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.

Take for example this morning’s release of Weekly Unemployment Claims which rose 25K. Most thought the jobs situation was stabilizing. China seemed as though it’s growth would never slow. Now their slowdown is very real and the Shanghai Index chart (Chinese Stocks) has turned bearish. Greek’s have once again taken to the streets, looking for another bank to burn. Seems as though they are not in love with the austerity plan. When will Europe and our country for that matter figure out that when more people are riding in the wagon than pulling it, we have a problem. Off the soap box, on to the news.

The Weekly Claims number was a shocker. Analysts had expected a drop to 440K, not the 471K print. Continuing Claims dipped however, but not to the levels we were looking for. Not so good for the economy but good for Austin mortgage rates. Stocks are now in 10% correction mode from the highs. Another 5% is certainly possible. Leading Economic Indicators for April were also released, down .1%. The index fell for the first time in a year, adding insult to injury as far as stocks are concerned.

Last but not least, the Philly Fed Manufacturing Index rose 1.2% to 21.4. Looks like things are improving in the city of brotherly love. With Austin mortgage rates/pricing at the best levels of the year and the 10 year note hitting 2010 low yields, the time is right for borrowers to lock in their Austin mortgage rates.

We feel the market has priced in a ton of bad news. Not that it can’t get worse because we all know that’s possible. Just the same, it will take more and more negative news to drive the trade to lower yields. Given all of our oscillator work, we see a very overbought market. One that’s ripe for a correction. At the same time, until investors feel certain that the world will not come to an end, yields will not rise much. Perfect time for Austin borrowers to use the exclusive float down program offered by Max Leaman at PrimeLending Austin. Call Max at (512) 293-1239.

The big news in this week’s economic data came from the housing sector. March Existing Home Sales rose 7% from February, and existing home sales were 16% higher than one year ago. Inventories of unsold existing homes fell to an 8-month supply, from 8.5-months in February. March New Home Sales were even better, jumping 27% from February to the highest monthly rate since last July. This marked the largest single-month increase in new home sales since 1963. The chief economist of the National Association of Realtors (NAR) credited the homebuyer tax credit for the strong March housing data. Buyers must sign a contract by April 30 to take advantage of the tax credit, so the April data should benefit as well.

Friday morning, CNBC reported that support is growing among Fed officials to begin sales of mortgage-backed securities (MBS) from the Fed’s portfolio. In a program which ended March 31, the Fed purchased $1.25 trillion of MBS to help lower mortgage rates and boost the economy. According to CNBC, “at least” six members of the Fed’s policymaking committee support near-term MBS sales if the economy continues to improve. The selling could begin as soon as the third or fourth quarter of this year. Fed Chief Bernanke still views the likely time frame to begin MBS sales as next year, but his recent comments have indicated a willingness to keep more options open. With the next Fed meeting taking place on Wednesday, the 2:15 et release of its statement will take on added significance. If the Fed actually conveys an intention to begin to sell MBS soon, Austin mortgage rates would be likely to rise on the news.

For the week of March 22, 2010 – Vol. 8, Issue 12

INFO THAT HITS US WHERE WE LIVE February housing starts were down 5.9%, to an annual rate of 575,000 units, but this was higher than consensus expectations and almost all the drop came from multi-family units. Single-family homes were off only 0.6% in February and are still up 39.8% over their low a year ago. Meanwhile, new building permits for February fell 1.6%, to an annual rate of 612,000, but that was also better than estimates and permits are still up an estimated 11.3% from a year ago. The experts all thought we’d see a MAJOR drop in home building given the record snow storms on the East Coast. But we didn’t. The Mortgage Bankers Association (MBA) estimates we’ll see 694,000 housing starts in 2010, a 20% hike from 2009 numbers.

At last week’s meeting, the Fed confirmed it would end its purchasing of mortgage-backed securities, as scheduled, on March 31. This buying program has helped keep interest rates historically low the past year. Even though the Fed will stop buying, they have no plans to sell the bonds they’ve bought, which may have put pressure on rates to go up. The MBA currently predicts rates to rise very gradually for the rest of the year and keep rising in 2011 and 2012. But let’s face it. If mortgages get into the 6% range, which is NOT being forecast until NEXT year, they would still be at a very attractive level which should in no way slow the housing recovery.

Buyers who want to take advantage of today’s low Austin mortgage rates AND the homebuyer tax credit should note they need to sign a contract by April 30 and close by June 30.

>> Review of Last Week

NOW THAT’S MORE LIKE IT… Investors felt good enough about the economy to push stock market indexes up for the week, landing them at their highest levels in over a year. There was a modest drop in the markets on Friday, with India’s central bank hiking rates a bit and continued concern over Greek debt. But, hey, stocks had already gone up eight days in a row by that point. And for good reason.

Tuesday the Fed didn’t touch the rate and their statement still predicted “exceptionally low levels of the federal funds rate for an extended period.” Corporations and investors like cheap money as much as you and I, so this kept stock prices heading up. We also had nice quarterly earnings from FedEx, Nike and Guess, plus General Electric‘s forecast of an earnings turnaround at GE Capital, their financial division.

Both the Consumer Price Index and the Producer Price Index came in below expectations, showing inflation remains in check. Initial unemployment claims met estimates. Industrial production, capacity utilization and the Philadelphia Fed Index of manufacturing all surpassed estimates. It’s interesting that in the last two weeks, the economic data has outperformed what you would have expected, given the harsh winter weather. Payrolls, retail sales, manufacturing measures and housing starts all beat expectations. Some observers now expect a payroll increase in March. Let’s hope they’re right.

For the week, the Dow was UP 1.1%, to 10741.98; the S&P 500 went UP 0.9%, to 1159.90; while the Nasdaq headed UP 0.3%, to 2374.41.

