Friday’s steep sell off in Bonds is the fifth consecutive session of declines and  makes many wonder if the party is over for low mortgage rates.

All the gains made due to Bernanke’s  “Significant Downside Risks” and the start of  Operation Twist have evaporated.  Fortunately, the decline in Bond prices has been halted at the 50-day moving average.  A drop below this level of support could result in further losses; hence Bonds could loose as much as 100 basis points from current levels and push Mortgage Rates higher.  For now it appears Bonds are back to trading in a sideways pattern as the they did prior to September 21st.

For those new to “Market Update” it’s important to understand how Mortgage Rates move and what effects them.  Contrary to popular belief, Mortgage Rates are tied to the Fannie Mae Bond Market (FNMA) Not the 10-Year Bond.  So, if the FNMA Bond prices move higher, the yield (interest rate) moves lower.  Therefore I monitor economic news that can affect the prices of FNMA Bonds.  One of the most significant being inflation.  Bond investors fear any news of inflation;  it causes investors to sell Bonds, which causes the price of Bonds to drop and the rates to rise.

This weeks Kiplinger Letter reported; The slow economy will keep a damper on demand through 2012, and ample supplies of resources…from workers to raw materials…mean little pressure on wages or prices for at least the next year or so. But come 2013 or soon after: Watch out. Annual inflation of 5%-6% or more is a good bet, even if economic growth remains pokey. If the pace picks up, inflation will climb even higher. Worse, the trend may continue for years.

Adding pressure to Bonds was Friday’s Jobs Report.  The Labor Department reported that 103 thousand jobs were created in September, higher than expectations of 60 thousand.   However, 45 thousand of those jobs were due to the return of striking Verizon workers.

The FNMA 3.50% Coupon Bond fell 69 basis points to end the week at 101.41, 250 basis points lower than the high of 104.00 reached back on September 22nd.

I am recommending floating/not locking into mortgage rates for those at the beginning of the application stage.  If we’ve learned one thing over the past year is that this is a very volatile market.  Let the volatility be your friend.  However, you will need to work with a Mortgage professional that monitors these markets closely and can react in an instant.

Mortgage Bonds ended the week about 3 basis points lower than where they started with the 30 Year Fixed Rate relatively unchanged for the week at 3.875% .  A slowdown of the over heated Chinese Economy helped to keep Mortgage Bonds above support levels.  Remember, Mortgage Rates move in the opposite direction of Mortgage Bond prices.  So, rising bond prices helps to move Mortgage Rates lower.

Waiting For Home Prices to Move Lower Can Cost Plenty

Many still lack confidence in the economy and hesitate to buy a home as they are hoping home prices will fall further.  However, delaying that home purchase can actually cost a lot more if mortgage rates rise. Lest say you are hoping for the real estate market to drop by another 10%. That would reduce a $600,000 home by $60,000.  So you save $60,000?

Not so fast.   Lets say you were going to get a $417,000 mortgage on that home, but while waiting for the market to drop, the rate for a 30 year fixed rate mortgage rose 1.50%  from 3.875% to 5.375%.  That higher rate will cost $194,000 more in payments over the life of the loan. So the house actually cost $734,000.

How To Shop For A Mortgage

Shopping for a mortgage can be stressful.  Many people start at the bank where they have their checking and savings and are quickly dismayed as banks do not employ individuals that are trained, tested & licensed.  Additionally, with the difficulties in today’s lending markets, going to a bank limits your options and can result in denial or a higher rate.  The reason is that the majority of banks have to adhere to Fannie Mae underwriting guidelines. You know the organization that looses billions of tax payer dollars and relies on government bailouts. Well, Fannie Mae’s guidelines have tightened up and bank underwriters are overly cautious when underwriting loans they sell to Fannie Mae, as they don’t want to have to buy them back.  Hence, you want to keep your options open. 

A professional Mortgage Broker still has several options the banks do not have.  Such as arranging your loan with lenders and banks that do not sell their loans to Fannie Mae.  These lenders typically use common sense underwriting guidelines making getting a mortgage easier than one through the Fannie Mae lenders.  So how do you shop for a Professional Mortgage Broker?  Well there are few left, as many did not survive the credit crisis. So they are a commodity.

A common misconception is that using a Professional Mortgage Broker will cost you more,  The fact is using a mortgage broker will cost you less, as they have multiple lenders they can place you loan with.  They do the shopping for you. Brokers work with banks wholesale channel, so they have access to the same rates as banks retail channel.  You can check a Professional Mortgage Brokers credentials with the Nationwide Mortgage Licensing System http://www.nmlsconsumeraccess.org/

Economic News

The Case-Shiller Home Price Index rose 0.9% in July from June in the 10 and 20 city survey, and was the fourth monthly gain in a row.

Initial Jobless Claims were 391,000. That is a tough number to see this far after the official end of a recession – but it was a bit better than the 419,000 expected. Anything under 400K in Initial Claims feels better.

Personal Income was -0.1%, which was lower than the 0.1% gain expected.

