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Weak Jobs Data Helps Keep Mortgage Rates Near Four Month Lows

While we generally try to avoid getting caught up in political poo throwing, we know many are anxiously awaiting news from Capitol Hill regarding the extension of the first time home buyer tax credit. Although there has yet to be definitive progress. Here are a few words of support from the Obama Administration to help you deal with the suspense.

From Thomson Reuters:

The Obama administration on Thursday pressed Congress to back a limited extension of a popular first-time homebuyer tax credit that is set to expire at the end of November.

"This credit has brought new families into the housing market and contributed to three consecutive months of rising home prices nationwide," Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan said in a prepared statement.

The statement made no mention of a possible expansion of the credit to repeat buyers of primary residences.

Key senators agreed this week on a proposal to extend the $8,000 first-time homebuyer tax credit, which expires at the end of November, for houses under contract by the end of April. Buyers would have through June to close on the house.

The senators also agreed to expand the credit to allow for those who have been in their home for at least five years to receive a $6,500 tax credit if they purchase a new primary residence.

The administration had been open to extending the existing credit but has expressed concern about the cost of expanding the credit to repeat buyers.

Both the Senate and the House of Representatives would have to approve the deal reached by the key senators before it could be sent to the White House for President Barack Obama's signature into law.

Patiently waiting...

Mortgage rates were pushed higher yesterday after benchmark Treasury yields moved higher, outside the well defined range that has kept rates relatively stable since August. New supply of Treasury debt combined with several psychological factors pressured MBS prices lower and forced lenders to reprice for the worse. Despite this move lower, we are not yet convinced this a long term move outside the range. The market is still very nervous about a stock sell off and another dip lower in the recession. This will likely keep demand for AAA rates Treasury debt high, which would foster a steady interest rate environment.

Following yesterday’s data free day, today we get a few economic reports to digest. First out this morning was the S&P Case Shiller Home Price Index which tracks the monthly change in values of residential real estate in 20 metropolitan regions across the country. Rising home values encourage new construction which creates jobs and more consumer spending. Conversely, declining home values causes consumers to be more cautious about spending, instead favoring an increase in their savings rate. Many economists believe that until home prices start to move higher, it will be extremely difficult for our economy to sustain any acceptable growth, thus data on home sales and home prices has become quite relevant to market participants.

The data shows that home prices rose 1.2% in August from, beating economist expectations for a rise of only 0.7%. This is the fourth month in a row of improvements in home values. The biggest movers in August were Minneapolis up 3.2% and San Francisco up 2.8% while the biggest decliner continues to be Las Vegas with a decline of 0.3%. On a year over year basis.

The final report of the day was the Consumer Confidence Survey. The Conference Board questions 5,000 consumers on their attitudes on present economic conditions and their expectations of future conditions. An optimistic consumer is much more likely to spend money while a pessimistic consumer is more likely to save. Since our economy is driven by consumer spending, the stock market likes to see optimistic consumers and the fixed income market prefers more pessimistic consumers. This data has been showing growing optimism among consumers but last month’s report fell back from the prior month’s reading as consumers became more concerned about the jobs outlook.

Today's report indicates that consumers continue to lose confidence, the survey fell for the second month in a row and was much lower than expectations. The jobs outlook was the main cause for a lack of confidence among consumer.

At 1pm eastern, the Department of Treasury will auction off $44billion of 2 year notes to the highest bidder. For the auction to be deemed successful, market participants look to the demand. Strong demand, especially from foreign accounts, is one of the many factors that have kept treasury yields and mortgage rates near historic lows despite record amounts of U.S. borrowing. Matt and AQ will cover the auction once it is complete on the MBS Commentary blog.

Reports from fellow mortgage professionals indicate lenders rate sheets to be similar to yesterday’s. This keeps the par 30 year conventional rate mortgage in the 4.875% to 5.125% range for well qualified consumers. To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee. You can elect to pay less in fees and secure a higher rate which is a good option for homeowners that do not plan on keeping their home for more than 3 years.

Following the release of the morning data, MBS have moved back into the trading range which has kept rates stable over the last few weeks. Since we are near the bottom, I will continue to advise cautiously floating for now but be ready to lock. If the auction today has weak demand, MBS will be pressured to move lower in price which causes rates to move higher.

