The impact of the homebuyer tax credit was seen in the weak housing market data released this week. July Existing Home Sales dropped 27% from June to an annual rate of 3.83 million units, the lowest level since May 1995. July New Home Sales showed a decline of 12% from June to the lowest level ever recorded. These figures sound terrible, but they really just demonstrate the effect of the homebuyer tax credit on the timing of purchases. The National Association of Realtors (NAR) still expects total existing home sales this year to be roughly the same level as last year.

Since the financial crisis, the Federal Housing Association (FHA) has grown rapidly and is now backing nearly half of all new home-purchase loans. To boost reserves and reduce risk to taxpayers, the FHA will raise the annual fee it charges to new borrowers. In particular, for case numbers ordered October 4 or later, it will raise annual insurance premiums (MIP) to 0.85% or 0.90%, based on LTV, up from 0.55%.

As the economic recovery has lost steam recently, investors are closely watching for signs that growth will slow even more. The economic data released during the week was generally weaker than expected. In a sign that the labor market is not improving, Weekly Jobless Claims rose to 500K, the highest level since November 2009. After a series of positive readings, the Philly Fed manufacturing index surprisingly fell to -7.7. Readings below zero indicate a contraction in the sector. Slower economic growth typically leads to less inflationary pressure, which is positive for Austin mortgage rates.

On Tuesday, a conference was held to discuss the future of Fannie Mae and Freddie Mac, and participants offered a wide range of ideas. While no clear consensus was reached, a few hints emerged about what to expect. Treasury Secretary Geithner suggested that the government should retain a role in providing guarantees for mortgages, but that taxpayers should be exposed to less risk. The Obama administration has announced that it will produce a proposal to address these issues by January 2011. In almost any scenario, changes will be phased in very slowly over a period of many years to avoid disruptions to the housing market.

For the week of August 16, 2010 – Vol. 8, Issue 33

INFO THAT HITS US WHERE WE LIVE Last Wednesday the National Association of Realtors reported the median price of existing single-family homes UP for Q2 in two thirds of U.S. metropolitan areas, or 100 markets. This compares with only 26 markets with price gains in the same quarter a year ago. Experts say these figures show the federal tax credits helped stabilize home prices in the first half of the year. Nationally, the median price for single-family homes increased to $176,900 in Q2, UP 1.5% from a year ago.

The NAR also reported sales of existing single-family homes and condos for Q2 were UP 9.1% over Q1, hitting an annual rate of 5.61 million. That number is UP 17.3% from Q2 a year ago. With the tax credit gone, the NAR is forecasting a Q3 sales drop to a 4.55 million annual rate. But they do see sales coming back in the last three months of the year, to a 5.27 million unit annual rate. The NAR’s chief economist added: “Prices in some areas remain below replacement construction costs, so even with an elevated supply of existing homes…we don’t expect any consequential movement in home prices for the foreseeable future.”

Freddie Mac’s weekly survey showed Austin mortgage rates staying at record low levels for conforming loans. But demand for purchase loans has dropped after the tax credit expiration, according to the Mortgage Bankers Association. 

>> Review of Last Week

DIPPY… It was a week of “double-dip recession” fears, but when all was said and done, the economic recovery continued, albeit at a slower pace. The only dipping that occurred happened on Wall Street, as investors’ worries sent the Dow Industrials down 265 points on Wednesday. By the time the markets closed Friday, all three major indexes had truly dipped — from 3% to 5% for the week.

That Wednesday dip in the Dow was the delayed reaction to the results of the Fed meeting on Tuesday. The central bank kept the rate down at 0%–0.25%, but their policy statement raised investors’ “double-dip” worries. The Fed said the economy isn’t as strong as they thought it would be two months ago and they would begin buying Treasury bonds “to support the economic recovery.” But in spite of Wall Street’s jitters, the real economic data wasn’t so bad.

