Mortgage rates improved a few basis points yesterday. Lenders were somewhat subdued in passing along interest rate improvements though. This is a function of a few reasons. First, mortgage-backed securities prices have held to a tight range over the course of the week. The second reason is a bit more obvious, the FOMC meeting ended today at 2:15pm. This was a major market event, so it makes sense that lenders would be defensive ahead of a scheduled event that had the potential to move interest rates in either direction. Before getting to the impact of the FOMC on mortgage rates, allow me to recap the day's economic data releases.
Early this morning, the Mortgage Bankers’ Association released their weekly applications index. The MBA survey covers over 50 percent of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. A rising trend of mortgage applications indicates an increase in home buying interest, a positive for the housing industry and economy as a whole. Furthermore, in a low mortgage rate environment, such a trend implies consumers are seeking out lower monthly payments which can result in increased disposable income and therefore more money to spend on discretionary items or to pay down other debt.
The report indicated a 3.3% decline in purchase application activity and a 15.1% decline in refinances. Of note, the MBA issued a rare comment: “Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today’s rates.” I agree, mortgage rates in the low 5% range are still extremely aggressive when you look back at the history of mortgage rates, but I think a more accurate statement would have been “many borrowers want to refinance to take advantage of near record low mortgage rates, but the tightening of lender guidelines has made it too difficult for borrowers to qualify.” Maybe that's what the MBA was really trying to say? What is your opinion?
For more on the MBA Applications Index and the potential impact on the Fed's intentions to exit the MBS market, check out the MND STORY.
We also received another look into the strength of housing: the New Home Sales survey. This survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. Changes in sales price data reflect changes in the distribution of houses by region, size, etc., as well as changes in the prices of houses with identical characteristics. It takes four months to establish a trend of new home purchases
New home sales in November fell by a much larger than expected 11% to an annualized pace of 355,000 sales. Economists surveyed expected December’s report to post an increase in new home sales to an annualized pace of 370,000 sales.
The report indicated New Home Sales in December were much worse than expected. Sales fell 7.6% to an annualized pace of only 342,000. Helping to offset the negative report was the prior month’s report was revised higher to 370,000. The seasonally adjusted estimate of new houses for sale at the end of December was 231,000. This represents a supply of 8.1 months at the current sales rate. An estimated 374,000 new homes were sold in 2009. This is 22.9% below the 2008 figure of 485,000 and a record low for annual new homes sales.
The median sales price of new houses sold in December 2009 was $221,300, an increase of $11,000. The average sales price was $290,600, an increase of $20,600!!!
Here is a quote from the MND story:
"When trying to rationalize the increase in prices vs. the fall in sales, one has to assume this was a factor of who was buying a home in December. First time home buyers generally go for the bargains whereas upgrade buyers are looking to UPGRADE (:-D) to a larger, more expensive home. So it is likely that less FTHBs were buying new homes in December."
Do you agree with this perspective?
The Treasury had another debt auction today. This time it was $42billion of 5 year notes. Yesterday’s 2 year auction went okay causing very little reaction in the markets, the same thing happened today. HERE is a post on the results
Then came 2:15 pm, the release of the FOMC Statement. Let me just get it over with...MORTGAGE RATES MOVED HIGHER AFTER THE FOMC RELEASE
There were only a few changes made to the text of the statement, for the most part it was the same as the December statement with a few more hints that the Fed's economic outlook was become more positive. They didn't change the verbiage regarding the Fed MBS purchase program, we still expect the Fed to exit the MBS market at the end of March.
The problem was with voters. Kansas City Federal Reserve President Thomas Hoenig voted against low interest rate policy. He stated that he believed that "economic and financial conditions had changed sufficiently," enough to say that exceptionally low levels of the fed funds rate for an "extended period" was no longer warranted. The interest rate market did not like this, a few minutes after the statement was released MBS prices fell rapidly which forced several lenders to reprice for the worse, increasing mortgage rates in the process. HERE IS THE STORY
Reports from fellow mortgage professionals now indicate lender rate sheets to be worse than yesterday. The par 30 year conventional rate mortgage does however remain in the 4.75% to 5.00% range for well qualified consumers, unfortunately to get those rates borrowers will have to pay a few more basis points in closing costs (discount points). 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. If you are seeking a 15 year term, you should expect par in the 4.25% to 4.50% range with similar fees.
Lenders continue to offer the best mortgage rates we've seen since early December. While I am tempted to see if rates keep improving tomorrow, I think borrowers should still be locking in their loans. Like yesterday, if you want to risk it and continue to float keep an eye on the equities market. If stocks move higher tomorrow, mortgage rates should move higher. The safe call is to take advantage of the recent price gains and lock.
Tonight, President Obama will deliver the State of the Union Address. I stay out of politics with the blog but his speech can have an effect on the markets so we must all pay attention. If anything major develops, I will cover it tomorrow.