last week’s FOMC meeting, the Fed didn’t change its policy to keep interests rates at the current level for an “extended period.” Economists are now pushing off any rate hike to the end 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%

Probability of change from current policy:

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.

Bonds, notes, and mortgage backs were under pressure early but only by a couple of 32’s while stocks jumped 150 on the big board.  Since the open, stocks have given up nearly half their gains and mortgage backs are unchanged while the 10 year note is up 1/32^nd trading at 3.59%.  Trading fixed income of late is “cat” like, requiring one to be quick at the switch.  Reason is that being risk adverse is a headline by headline event.  With little insight on the risk markets other than to expect just about anything, traders must balance auction supply and the White House with “Who Dat” across the pond.

Lucky for us, DC is closed for another day.  Earlier today, the NFIB Small Business Index improved 1.3 points as many plan to increase employment.  Trouble is expectations for the economy to improve fell a point.  Wholesale inventories were also released, down .8% with Sales up .8%.  Durable Goods did the damage, down 1.1%.  It appears that inventory rebuilds may have misjudged draw downs, something we talked about as a concern going forward.  Out in about an hour, we’ll see who shows up to buy 40 billion of 3 year notes.  This auction should go well.

Tomorrows 10 year and Thursday’s 30 year bond auctions will tell the tale of the tape.  Technically, the market is trading within the range formed since last Friday.  We see the action as neutral but cautious.

The FOMC is finishing up their two day meeting with any change in short term rates and policy statement due out at 1:15 pm cst.  The consensus thinking is that they will continue their low interest rate policy for an “extended period of time”.  We also expect the FOMC to note that the economy still has “challenges” with some improvement seen within the economy.

Given today’s power packed agenda, the FOMC should not move the market.  Earlier this morning, New Home Sales dipped by 7.6% to 342K units.  Sales gains in the Northwest and West were over shadowed by losses in the Midwest and South.  Housing, along with employment, needs to be top priority for our country.  Let’s see what the CEO of the U.S. has to say tonight.

We also have 42 billion of 5 year notes on the auction block.  Results are due at high noon cst.  Given the anxiety in stocks and overseas markets, we expect the issue to go well.  Trouble with this call is that it is happening on a FOMC day and historically, only one out of the last five have come in on the screws.  The others had been sloppy.  Technically, the market is making higher highs and higher lows, holding the bullish regression line.

Once again we challenged the 3.56% yield level and have backed away.  Currently, the 10 year note is up 6/32’s (yield 3.61%), mortgage backs up 3/32’s, and stocks off 30 something on the big board.  Buckle up!

Housing Starts were also released, falling 4.0% to 557K.  The below consensus print took its punishment from single family homes down 6.9% and unseasonable cold weather for much of December.  Building Permits when the other way, rising 10.9%.  Interesting news from Pimco, the world’s largest bond fund on their changes in asset allocation.  In December, they dropped their holdings of government related bonds from 51% to 32%, increased cash holdings from 7% to 8%, and increased holdings in both mortgage backed securities and dollar denominated developed market debt (Germany, etc.) to 17%.  Bill Gross, Pimco’s bond god, said the decisions were based on their view of the dollar’s direction (negative) and increased government debt.  All of the above has been good for mortgage pricing and bad for your 401K.

Stocks are really taking some heat, down 200 points on the big board.  10 year notes are plus 16/32’s (yield 3.65%) and mortgage backs are plus 6/32’s.  Yesterday we talked about the 3.67% level being key for near term direction.  If we can close below that level (currently at 3.64%), we should have a little more giddy up in our getalong.  Buy signals are all over the chart along with positive trend signals on 8 day ADX.  Given the close we are looking for, next target on the chart points to 3.55%.  Shaping up to be a good day for the good guys/gals.