Preliminary Q2 Productivity slipped a tad, but it’s UP 3.9% over last year. The trade deficit in June grew more than expected, but exports dropped only slightly and are UP 17.7% for the year, a healthy sign for American companies. July Retail Sales were up less than expected, but when May and June upward revisions were included, the numbers beat expectations, UP 0.7% overall and UP 0.2% excluding autos. And those talking up a global double-dip recession were quieted when Germany’s Q2 GDP showed a 2.2% expansion from the previous quarter, that country’s fastest growth in two decades.

For the week, the Dow ended down 3.3%, to 10303.15; the S&P 500 was down 3.8%, to 1079.25; and the Nasdaq was off 5.0%, to 2173.48.

With investors seeking safety, the bond market benefited, with a big focus on Treasuries after the Fed’s comments on Tuesday. The FNMA 30-year 4.0% bond we watch ended essentially flat for the week, down a scant 6 basis points, closing at $102.69. As noted above, national average mortgage rates remained in historically low territory for the eighth week in a row. 

>> This Week’s Forecast

HOME BUILDING, MANUFACTURING, LEADING INDICATORS…This week we see how home builders feel, with Tuesday’s Housing Starts and Building Permits. Starts are forecast to be up, though permits are expected to slide a little from last month. There are some important reads on manufacturing beginning with Monday’s Empire State Index, Tuesday’s Industrial Production and Capacity Utilization numbers, and Thursday’s Philadelphia Fed Manufacturing Index. All are expected to be up, along with the Leading Economic Indicators (LEI) Index, out the same day. No double dipping here.

Key Q2 corporate earnings reports will come from Deere, Dell, Home Depot, Lowe’s, Target, and Wal-Mart.

>> 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 August 16 – August 20

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months At last week’s meeting, the Fed made no changes to its pledge to keep rates “exceptionally low” for an “extended period.” Many economists now think the Fed Funds Rate will stay at its current super-low level well into next 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:

Currently, the Dow is off a smooth 200.  The Naz is not much better, off 60 points.  10 year notes are plus 20/32’s and mortgage backs are lagging behind, up 5/32’s.  With the Fed once again the lender and buyer of choice, expectations are that they will purchase 15 to 20 billion a month.  This move will keep Austin mortgage rates low as traders will adopt the old trading slogan, “Don’t fight the Fed”.   In the news, our June Trade Deficit grew 8 billion to a record 49.9 billion.  Imports grew, exports fall, in a simple formula that did the damage.  Once again, this will be a drag on GDP.

We do have an auction today.  24 billion of 10 year notes hit the tape at high noon (cst).  Look for this to be a bullet auction will traders falling all over themselves to buy.  Put up a chart and all you see is a major bull trend.  With the 10 year now at 2.71%, a breakout to lower yields/better mortgage pricing has been confirmed.

In this market, best bet for Austin mortgage borrowers is to take advantage of the historic low levels of Austin mortgage rates.

INFO THAT HITS US WHERE WE LIVE Tuesday we had Pending Homes Sales, which after dropping 30% in May, fell just 2.6% in June, with the push to qualify for the tax credit no longer a factor. These figures indicate there should be a drop in Existing Home Sales come July and maybe again in August. But some analysts feel that after this post-tax-credit dip, housing will come back solidly, just like auto sales did after “cash for clunkers” expired last year.

The report did include encouraging words on home pricing from the National Association of Realtors chief economist: “…since home prices have come down to fundamentally justifiable levels, there isn’t likely to be any meaningful change to national home values. Some local markets continue to show strengthening prices.” We all know you can’t time a bottom, but it looks like serious buyers might want to act now.

The Mortgage Bankers Association reported an increase in demand for purchase loans for the third week in a row. Its Weekly Mortgage Applications Survey had purchase loan demand UP 1.5% for the week ended July 30.