I have been writing often about the expiration of the First Time Home Buyer Tax Credit at the end of next month. As it stands right now it is still set to expire; however, there is growing momentum on Capitol Hill for its extension. There are two plans that are being considered. One calls for a phased out expiration of the current credit through the end of 2010 where the tax credit gets smaller and smaller as the year progresses. The other plan is calling for an extension through at least June of next year but also wants to increase the amount of money the homeowner can make to qualify and to extend to any home buyer and not just first time buyers. Some people feel that the housing market will suffer another setback if the credit is allowed to expire while others say it is a bad idea to extend the credit. To read opposing views, click here for an article on why it should be extended and here is a link on why it shouldn't be extended.

What is your opinion on the tax credit? Should it be extended or allowed

Dear Mr. Hood:

Thank you for contacting me to express your support for expanding the first-time homebuyer tax credit. I appreciate the time you took to write and welcome the opportunity to respond.

In July 2008, the Housing and Economic Recovery Act of 2008 (Public Law 110-289) provided first-time homebuyers with a tax credit, equivalent to an interest-free loan, worth up to $7,500. The tax credit applied to homes purchased between April 9, 2009 and July 1, 2009. As the housing situation worsened in the fall of 2008, additional action was taken to prevent further declines in home values. Congress included in the American Recovery and Reinvestment Act of 2009 (Public Law 111-5), a more robust first-time homebuyer tax credit. Specifically, the tax credit was increased to $8,000 for homes purchased in 2009 and will not have to be repaid.

I understand your belief that the first-time homebuyer tax credit should be increased and expanded further. As you know, on June 10, 2009, Senator Johnny Isakson (R-GA) introduced the "Home Buyer Tax Credit Act of 2009" (S. 1230), which would increase the credit to up to $15,000, remove income eligibility limits, and expand it to include homebuyers purchasing homes other than their first. S. 1230 has been referred to the Senate Finance Committee, of which I am not a member. Please know that I will keep your support for this legislation in mind should it come before the full Senate.

Once again, thank you for writing. If you have any additional questions or concerns, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841. Best regards.

The bond market is closed in observance of Columbus Day. While mortgage-backed securities are not being traded today, several lenders have published rate sheets and many originators are still working...so dont be afraid to contact your loan officer!

Last week ended on a sour note as prices of mortgage backed securities fell precipitously. Losses continued all the way into the close which forced lenders to reissue higher mortgage rates by day's end. We do have some potentially market moving data being released this week which could help slow the pace of rising mortgage rates.

The calendar kicks off on Wednesday with Retail Sales numbers. Retail Sales data measures the total receipts at stores for both durable and non durable goods. An increasing trend is positive for the economy and stocks as higher sales leads to higher corporate profits. Economists surveyed expect overall sales to registers a 2.1% decline following last month’s 2.7% increase. When excluding auto sales from the figures, expectations are for a modest 0.3% increase after last month’s 1.1% increase. Additionally, on Wendesday the minutes from the September 23rd FOMC meeting will be released. Market participants will scour the minutes for any hint at future monetary policy and the Fed’s outlook on the economy.

On Thursday we get a read on inflation with the Consumer Price Index. This data is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Recent data on inflation shows it to under control, this week's report is expected to continue that trend. We also get two readings on the strength of business conditions with the Philly Fed index and the Empire State Manufacturing Survey. Recent readings of both of these reports have shown conditions improving which is positive for stocks and negative for MBS. Lastly, weekly jobless claims will be released. Market participants will be looking for continued improvements in the labor market.

Our week concludes with Consumer Sentiment and Industrial Production. Recent sentiment surveys have shown the U.S. consumer becoming more positive on their own personal financial conditions and their outlook on the economy. An optimistic consumer is more likely to spend while a pessimistic consumer is more likely to save. Economists’ surveyed are expecting this report to continue to show growing optimism among consumers. Industrial production is expected to post a 0.2% increase following last month’s robust 0.8% increase. Companies increase production when they expect increasing sales so the stock market likes to see an increasing trend in this report.

Lastly, earnings season picks up in the days ahead which could affect the direction of mortgage rates. Read the MND STORY for more on the Week Ahead.

Reports from fellow mortgage professionals indicate the lenders who decided to publish rate sheets today have done so in a conservative manner. The par 30 year conventional rate mortgage is in the 4.875% to 5.125% range for the best qualified consumers. To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.