The 2nd Quarter Final reading of GDP was revised higher to 1.3%, from a previous reading of 1.0%. The inflation reading for the 2nd Quarter – showed inflation at 2.5% up from a previous reading of 2.4%. Inflation has gone up every month since last December. ?

Mortgage Rates moved lower as Mortgage Bonds Rallied strong after Wednesdays Fed meeting pushing Mortgage Bond’s up $2.00 to a new high of 103.65.  The Fed said it will switch from buying short term U.S. Debt to longer term debt, hoping to move rates lower.

However, if you tuned into the Kathleen Hays show on Bloomberg Wednesday, you would have heard me say that I was concerned that the Fed’s new “Operation Twist” plan could have the same reaction that the Fed’s “QE2” plan had, which was that it increased mortgage rates rather than lower them. Click here to listen to the show 

“Come on Baby Let’s Do The Twist”              *Chubby Checker 1960.
So what do you think happened on Friday after the initial knee jerk reaction  on Thursday?  You guessed it, Mortgage bonds started to sell off and mortgage rates adjusted higher.  Could this be due to a bit of profit taking from investors? Maybe, but the closing technicals in the chart below suggest otherwise.   The 3-day pattern is very close to an “Bearish Evening Star”, which is a major top reversal pattern formed by three candlesticks.  The long red candle on Friday confirms the reversal pattern. See chart below.

Enough with all the technical lingo. The bottom line is that this may be a repeat of what happened the last time the Fed tried to stimulate our economy, and we all know it did not help.

Many industry professionals are saying lenders rates do not reflect the gains in the Bond Market.   This should come as no surprise, as there is no excess capacity in the lending industry. Prior to Wednesday’s sharp rise in Bonds, lenders could hardly keep up with the volume presently at hand, so Banks will be very slow to adjust Mortgage rates lower.   Quite frankly, I think anyone who is considering home financing for buying a home or refinancing would be making a mistake if they didn’t take advantage of these rates.  Holding out for lower rates can get very expensive, for there is a lot more room for rates to move higher.

Click on Imge to Enlarge Chart

Economic News

Jobless Claims Fall More than Expected Down 9,000 to 423,000

Existing home sales up 7.7% in August
Sales of existing homes rose 7.7% in August despite tighter lending
standards and appraisal problems, according to the National Association of
Realtors.

Dow Posts worst week since 2008.

Housing Starts Fall More than Expected Down 5.0% to 571,000

Building Permits increased by 3.2%

Mortgage Bonds moved lower as inflation reared it’s ugly head. Inflation is the arch enemy of Bonds and Mortgage Rates. The Consumer Price Index (CPI) jumped up to the Feds threshold of 2%.  Should inflation rise, Bond friendly news will not be able to keep Mortgage Rates from rising.  Simply put, Bond investors require a higher yield to offset less buying power imposed by inflation.

The 3.5% Coupon Bond ended higher Friday, bouncing off session lows and closing below the 25-day moving average for the second day in a row. If prices move below the $100.50 level,  Mortgage rates could move higher.

With few economic reports due out next week, the focus will be on the  The Federal Open Market Committee (FOMC) on Tuesday and Wednesday.

Economic News

Producer Price Index and Retail Sales were  unchanged in August.

Philly Fed Index Shows Improvement, at 17.5 in September Vs. -20.7 in August.

Jobless Claims Rise More than Expected, Up 11,000 to 428,000.

Weekly Mortgage Applications Rise 6.3 Percent, First Rise in a Month.

Friday Septmber 9, 2011

by John Sauro

The 3.50% coupon closed at 102.06 on Friday, an all time high.  News of a possible Greek default  pressured stocks lower and Mortgage Bonds higher.

While this is good for Mortgage Rates, markets could reverse in a heart beat on  news of Greece averting default.  So the advise is to lock into rates. See chart below.

President Obama’s address to the nation Thursday night on potential ways to stimulate the ailing economy gave support to a nationwide mortgage refinancing program.

Critics quickly argued the plan does not go far enough to repair the ailing mortgage finance market. Mark Vitner, senior economist at Wells Fargo (WFC: 23.52 -3.61%) said “that’s not the bold stroke that I want. It’s not just refinance; we want people to be able to sell their homes.”

I have been calling on our government since 2009 to implement a plan that I beleive could reverse the tide of the real estate market. A big part of the problem with the real estate market, as is with the economy, is consumer confidence.

The point is, no one wants to catch a falling knife. My proposal has been for the government to allow home buyers and home owners to write of a percentage of home value lost on their annual taxes for a period of five years.

Such a plan would stabilize home values almost immediately. Hence, reassuring home buyers that a home purchase will not result in losses. The cost to the government would be minimal, as once the market stabilizes, the need for the write off’s diminish. It’s a simple cost effective plan that gets to the heart of the matter.

Economic News

Home Prices Edge up 4 percent in the second quarter as per Clear Capital.

Jobless Claims rose more than expected, up by 2,000 to 414,000.