>> Review of Last Week

SUMMER RALLY LITE… Coming off July’s hot month for stocks, August began with a 208-point gain in the Dow. But before this summer rally could really take off, investor optimism cooled, sending market indexes up and down by small amounts for the rest of the week. Friday’s July jobs report came in below expectations, which drove stocks lower, though only by 21 points. All major indexes ended UP for the week, so it’s still a rally, if not a particularly strong one.

What made investors cautious included the July ISM Manufacturing Index, which fell from June’s 56.2 reading to 55.5. Wall Street ignored the fact this is still a strong number, above the 50 level that signals expansion. Then Personal Income and Consumption came in unchanged for June. But income after taxes is UP 3.2% annually the last six months and “real” (inflation-adjusted) consumer spending was UP 0.1% for June and UP 1.6% annually the last six months. PCE consumer inflation dropped for the third month in a row, but core PCE, excluding food and energy, is up 1.1% the last six months, calming fears of deflation.

Wednesday, July ISM Services climbed to 54.3 from 53.8 in June, showing continued expansion in the non-manufacturing arena. Now for the July jobs report. Private sector payrolls grew less than expected and government payrolls declined more than expected. But private payrolls are up 90,000 per month since the beginning of the year. In addition, average weekly earnings are UP 0.5% for July and UP 3.0% in the last year, which should continue to drive up consumption and the economy. The unemployment rate held at 9.5%.

For the week, the Dow ended UP 1.8%, to 10653.56; the S&P 500 was UP 1.8%, to 1121.64; and the Nasdaq was UP 1.5%, to 2288.47.

Bonds ended the week well, with the headline numbers in the July jobs report attracting safe haven investors who sent prices up. Mortgage bonds did especially well, with the FNMA 30-year 4.0% bond we follow heading UP 34 basis points for the week, ending at $102.75. Freddie Mac’s weekly survey of conforming loans showed national averages for fixed-rate mortgages down for the seventh week in a row.

>> This Week’s Forecast

THE FED, THE INFLATION, THE CONSUMER…Tuesday is Fed day, as the nation’s central bank comes out of another meeting where they look at the economy and decide what to do about the cost of money. No one expects the Fed Funds Rate to budge from its current rock bottom level. But the FOMC policy statement will be carefully scrutinized to see if any changes in wording shed useful light on the state of the recovery. Friday’s CPI numbers look at consumer inflation, expected to stay tame. With prices in check, Friday’s July Retail Sales reports are expected to rebound from June, showing the consumer is indeed helping things along.

>> 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 August 9 – August 13

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Virtually no economists think the Fed will touch rates at Tuesday’s meeting, nor for the next two confabs after that. We will all be carefully listening to the FOMC policy statement for any insight on what might quicken the pace of the recovery and add jobs. 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 particular, Friday’s weaker than expected Employment data was positive for mortgage rates. Against a consensus forecast for a loss of -90K jobs, the economy lost -131K jobs in July. This included the loss of -143K census positions. Private employers added 71K jobs, below expectations of 100K. The Unemployment Rate remained at 9.5%. Average Hourly Earnings, a proxy for wage growth, rose at a tame 1.8% annual rate.

To stimulate the economy, the Fed purchased $1.25 trillion in mortgage-backed securities (MBS) in 2009 and early 2010. Due to defaults, refinancings, and maturities, some MBS “roll off” the Fed’s portfolio every month. Until recently, investors expected the Fed to let its portfolio slowly shrink in this fashion. Tuesday, though, a Wall Street Journal article suggested that Fed officials are considering a plan to replace those securities with new purchases to further stimulate the economy. Investors are divided about whether recent economic data has been weak enough for the Fed to decide to do this. It may be addressed at the August 10 FOMC meeting. While the demand created by this action would be small compared to the original MBS purchase program, it would further support low Austin mortgage rates.

Last bit of news today was the Univ. of Michigan Sentiment, posting a print of 67.8.  This was significantly lower than the June print of 76 and was the lowest result since November.  Stock market volatility may have contributed, as consumers continue to say they are depressed despite the jump in spending early in the year.  The GDP figures and the relatively weak economic data releases this week suggest bonds should be well bid for today and going further.

On a positive note,  for the sixth week in a row now, Austin mortgage rates have eased to all-time record lows, even during a week of pretty mixed housing data.  Rates sit at the lowest point since Freddie began tracking it in 1971.

Buying today has helped the market maintain its bullish signals that have formed on intraday charts.  However, one thing to note is that all have reached elevated readings that make additional upside less likely for the immediate time frame.  This sets the market up for a pullback after bullish conditions on weekly and monthly charts get their way today.  Now, this doesn’t suggest a major reversal is in play by any means, just a slight pause, possible into next week.  I think any stability below a 2.95yld would still put us in a good position to do better.

Have a great weekend!

Yesterday’s early morning data included a 1% decline in durable goods orders and like the Fed report, suggested a sluggish economy. Somewhat encouraging housing data released earlier in the week supported the notion housing markets might be stabilizing, but careful review led most analysts to conclude seasonal factors, not expired tax credits, and other transient factors resulted in headline home price and sales figures appearing stronger than actual underlying trends. Foreclosure filing trends also suggest the housing market will continue to struggle as a report from RealtyTrac shows increased filings in 75% of the major metropolitan areas increased during the first half of this year with problems spreading into what had previously been some of the least affected areas. This morning’s weekly jobless claims report showed 457,000 first time claims for the week ending July 24th, an in-line-with-expectations decline of 11,000 from the prior week.

Buying today has taken prices through the 8-day moving average at 122-31 and the 62% retracement of the drop from the July high at 123-05.  The latter indicates that a full retracement of that rally is underway.  This move would take prices to the July high at 123-24.  Daily studies, however, are still a bit skeptical of the strength.  If we see a strong move above 123-24, hold on, we might be in for a ride to even lower Austin mortgage rates.

To wrap up this week’s coupon auctions, the Treasury will sell $29bln 7-year notes at high noon.  The auction is expected to follow others this week with a fairly positive result.  Stocks are taking it on the chin, currently down around 80 points.  10yr is up 3+, trading 2.99%.  Mtg backs are trading a bit unstable, currently reading anywhere from up 4s to up 6s.

For the week of July 26, 2010 – Vol. 8, Issue 30

INFO THAT HITS US WHERE WE LIVE Tuesday, June Housing Starts came in down 5.0% from May to a 549,000 annual rate. This was below expectations, but still up 15.1% from the low they hit in April 2009. Most of the drop came from volatile multi-family starts. Single-family starts were down a mere 0.7%. Most significantly, housing completions shot up 26.2% in June, the biggest monthly gain going back to the late 1960′s. Builders clearly shifted focus from starting to finishing, as they pushed to close sales qualifying for the homebuyer tax credit. Finally, Building Permits were UP 2.1% for June, beating expectations, so things are looking up for the months ahead.

Thursday saw June Existing Home Sales down 5.1% to an annual rate of 5.37 million. But this beat expectations for the fourth time in five months and was 9.8% above sales a year ago. The median price for an existing home also gained in June, coming in at $183,700. This is up 1.0% from last year. In addition, the FHFA price index for homes financed by conforming mortgages went up 0.5% in May, increasing for the third month in a row.

National average rates for fixed rate Austin mortgages hit new lows, according to Freddie Mac’s weekly survey of conforming loans. So refinance applications shot up 7.6% over the week before, but best of all, purchase loan applications were also up a healthy 3.4%.

>> Review of Last Week

UP WE GO… It was another interesting week on Wall Street, with stocks briefly headed in the wrong direction before ending the week decidedly UP. The fact was, the good economic news simply outweighed any disappointments by a lot. The net result for the stock markets left all major indexes resoundingly UP for the week…from 3% to 4%!