Investors focused on buying stocks for four days, though Friday the mood changed to selling. So bonds, which usually head in the opposite direction from stocks, finished with some strength. The FNMA 30-year 4.5% bond we watch ended the week virtually flat, off just 4 basis points from the week before, closing at $100.84. Average mortgage rates stayed at their historically low levels, as reported in last week’s Freddie Mac Survey.

>> This Week’s Forecast

HONING IN ON HOMES AND Q4 GDP… We’ll get a good look into the housing market with February Existing Home Sales on Tuesday and February New Home Sales on Wednesday. Friday the third estimate of Q4 GDP comes in. This will give us a more accurate read on the recovery’s first quarter of economic growth. Thursday, Chairman Ben Bernanke will give his rescheduled Congressional testimony on the Fed’s “exit strategy” for easing rates up from their current super-low levels.

>> 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 22 – March 26

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Even though the Fed stuck to its “keep rates low for an extended period” mantra, the dissenting voices on the FOMC are getting louder. The economy is picking up even, though jobs still lag. So more experts think we’ll see a rate hike the second 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%

Probability of change from current policy:

The big story of the day will be front and center at 1:15 pm cst.  That being the FOMC one day meeting to determine short term interest rates and make any changes to the policy statement.  For the most part, it looks like they could have mailed this one in with the only possible change coming in policy language regarding “low interest rates for an extended period of time”.  Some analysts are looking for the word “extended” to be dropped.  We see no change to rates or policy as we view the Fed to be “out of bullets” given zero percent interest rates and quantitative easing bloated balance sheet issues.  In our opinion, all they can do is manage expectations until the economy starts to pick up and then shift to an exit strategy.

What happens if all of the above is true?  The most likely outcome will be stocks doing better as they view “cheap’ money to continue.  That could put pressure on our mortgage pricing.  If they remove the “extended” language, both stocks and our Austin mortgage pricing would most likely suffer as traders attention would turn to Fed Funds rate hikes being priced in (in the near future).  As you can see, our best case is for Austin mortgage rates to hold steady so use this time to be a little defensive into the announcement.

Currently, the 10 year note is up 6/32’s (yield 3.68%), mortgage backs unchanged to off 1/32^nd (widening spreads), and stocks up a baker’s dozen on the big board.

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.

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.

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.

INFO THAT HITS US WHERE WE LIVE New home sales fell 11.2% in January to a record low level. Existing home sales weren’t very pretty either, down 7.2%, though they’re UP 11.5% over a year ago. Let’s remember that last Fall we all thought the tax credit was going away at the end of November. Many sales got pushed into October and November, causing sales drops the next two months. But the median new home price is down just 2.4% year over year and the average price is now UP 3.7%. For an existing home, the median price is unchanged from a year ago and the average price is UP 2.6%. More evidence home prices are stabilizing, with some analysts expecting modest gains for the year. Supporting this, the Case-Shiller home price index was UP 0.3% in December, its seventh straight monthly rise.

Even more interesting was the news that this has actually been a very good decade for home prices. From January 2000 to December 2009, prices were UP 46%, making residential real estate a clearly profitable investment. And that’s not even factoring in the mortgage interest and real estate tax deductions homeowners get!

Finally, we’ve reported that the Fed will stop buying mortgage bonds at the end of this month and experts feared rates may edge up. Now analysts say mortgage rates might not move much at all. This stems from the fairly calm market reaction to last week’s hike of the Fed’s discount lending rate (which is NOT the key Fed funds rate). Seeing little or no move in today’s low mortgage rates is good news for the near term.

>> Review of Last Week

MINOR SLIP… Another volatile week on Wall Street, as investors drove stock prices down two days, then up two days, with all three major indexes slipping just slightly for the week. Things got off to a weak economic start with Consumer Confidence dropping sharply in February, much like the temporary drop in January 1996 when, curiously, there was another big blizzard on the East Coast.

Folks didn’t much like the drop in new home sales either, but good news did come with the Richmond Fed Index, which showed that manufacturing in the mid-Atlantic region went from -2 in January to +2 in February. Then there was Fed Chairman Ben Bernanke’s monetary policy report to Congress, which he serves up every six months. Bernanke assured everyone rates will remain low, a message loved by investors.

The up-and-down news continued with durable goods UP a solid 3.0% for January, showing business is investing in equipment, usually a precursor to their investing in jobs. Not just yet, though, as weekly unemployment claims edged up a tad. Then Friday we had the blockbuster news that real GDP for Q4 was revised UP to a 5.9% annual growth rate. People who still can’t see a recovery should also look at the Chicago PMI. This gauge of Midwest manufacturing hit a five-year high of 62.6 for February.

For the week, the Dow was down 0.7%, to 10325.26; the S&P 500 was down 0.4%, to 1104.49; while the Nasdaq skidded down 0.3%, to 2238.26.

Bonds ended the week pretty nicely as investors sought safety in a week featuring strong Treasury auctions. The FNMA 30-year 4.5% bond we watch ended UP 87 basis points, closing at $101.09. As a national average, mortgage rates inched up a little, but still remain at very low levels.

>> This Week’s Forecast

INFLATION, MANUFACTURING, HOMES, JOBS… This week has everything! We start off with PCE, the Fed’s favorite reading on inflation, followed by the ISM take on the state of manufacturing, a sector that’s been leading the recovery. Thursday, Pending Home Sales looks to the near future of the housing market. Then the week ends with the all-important February jobs report. We will be looking for some encouraging signs on that front.

>> 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 1 – March 5

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months In Congressional testimony last week, Fed Chairman Bernanke recited his familiar mantra that interest rates should stay low for “an extended period of time.” Now very few economists feel the Fed funds rate will rise during the first half 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: