Housing Market Rates and Reports

Snapshot of The Market

 

Mortgage Rates Hold Steady

Following last week’s large rally, it was a relatively quiet week for mortgage rates. In the economic reports released this week, inflation remained low and the economic growth data was mixed. Mortgage rates ended the week with little change.The economic report which received the most attention this week was Retail Sales, which represent roughly 70% of economic activity. March Retail Sales declined 0.4% from February, which was weaker than expected. Since the beginning of the year, investors have been concerned that consumers would scale back their spending due to the payroll tax increase, the sequester cuts, and higher gas prices. Combined with the weak March Employment report released last week, the question is how quickly the economy will grow for the rest of the year. Looking at the averages for the first three months of the year, Retail Sales growth and job gains were fairly strong even with the weakness in March.

The FOMC Minutes from the March 20 Fed meeting were released on Wednesday and contained a bit of a surprise. The minutes revealed that, due to improvement in the economic outlook, there was growing support for scaling back the Treasury and mortgage-backed securities (MBS) purchase program, beginning as soon as this summer. The impact of this news on mortgage rates was limited, however, since the Fed meeting took place before the weak March Employment and Retail Sales reports were released. The recent data reduced investor concerns about an earlier than expected end to the bond-buying program. The minutes were a reminder that the economic data in coming months will determine the timing of Fed policy changes, meaning that volatility around major economic reports likely will remain very high.

Job Gains Fall Short

A wide range of economic news was favorable for mortgage rates this week. The Employment data was weaker than expected, Japan expanded its bond-buying program, and tensions with North Korea increased. As a result, mortgage rates ended the week significantly lower.Friday’s Employment report was disappointing in nearly every area. Against a consensus forecast of 190K, the economy added just 88K jobs in March. Average Hourly Earnings, a proxy for wage growth, was flat from last month. Digging deeper, the small bit of good news was that the data from the prior two months was revised higher by 61K jobs. This was far outweighed, however, by the bad news in the details of the Unemployment Rate. The Unemployment Rate unexpectedly dropped from 7.7% to 7.6%, but the decline was entirely due to people exiting the labor force. It is good for the economy if the Unemployment Rate declines because more people get jobs, but not if the cause is a shrinking labor force. Weak labor market data reduces future inflation expectations, which is good for mortgage rates. In addition, it likely extends the duration of the Fed’s bond-buying program, which is also good for mortgage rates.

Thursday, the Bank of Japan announced that it will sharply ramp up its bond purchases to levels which will add $1.4 trillion to its balance sheet over the next two years. Like the Fed, the BOJ is buying bonds to help boost the economy. This added demand for Japanese bonds caused their yields to decline, making US bonds relatively more attractive to global investors. This benefited US mortgage-backed securities (MBS), which helped push mortgage rates lower.

Cyprus Reaches Bailout Deal

It was a relatively quiet week. Mixed US economic data had little impact. Events in Europe were the main influence on mortgage rates. Investors grew more concerned that uncertainty in Europe could slow the pace of global economic growth. As a result, mortgage rates ended the week a little lower.The bank problems in Cyprus raised broad questions about the relationship between the troubled countries and the stronger countries in the European Union (EU). Early in the week, Cyprus reached an agreement to receive an EU bailout package for its banks. The terms of the aid highlighted the growing reluctance of Germany and the other healthier countries to use taxpayer funds to provide aid to the weaker countries. Investors are concerned that this may slow the implementation of unpopular reform measures intended to boost economic growth in the troubled countries. Adding to the uncertainty, Italian leaders have made little progress in forming a coalition government, making it very difficult for the third largest country in the EU to do anything to improve its economic situation.

So why is political and economic uncertainty in Europe positive for US mortgage rates? Since US companies conduct business in Europe and export to Europe, slower growth there will be a drag on the US economy as well. This results in reduced expectations for future inflation, which is good for mortgage rates. In addition, the duration of the Fed’s MBS and Treasury purchase program depends on the strength of the US economy and the labor market. Weaker growth and lower inflation could justify Fed purchases for a longer period of time, providing an extra benefit for mortgage rates.

Cyprus Reaches Bailout Deal

It was a relatively quiet week. Mixed US economic data had little impact. Events in Europe were the main influence on mortgage rates. Investors grew more concerned that uncertainty in Europe could slow the pace of global economic growth. As a result, mortgage rates ended the week a little lower.The bank problems in Cyprus raised broad questions about the relationship between the troubled countries and the stronger countries in the European Union (EU). Early in the week, Cyprus reached an agreement to receive an EU bailout package for its banks. The terms of the aid highlighted the growing reluctance of Germany and the other healthier countries to use taxpayer funds to provide aid to the weaker countries. Investors are concerned that this may slow the implementation of unpopular reform measures intended to boost economic growth in the troubled countries. Adding to the uncertainty, Italian leaders have made little progress in forming a coalition government, making it very difficult for the third largest country in the EU to do anything to improve its economic situation.

So why is political and economic uncertainty in Europe positive for US mortgage rates? Since US companies conduct business in Europe and export to Europe, slower growth there will be a drag on the US economy as well. This results in reduced expectations for future inflation, which is good for mortgage rates. In addition, the duration of the Fed’s MBS and Treasury purchase program depends on the strength of the US economy and the labor market. Weaker growth and lower inflation could justify Fed purchases for a longer period of time, providing an extra benefit for mortgage rates.

Retail Sales Surge

The economic growth data released this week was mostly stronger than expected, which normally would push mortgage rates higher. After a large increase last week following strong Employment data, however, rates instead recovered some ground and ended the week a little lower.

This week’s economic data continued to demonstrate improvement in the economy. February Retail Sales jumped 1.1%, which was far above expectations. Retail Sales are closely watched because they account for roughly 70% of economic activity. There has been concern that higher payroll taxes and rising gas prices will slow consumer spending, but there have been few signs of this so far. February Industrial Production showed stronger than expected gains as well, and Capacity Utilization rose to the highest level since March 2008. Weekly Jobless Claims dropped sharply, and Continued Claims declined to the lowest level since the middle of 2008. This kind of strong economic growth should support continued improvement in the housing market.

The headline monthly inflation reports reflected large increases due to rising gas prices, but core levels remained well within the Fed’s comfort zone. The February Consumer Price Index (CPI) rose 0.7% from January. By contrast, Core CPI, which excludes food and energy, increased just 0.2%. Fed officials prefer to look at core readings of inflation, which exclude the most volatile components and present a better indication of long-term trends. According to the Fed statement, core inflation levels below 2.5% do not pressure the Fed to scale back its bond purchase program, which has helped keep mortgage rates low. This month, Core CPI was 2.0% higher than one year ago, while the Core Producer Price Index (PPI) was even lower at 1.7%.

Unemployment Rate Declines

Unexpected strength in the labor market was seen this week. The good economic news lifted the Dow stock index to a record level, but it also pushed mortgage rates higher.Mortgage rates climbed on the days leading up to Friday’s Employment report and rose even higher after the figures were released. Against a consensus forecast of 170K, the economy added 236K jobs in February. The Unemployment Rate declined from 7.9% to 7.7%, the lowest level since December 2008. Average Hourly Earnings, a proxy for wage growth, increased modestly from last month. In short, today’s data exceeded expectations nearly across the board.

The growth in the labor market is a major component of a broader improvement in the US economic outlook. Recent manufacturing, Durable Orders, and Retail Sales reports have also reflected a pickup in economic growth. This has resulted in an increase in Consumer Confidence and Consumer Sentiment, as well as higher stock prices. For the housing sector, the positive economic news increases the ability and the willingness of people to buy homes. The downside is that stronger economic growth generally causes mortgage rates to rise.

 

Trade Deficit Shrinks

Following last week’s packed schedule, there was far less major economic news this week. The global economic data that was released was generally a little stronger than expected. This was negative for mortgage rates, which ended the week a little higher.

The biggest surprise in this week’s economic news came from Friday’s data on imports and exports. The December Trade Deficit declined to the lowest level since January 2010. Exports were higher than expected, and imports were smaller than expected. Since the first reading for fourth quarter GDP used an estimate of the December trade data, the actual results will almost certainly lead to an upward revision. Last week’s release of fourth quarter GDP showed the first decline since December 2009, but economists now predict that it will be revised to show an increase of 0.5%. Stronger growth is great news for the economy, but it raises inflationary pressures and is unfavorable for mortgage rates.

The housing market data released this week also contained good news for the economy. According to the National Association of Home Builders (NAHB), the number of improving housing markets expanded for the sixth straight month in February. The index considers the levels of housing permits, employment and home prices to determine improvement. The latest report shows that 259 of 361 metro regions are improving (roughly 70%), up from just 12 regions in September 2011.

 

Retail Sales Increase

Improving economic growth in the US was negative for mortgage rates this week. This was mostly offset by weakness in Europe and Japan, however. As a result, mortgage rates ended the week just a little higher.The biggest US economic report released this week was Retail Sales. Since Retail Sales account for roughly 70% of economic activity, this report is closely watched by investors and the Fed. Consumer Spending increased at a 2.2% annual rate during the fourth quarter of 2012, but investors are concerned that it may slow during the first quarter due to a number of factors, including this year’s payroll tax increase and rising gas prices. Investors were pleased that the actual results showed that January Retail Sales posted a small increase from December. The full impact of the payroll tax increase may not be seen until February or March, though.The news from Europe and Japan released this week revealed less impressive economic results. Fourth quarter GDP in the euro zone fell short of expectations, declining at a 2.3% annualized rate, the third straight quarter of negative readings. Even Germany, which had remained relatively strong during most of Europe’s financial crisis, dropped at the same 2.3% annualized rate. GDP in Japan was expected to rise during the fourth quarter, but it also declined, for the third straight quarter. In general, slower global economic growth reduces future inflation expectations in the US, which is positive for mortgage rates.

Quiet Week

Following last week’s burst of major economic headlines, which were mostly negative for mortgage rates, there was very little market moving news this week. Mortgage rates reversed a portion of last week’s increases, ending the week a little lower.After last week’s fiscal cliff deal, Fed meeting, and Employment data, this week’s news had little impact on mortgage rates. Very little economic data came out this week, and the results for the Treasury auctions were close to average. A meeting of the European Central Bank (ECB) produced no surprises. In short, after weeks of high volatility, daily mortgage rate movements were relatively small this week.The much anticipated Qualified Mortgage regulation was released this week by the CFPB. This rule, when first proposed, caused concern in the housing industry for how its requirements might overly restrict mortgage availability. As released, though, it should have very little impact on mortgage availability, and much of what will be required under the regulation (when it becomes effective a year from now) is common practice today.

Trade Deficit

Shrinks following last week’s packed schedule, there was far less major economic news this week. The global economic data that was released was generally a little stronger than expected. This was negative for mortgage rates, which ended the week a little higher.The biggest surprise in this week’s economic news came from Friday’s data on imports and exports. The December Trade Deficit declined to the lowest level since January 2010. Exports were higher than expected, and imports were smaller than expected. Since the first reading for fourth quarter GDP used an estimate of the December trade data, the actual results will almost certainly lead to an upward revision. Last week’s release of fourth quarter GDP showed the first decline since December 2009, but economists now predict that it will be revised to show an increase of 0.5%. Stronger growth is great news for the economy, but it raises inflationary pressures and is unfavorable for mortgage rates.The housing market data released this week also contained good news for the economy. According to the National Association of Home Builders (NAHB), the number of improving housing markets expanded for the sixth straight month in February. The index considers the levels of housing permits, employment and home prices to determine improvement. The latest report shows that 259 of 361 metro regions are improving (roughly 70%), up from just 12 regions in September 2011.

 

Economic Data Exceeds Expectations

Positive economic data was the primary influence on mortgage rates this week. Unexpected strength in Retail Sales, Housing Starts, and Jobless Claims combined to push mortgage rates a little higher.Stronger economic growth is great for the labor market and the stock market. Unfortunately, it also increases the risk that future inflation will move higher, so it is generally not good for mortgage rates. Two factors helped contain the increase in mortgage rates this week, however. First, the inflation data released this week showed that inflation is not a problem right now. In addition, Fed purchases of mortgage-backed securities (MBS) provided sufficient demand to keep mortgage rates at low levels.The Housing data released during the week continued to be encouraging. December Housing Starts jumped 12%, well above the consensus forecast, to the highest level since June 2008. Building Permits increased 1%. The January NAHB Home Builder Confidence index remained at the highest level since 2006. The Fed’s Beige Book reported improving real estate conditions in all twelve regions.

 

Housing Ends Year on High Note

The fiscal cliff talks were the primary influence on mortgage rates again this week. A lack of progress on reaching a deal caused investors to shift to safer assets such as bonds. As a result, mortgage rates ended the week a little lower.The housing sector data released this week was again encouraging. November New Home Sales rose 4% from October to the highest level since April 2010 (when the homebuyer tax credit was about to expire). November Pending Home Sales, a leading indicator, also rose to the highest level since April 2010, and were 12% higher than one year ago. According to the NAR Chief Economist, “Home sales are recovering now based solely on fundamental demand and favorable affordability conditions.”Housing ends the year on a definite upswing. Existing Home Sales rose roughly 10% during 2012, and the National Association of Realtors (NAR) forecasts a similar increase for 2013. Total housing inventory of available existing homes is at the lowest level since 2005. The October Case-Shiller 20-city home price index showed an increase of 4.3% from one year ago. In addition, mortgage rates end the year near record low levels, around 50 basis points lower than this time last year.