H.R.3706 Bill

New legislation in the works for FHA!! If this legislation is passed FHA will then require a minimum down payment of 5%!!

http://www.thinkbigworksmall.com/mypage/player/tbws/17109/1073808

Last week was a very nice for mortgage rates. The economic data was mixed, some pointing toward economic growth, while some hinted at difficulty ahead for the recovery. Despite the mixed data, the prices of mortgage backed securities approached the highest levels of the year bringing mortgage rates to 5 month lows. After hitting the highs of the year early on Friday, MBS lost ground and many lenders repriced for the worse. But it's important to note that closing prices merely returned to morning levels. There is a possibility that we are beginning to see a shift in economic outlook away from the quick V shaped recovery toward a more painful W(double dip) shaped recovery. If this holds true stocks could move lower benefiting MBS and treasuries.

Today

Following last week’s plethora of tier one economic reports, the week ahead (full MND STORY as always) is rather light on data. ISM Non-Manufacturing Index. The Institute for Supply Management survey was today's only release and was very close to expectations. This report measures about 400 firms including agriculture, mining, construction, retail, etc… on their economic outlook. Readings above 50 indicate expansion while readings below 50 indicate contraction. Unlike its sister report, ISM Manufacturing index which measures the strength of the manufacturing sector of our economy, this report has yet to register a reading over 50 but economists surveyed expect this month’s report to come in at the breakeven level of 50. The report indicates that the non-manufacturing sector of our economy is expanding with a 50.9 reading.

Tuesday

Tuesday brings us no economic data but we do have round one of scheduled Treasury auctions which were announced last week. The U.S. Department of Treasury will offer up $39billion of 3 year notes to the highest bidder. Since the supply is already known, market participants will gauge the success of the auction by looking at the demand including that of foreign investors. Despite record amounts of government borrowing, investor appetite for US debt has remained robust. This helps mortgage rates remain near historic lows. Later in the evening, Kansas City Federal Reserve Bank President Thomas Hoenig will speak to an economic forum in Denver. Any time fed members and voting member of the FOMC speak, market participants pay attention for any hint at future monetary policy and their outlook on the economy.

Wednesday

Though not empty, Wednesday's calendar is also light with the only relevant report being the weekly Mortgage Bankers’ Association applications index (measures the weekly change in mortgage applications). Despite record low mortgage rates, very affordable home prices and government incentives for first time home buyers, last week’s report fell over 6% indicating slowing home sales). Round two of Treasury auctions arrives later in the day with the U.S. Department of Treasury offering up $20billion in 10 year notes.

Thursday

Thursday brings us the weekly jobless numbers which are expected to show less claims than the prior week continuing the recent trend of improvement. Additionally, the last auction of the week will be held with $12billion of 30 year bonds. Lastly, Thomas Hoenig will deliver his second speech of the week but this time to an economic forum in Oklahoma.

Friday

The week wraps up with the highest impacting report, International Trade numbers. This data measures the difference between what our country imports and exports. Last month’s report showed our trade balance widening significantly to $32billion from a revised $27.5 billion in July, and economists surveyed expect further widening in this month’s report to $33billion.

Update On First Time Homebuyer Tax Credit!

As I have mentioned quite frequently on the blog, the first time home buyer tax credit which gives up to a $8000 tax credit to first time home buyers is set to expire on November 30th. YOUR LOAN MUST CLOSE ON OR BEFORE THAT DATE TO TAKE ADVANTAGE OF THE GOVERNMENT STIMULUS!!! The Wall Street Journal reports that congress is considering extending the tax credit (read story...) .

Since many believe that our economy will have a difficult time recovering until the housing market improves, the extension is possible. However, if you are looking to take advantage of this incentive do not count on it being extended. The aforementioned article gives viewpoints on both sides of the debate. As the deadline approaches, volume at lenders should pick up as applicants rush to take advantage so I expect lenders turn times to be extended. Additionally, we are seeing the best rates since early this year which is also increasing volume at lenders so be prepared for longer turn times. As it is right now, if your loan for any reason closes after November 30th, there will be no soup for you.

Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 4.625% to 4.875% range for the best qualified consumers. In order to secure a par interest rate on a 30 year conventional mortgage you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.

The last time rates were at the current levels, lenders got slammed with business as applicants rushed to take advantage of the low rates. With the increased volume, lenders started to raise rates as a way to slow down the submission of applications and not because MBS moved lower in price! Granted, many people that could refinance have done so already but the possibility exists that lenders may repeat what they did in the past. Looking at recent history and learning from it, makes me continue to caution you on floating. MG discussed this as well in his opening commentary (MG and AQ write for the mortgage professional, so it's more abstruse to the average consumer, but if you can glean the wisdom, it's valuable stuff).