Topping the disappointments were Fed Chairman Ben Bernanke’s comments before Congress that the U.S. economic outlook is “unusually uncertain.” This allowed him to add that the Fed stands ready to take additional action, if necessary, to either do more boosting or halt inflation. OK, but right now there’s plenty of evidence the world’s largest economy is recovering just fine, if at a slightly slower rate than before. Earnings from IBM and Amazon.com also disappointed, but overall there were pretty slim pickings for the bears.

There actually was a big batch of strong earnings. Of the 150 S&P500 companies who have reported Q2 results, 85% of them beat earnings estimates by an average of 7%. General Electric raised its quarterly dividend 20%, the first increase since it historically cut its dividend over a year ago. Even the media is beginning to admit companies appear to be doing well. Then Friday we got the long-awaited results of the European bank stress tests, which came out better than expected. There was some grousing over how stressful the tests truly were, even though the Committee of European Banking Supervisors hadn’t seemed too soft before.

For the week, the Dow ended UP 3.2%, to 10424.62; the S&P 500 was UP 3.5%, to 1102.66; and the Nasdaq was UP 4.1%, to 2269.47.

Good news for the European banks and the stock market wasn’t so good for the bond market. Investors stopped chasing safety plays, so bond prices suffered. The FNMA 30-year 4.0% bond we follow fell 16 basis points for the week, ending at $101.75. But, as reported above, national average rates for conforming mortgages remain at record low levels.

>> This Week’s Forecast

FROM NEW HOMES TO Q2 GDP… This week takes us on an economic trip across topics that range from Monday’s June New Home Sales (expected to rise a bit) to Friday’s Advanced Q2 GDP, likely to settle on moderate growth just shy of 3%. In between, Wednesday’s Durable Goods Orders should be up, showing business continues to recover. We’ll also watch Tuesday’s Consumer Confidence and Friday’s Michigan Consumer Sentiment. These are forecast to dip just a little.

Q2 corporate earnings reports continue, including BP, Boeing, Exxon Mobil, Sony, and Visa.

>> 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 July 26 – July 30

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Since Fed Chairman Bernanke still finds things “uncertain,” economists are more certain than ever the Fed will keep rates at super-low levels for the rest 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%

Probability of change from current policy:

Today, the good personality appears, as the Fed Chief stuck to yesterday’s script and Big Caps like Caterpillar and 3M wacked it out of the park (better bottom line earnings and top line revenue stronger than expected).  Results, Dow up over 200 points as if everything in the economy is all right.  Euro zone manufacturing numbers were better than expected, adding a little icing on the cake.  The point I’m trying to make here is that volatility is at all time highs.  This is a product of an economy that is slowly coming out of a recession, showing bright spots from time to time while evil in the form of housing and employment woes let their personality loose just the same.  Expect this type of market trashing until a clear direction can be found.  One that points to a double dip or one that points to a more sustained recovery.  We believe the latter has the highest percentage outcome.

Reasons being are that the Euro zone appears to be stabilizing (tomorrow’s stress test results will be key), large blue chip companies are doing pretty well despite the gloom and doom, and interest rates, both by the Fed and the market (mortgage backs) will be low until the aforementioned bias is intact and investor sentiment turns bullish.  Just the same, do not take anything for granted.  Earlier today, Weekly Unemployment Claims jumped 37K to 464K while Continuing Claims fell 223K.  Distortions here are huge, maybe Consensus worker layoffs and long term claimants felling off the table.  Time will tell.  June Existing Home Sales took a dip as well, down 5.1%, the second consecutive month of declines.  The number was actually better than economists expected.  Wow, great news, their only down 5.1%.  Let’s call the Claims and Existing Sales today’s evil twins.

All of the above has pinched the 10 year note and mortgage pricing but to no great degree.  10 year down 10/32’s, MBS off 4/32’s.  The selling has not hurt the chart, just neutralized conditions a bit.  We see neither bull nor bear in control or as we like to call it, a Goldilocks market (just right).  With the market being so psycho and at historic lows in Austin mortgage rates, best to be careful.  You never know if tomorrow will be Dr Jekyll or Mr Hyde.