Fiscal Cliff Talks Drive Mortgage Rates

The fiscal cliff talks were the primary influence on mortgage rates this week. As investor optimism for a deal rose and fell during the week, so did mortgage rates. For the week, mortgage rates ended just a little lower.If no fiscal cliff deal is reached, the spending cuts and tax increases which will occur beginning January 1 are perceived as negative for stocks and positive for bonds. As a result, when comments from political leaders at the beginning of the week hinted at progress, mortgage rates moved higher and stocks gained. The reverse took place later in the week and especially on Friday following the failure in the House to pass the “Plan B” fiscal cliff proposal. The fiscal cliff talks most likely will continue to have a major impact on mortgage rates until a deal is reached.The housing sector data released this week was encouraging. November Existing Home Sales rose 6% to the highest level since November 2009. Total housing inventory of available existing homes declined 4% to the lowest level since September 2005. November Housing Starts declined 3%, but Building Permits increased 4% to the highest level since July 2008. The December NAHB Home Builder Confidence index rose for the eighth consecutive month to the highest level since April 2006.

Mortgage Rates Rise after Fed Announcement

With little progress on the fiscal cliff talks and few surprises in this week’s economic data, the Fed meeting was this week’s big story. Policy changes announced in Wednesday’s Fed statement raised investor concerns about higher future inflation, and resulted in mortgage rates ending the week a little higher.The Fed announcement contained two major policy changes. The first, which was widely expected, is that the Fed will purchase $45 billion per month of long-term Treasury securities beginning at the start of 2013 to replace the Operation Twist program which expires at the end of this year. This will be in addition to the $40 billion of mortgage-backed securities (MBS) the Fed now purchases monthly. The second change from the Fed was not expected. For the first time, the Fed announced that it will keep the fed funds rate at very low levels until certain economic targets are reached. Specifically, the fed funds rate will remain low until unemployment falls below 6.5% and inflation tops 2.5%.Despite four years of extraordinary levels of Fed stimulus, the economic data released this week revealed that inflation is not a problem right now. This week’s data showed that Core CPI, the most widely followed measure of inflation, was only 1.9%. The concern for investors after the Fed statement is that the Fed appears to be willing to tolerate a higher level of inflation in its efforts to boost the economy, and inflation is negative for mortgage rates.

Job Gains Exceed ExpectationsOnce again, investors mostly remained on the sidelines waiting for progress on the fiscal cliff talks and the European debt troubles. Headlines in these areas, along with Friday’s Employment report, caused daily volatility, but mortgage rates ended the week with little change.Friday’s Employment data was stronger than expected. Against a consensus forecast of 90K, the economy added 146K jobs in November. Expected to increase to 8.0% from 7.9%, the Unemployment Rate decreased to 7.7%, the lowest level since December 2008. The decline was due to workers leaving the labor force, however, rather than job gains. Overall, investors feared weaker results, and the news was favorable for stocks and negative for bonds.The last few weeks in December are traditionally a period marked by larger than usual price movements, due to thin trading volume. Usually the flow of news also winds down toward the end of the year. This year, however, there remain several major events which likely will have a significant impact on mortgage rates over the next few weeks, including a Fed meeting, the fiscal cliff talks, and deadlines on the Greek bailout. While there is no way to know what net effect these events will have on mortgage rates, it is reasonable to expect a high level of volatility.

Markets React to Fiscal Cliff Talks

The main influence on mortgage rates this week was the perceived progress, or lack thereof, on the fiscal cliff talks. US economic data and news from Europe had little impact. Investors grew a little less hopeful during the week about a fiscal cliff deal, so mortgage rates ended the week lower.If no action is taken, a series of tax increases and government spending cuts will take effect at the first of the year, known as the fiscal cliff. During the week, political leaders from both parties made a series of statements about the changing status of negotiations to avoid the fiscal cliff. The result for financial markets was increased daily volatility in the stock and bond markets. Opinions vary widely on the level of progress, but investors ended the week with reduced optimism for a deal. As long as the talks drag on, the increased level of volatility is likely to continue.If Congress is not able to reach a deal to avoid the fiscal cliff, economic growth can be expected to slow significantly. However, slower economic growth generally reduces inflationary pressures and is positive for mortgage rates. Therefore, as optimism for a deal rises and falls, so do mortgage rates.