European Central Bank Leaves rates unchanged at 1.50%.

That’s right, that’s how many net jobs were created according to Fiday’s Jobs Report.  17,000 jobs were created, well below the 110,000 expected and there were revisions to previous months which erased an additional 58,000 jobs.

Mortgage Bonds reacted  to the news, moving higher by approximately 30 basis points. The 3.50% coupon finished the week at $101.72, a gain of 94 basis points.  The  conforming 30 Year Fixed rate is priced at 4.125%.

Economic News

ISM report comes in at 50.6, better than expected.

Factory Orders rise more than expected, up 2.4% in July.

Chicago PMI at 56.5 in August vs. 58.5 in July.

Personal income rises 0.3%, slightly less than expected.

S&P Case-Shiller Index up 3.6% in 2Q, down 5.9% from a year ago.

Personal Income rises 0.3%, slightly less than expected.

Market Update- August 25th, 2011
By John Sauro

Fed Chief Ben Bernanke’s speech at Jackson Hole Wyoming delivered little news of what the Fed will do to help the ailing economy.  Markets were hoping for news of additional stimulus. The Fed Chairman said, the Fed is ready to use additional tools as appropriate, but did not list those tools.

Many experts believe the Fed has run out of bullets and that it is now up to Washington to come up with a realistic budget.

Mortgage Bonds continued their rally from Thursday to settle at $100.78, $1.688 lower than the high, reached on August 18th.  As a result Mortgage Rates moved slightly higher with the conforming 30 year fixed rate at 4.125%.

Economic News

Consumer Sentiment Sinks to 55.7 in August, In line with Estimates.

Second-Quarter Economic Growth Revised down to 1.0%. Slightly less than expectations.

Jobless Claims rise more than expected. Up 5,000 to 417,000.  Still above the important 400,000 number.

New Home Sales fall more than expected. Down 0.7% in July.

 Friday August 20th, 2011 6:15  PM ET
By John Sauro

Can You Say Whiplash?
Whiplash is a good description of the recent activity in the financial markets. The stock market has logged its worst 4-week drop since March of 2009. Stocks accelerated their selloff to finish near session lows in light, choppy trading Friday as investors were reluctant to remain in the market ahead of a weekend, amid worries over a global recession in addition to the ongoing euro zone jitters.

Bonds prices and Mortgage rates have been the beneficiary of the concerns in the global economy and the selloff in stocks. The 10 Year Treasury yield plunged to a record low of 1.97% as the weekly 30-year mortgage tracked by Freddie Mac hit a low not seen in over 50 years. At one point the 30 year conforming fixed rate was priced at 4 percent.

After a wild week of trading, Mortgage Bonds hit a ceiling of resistance at the $101.75 level to settle the week at $101.44. The charts are showing a “Bearish Double Top Reversal”, a good reason for my bias toward locking into mortgage rates.
If the stock market reverses, it’s  possible much of the gains in Bonds would evaporate pushing mortgage rates higher.

Inflation numbers and expectations will help to determine the direction of interest rates.  It’s important to pay close attention to incoming inflation numbers and expectations – as in order for Mortgage Bonds, the 10-year Note and the 30-year Bond are to go higher – inflation expectations and numbers must level off.  Otherwise Bond prices will have to move lower over time, pushing mortgage rates higher.

Economic News

Home prices rose 1% in May compared to April, and 16 of 20 metropolitan areas tracked by the Standard & Poor’s/Case-Shiller house price index registered monthly price gains.

The Mortgage Bankers Association’s weekly mortgage applications survey for the week ending Aug. 12 noted its market composite index – a measure of mortgage loan applications – grew 4.1% on a seasonally adjusted basis, while the same index increased 3.6% on an unadjusted basis.
The Wall Street Journal said that Fannie Mae is paying $500 million to buy $73 billion worth of servicing rights from the wobbly Bank of America. Since Fannie is a ward of the Treasury that means the $500 million (more or less) is coming from – guess who– Taxpayers.

July Housing Starts Off 1.5%, Less Than Expected; Permits Down 3.2%,

Lower rates and more liquidity will not help this economy further.  There is plenty of money to lend, but the “velocity of money”, the rate at which money is spent or lent, is as Fed President Richard Fisher said, “in a coma” …meaning that everyone is neither spending nor lending.
Gold hit a Record $1,877 an ounce on Friday, highlighting the ongoing panic buying over the debt crisis.  Analysts believe a correction of 8 percent is likely as prices may be overblown due to the debt crisis.

Jobless claims up to 408,000
Initial jobless claims increased 2.2% last week, climbing back over 400,000.
The Labor Department said the seasonally adjusted figure of actual initial
claims for the week ended Aug. 13 rose by 9,000 to 408,000 from 399,000 the
previous week, which was revised upward 4,000. Analysts surveyed by Econoday
expected 400,000 new jobless.

Inflation Surging:
Producer Price Index Gains 0.4%; Up 0.2 % ex-Food and Energy