Mortgage Market Review - 10/19/09

This Morning…Monday, October 19, 2009:
The markets opened lower in price this morning, but are holding at support levels. There are no economic releases on the schedule today and the market will likely float in a low end range awaiting news, while chatter will continue over the possibility the Fed is preparing to pull the trigger on higher rates. This morning, mortgage rates opened slightly higher.

Last Week:
Mortgage bond prices fell sharply last week driving mortgage rates higher. Rates were under pressure from better than expected economic news and rising stocks. Retail sales, weekly jobless claims, and industrial production data were all better than expected. The improved economic outlook had investors flocking to buy stocks, which helped the Dow Jones index to close over 10,000.

This Week:
As I mentioned there is no news today, but on the 20th we have the Producer Price Index, and Housing Starts & Building Permits. Nada for Wednesday, and then on Thursday we have Leading Economic Indicators and Jobless Claims. We finish the week off with Existing Home Sales. Two optimistic possibilities for the housing markets that are swimming around; the Obama administration is seriously considering extending the first time home buyers tax credit, and in the FOMC minutes of the 9/23 meeting there were a few members talking about the possibilities of the Fed increasing its purchases of Mortgage Backed Securities after the buy ends at the end of Q1 2010 (see comments below). This is potentially good news.

EconomicIndicator
Housing Starts
Tuesday, Oct. 20,8:30 am, et
Up 1.5%
Important. A measure of housing sector strength. Weakness may lead to lower rates.
Producer Price Index
Tuesday, Oct. 20,8:30 am, et
Up 0.1%,Core up 0.1%
Important. An indication of inflationary pressures at the producer level. Decreases may lead to lower rates.
Fed "Beige Book"
Wednesday, Oct. 21,2:00 pm, et
None
Important. This Fed report details current economic conditions across the US. Signs of weakness may lead to lower rates.
Leading Economic Indicators
Thursday, Oct. 22,10:00 am, et
Up 0.8%
Important. An indication of future economic activity. A smaller increase may lead to lower rates.
Existing Home Sales
Friday, Oct. 23,10:00 am, et
Up 5.5%
Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.

Market Forecast:
The producer price index data to be released Tuesday will be the most important data this week. Any signs of inflation will generally not bode well for mortgage bonds. The Fed "Beige Book" will factor into trading this week. Stock strength and dollar valuation will play a pivotal role in mortgage interest rates as well.

What about the future of interest rates? Opinions are very divided. Many top economists believe that our economy will grow through the rest of this year, and then slow in the first half of 2010. (How did it get to be almost “2010” already?) In a recent release they stated, “While the lack of inflation, high unemployment and excess capacity in the economy should hold interest rates down, there is a lot of uncertaint0y regarding rates immediately following the termination of the Federal Reserve’s purchase of mortgage-backed securities. No doubt the Fed will do its best to minimize adverse effects, but the elimination of these purchases will put upward pressure on all long-term rates as well as the spread between mortgage rates and Treasuries.”

In spite of credit and equity issues still being more of a concern than interest rates for most, most economists are divided on where interest rates are going. On the “they’re going higher” side, smart folks point to the Treasury's financing need of an additional $2 trillion and their stated objective to lengthen the average maturity of their debt. In addition, if the economy really does start to pick up steam, and investors increase their risk appetite, this will also put upward pressure on yields. On the “they’re going to stay low” side, economists point to the continued high unemployment, soon to be in the double digits, low consumer spending, and rough housing market in many parts of the states. Perhaps the Fed remains on hold until 2011 and then only gradually raises rates, eventually bringing the Fed funds target up to 1.00% by year end. And maybe, in spite of gold continuing to set records and oil high, inflation remains low. As you can see…nobody knows!

Some Humor:
Several men are in the locker room of a golf club. A cell phone on a bench rings and a man engages the hands free speaker-function and begins to talk. Everyone else in the room stops to listen.
MAN: "Hello"
WOMAN: "Honey, it's me. Are you at the club?"
MAN: "Yes."
WOMAN: "I am at the mall now and found this beautiful leather coat. It's only $1,000. Is it OK if I buy it?"
MAN: "Sure, go ahead if you like it that much."
WOMAN: "I also stopped by the Mercedes dealership and saw the new 2010 models. I saw one I really liked."
MAN: "How much?"
WOMAN: "$90,000."
MAN: "OK, but for that price I want it with all the options."
WOMAN: "Great! Oh, and one more thing... The house I wanted last year is back on the market. They're asking $950,000."
MAN: "Well, then go ahead and give them an offer of $900,000. They will probably take it. If not, we can go the extra 50 thousand. It's really a pretty good price."
WOMAN: "OK. I'll see you later! I love you so much!!"
MAN: "Bye! I love you, too."
The man hangs up. The other men in the locker room are staring at him in astonishment, mouths agape.....He smiles and asks: "Anyone know who this phone belongs to?"

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