Mortgage Market Review - 7/27/09

This Morning…Monday, July 27, 2009:
This week's Treasury borrowing needs is hitting the bond and mortgage markets as the week starts. June new home sales at 10:00 were expected to be +2.3%; jumped a whopping 11.0%. The supply based on present sales has fallen to 8.8 months from 10.2 in May. The jump is sales is the largest month to month increase since Dec 2000. The median sales price $206,200.00. The initial reaction was rather muted in both the stock and bond markets. At 1:00 this afternoon Treasury will start the supply train with $6B of 20 yr inflation indexed bonds. Kind of an orphan auction but still will get attention. It should go well, while inflation isn't an issue now most believe it will be in the next year or so.
There is news today that mortgage servicers are meeting in Washington DC to discuss how it is possible for them to carry out the directives on modifying mortgages that have been advanced by the Obama Administration. They’d better do something, as the delinquency numbers at Fannie and Freddie are frightening. According to a report from Barclay’s, two million loans are already delinquent, and 75,000 per month are falling behind. As it turns out, the agencies have the option of repurchasing the delinquent loans. This is highly doubtful, but nonetheless if they decide to do that, large blocks of mortgages will pre-pay, and any investor will see their mortgage holdings drop. Remember, investors pay a premium hoping to keep the mortgage on their books for some time. But with 5% of all Fannie loans, and 3.6% of Freddie loans, delinquent, it is a real problem. This could become a serious issue in the near future.

Last Week:
As we noted a couple of weeks ago, market volatility in both financial bourses (stocks and bonds) would be high. Thin markets this time of year added to the increasing view that the economy is turning better are making price movements from day to day rather extreme, especially in the bond and mortgage markets. Last week was the kind of market that can whip-saw even the best. Early last week (Monday, Tuesday) mortgage rates fell, pushed up by the decline in yield on the 10 yr note. By Wednesday it was over, mortgages closed a little lower (price); on Thursday prices fell hard, Friday ended about unchanged. The bottom line; on the week there was almost no change in interest rates.

During the week, the DOW eclipsed the 9000 mark. Ben Bernanke spoke of a "jobless recovery", a situation where employers use productivity to increase production without additional labor. This would basically be an environment where the unemployment rate remains high long after the economy is in recovery. There wasn’t much data but the existing home sales data did come in higher than expected and weekly jobless claims increased but that was expected as well.

This Week:
There is a lot going on this week. We have New Homes Sales today, Consumer Confidence and the Case/Shiller Home Price Index tomorrow, Durable Goods (always a volatile number) and the Beige Book on Wednesday, Jobless Claims on Thursday, and Gross Domestic Product & the Chicago PMI on Friday. And in-between, the Treasury is selling over $100 billion of 2-yr, 5-yr, and 7-yr notes. On the flip side, the Fed has been in buying mortgage-backed securities, roughly $4 billion per day for a year-to-date total of about $682 billion. In addition, banks have been buying MBS’s which is very nice to see!

EconomicIndicator

New Home Sales
Monday, July 27,10:00 am, et
355K
Important. An indication of economic strength and credit demand. Weakness may lead to lower rates.
Consumer Confidence
Tuesday, July 28,10:00 am, et
48.7
Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
Durable Goods Orders
Wednesday, July 29, 8:30 am, et
Down 0.5%
Important. An indication of the demand for "big ticket" items. Weakness may lead to lower rates.
Fed "Beige Book"
Wednesday, July 29, 2:00 pm, et
None
Important. This report details current economic conditions across the US. Weakness may lead to lower rates.
Q2 Advance GDP
Friday, July 31,8:30 am, et
Down 1.5%
Very important. The aggregate measure of US economic production. Weakness may lead to lower rates.
PCE Core Inflation
Friday, July 31,8:30 am, et
Up 2.4%
Important. A measure of price increases for all domestic personal consumption. Weaker figure may help rates improve.
Q2 Employment Cost Index
Friday, July 31,8:30 am, et
Up 0.3%
Very important. A measure of wage inflation. Weakness may lead to lower rates.

Market Forecast:
With Treasury supply pushing against bond and mortgage prices, if the preponderance of economic releases continues to fuel the stock market, interest rates will increase. Always looking for an opportunity to profit from price improvements, yet only when we believe the odds are well in our favor; this week will be one where we won't want to take on much risk.
The employment cost index on Friday is a quarterly report issued by the Department of Labor. The report measures the growth of wages, salaries, and benefits costs over a certain period of time. It is important to note that no single economic indicator can consistently predict the future of the economy. However, the employment cost index is a closely watched release. Most of the recent Fed releases and speeches indicate inflation is a concern and market participants remain cautious. It is a good time to take advantage of mortgage interest rates at their current levels to avoid exposure to future market volatility.

Some Humor:
An elderly couple had dinner at another couple's house, and after eating, the wives left the table and went into the kitchen. The two gentlemen were talking, and one said, “Last night we went out to a new restaurant and it was really great. I would recommend it very highly.”
The other man said, “What is the name of the restaurant?”
The first man thought and thought and finally said, “What is the name of that flower you give to someone you love? You know, the one that's red and has thorns.”
“Do you mean a rose?”
“Yes, that's the one,” replied the man. He then turned towards the kitchen and yelled, “Rose, what's the name of that restaurant we went to last night?”