Mortgage rates moved mostly sideways near newly hit 2010 lows yesterday but did come under a small amount of upward pressure late in the day as the stock market rallied into the close. As the prices of mortgage backed securities moved lower, many lenders repriced for the worse, but the increases in consumer borrowing costs were not large. Mortgage rates continued to hold at the best levels of 2010.
We had two economic releases this morning: April New Residential Construction and the April Producer Price Index
New Residential Construction is better known as Housing Starts and Building Permits. Released by the Department of Commerce, Housing Starts data estimates how much new residential real estate construction occurred in the previous month. New construction means digging has begun. Adding rooms or renovating old ones does not count, the builder must be constructing a new home (can be on old foundation if re-building). Building Permits data provides an estimate on the number of homes planning on being built.
In April, Housing Starts rose 5.8 % to an annualized pace of 672,000 units. This beat consensus estimates for a read of 650,000 and improved from March when an annualized 635,000 Starts were seen. Building Permits declined 11.5 % to an annualized pace of 606,000 units. This was much worse than forecast and well-below the March report of 685,000 permits. This appears alarming but we remind that builders accumulated a healthy amount of permits during the winter months. READ MORE ABOUT THIS HOUSING DATA
Released at the same time was the Producer Price Index. PPI measures the changes in prices that manufacturers and wholesalers pay for goods during different stages of production. If businesses have to pay more for the materials they use to produce their widgets …they may be forced to pass along those additional costs to you…the consumer. During periods of bad economic conditions and high unemployment, producers find it difficult to pass along the higher prices to the end consumer. This makes consumer inflation reports of more importance than producer inflation. However; as stated before, inflation is one of the largest enemies of low interest rates so we must pay attention to any report on inflation as it can impact the markets.
The PPI came in 0.1% lower vs. the March data which was better than estimates for a read of +0.1%. However when excluding food and energy, producer prices rose 0.2% in April, this was slightly worse than economist forecasts which called for a read of +0.1%. Tomorrow we get the more important Consumer Price Index which measures inflation at the consumer level. The Fed continues to state that inflation is of no immediate concern and today’s PPI report continues to confirm that stance.
Mortgage rates looked like they were going to move up today as stocks were indicated to open higher before the lenders published rate sheets. However it wasn't long before stocks lost momentum and a flight to quality led benchmark Treasury yields lower. This helped mortgage-backed security prices rally from early session lows and resulted in mutliple lender reprices (one for the better, then one for the worse, then one for the better again).
A flight to safety happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. To remind readers, as benchmark Treasury yields fall, prices of mortgage-backed securities move higher, which allows lenders to offer lower mortgage rates. As Treasury yields rise, mortgage-backed security prices are led lower, which forces lenders to push mortgage rates higher.
Reports from fellow mortgage professionals indicate lender rate sheets to be about the same as yesterday. The par 30 year conventional rate mortgage remains in the 4.75% to 5.00% range for well qualified consumers. There are lenders offering 4.625% as par. To secure a par interest rate on a 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. If you are not planning on keeping your home for more than 5 years, you should consider a no cost loan. On a no cost loan, you have to accept a higher interest rate which pays the loan originator/lender enough money that they can pay your closing costs for you. On a no cost loan, you are still paying the costs, just paying them in the form of higher interest charges. You should expect a no cost loan to offer a rate of around 5.375% for a 30 year fixed. Your loan officer should be able to provide you a break even analysis to help you determine the most optimal mortgage vs closing cost plan for your family.
LOCK OR FLOAT?
From a recent post: It is very tempting to advise floating in this situation. Mortgage rates are literally at their best levels of the year. Consumer borrowing costs really are at the mercy of stocks right now. If investor sentiment on the global economic environment really has soured and stocks move continue to move lower, mortgage rates would fall a few more basis points but lenders would be slow to pass along improvements. On the other hand, if the recent downturn in stocks is just another "break", similar to what we've seen several times over the past 12 months, and stocks end up recovering and extending their rally, then the flight to safety in Treasuries that is preventing mortgage rates from rising will be reversed and consumer borrowing costs will go up as investor funds are reallocated to higher yielding assets.
I must remind: mortgage rates always rise faster than they fall! With that in mind, it seems like it is going to take another major headline news event to spook stocks enough to allow lenders to offer 4.500% mortgage rates on fixed rate conventional loans. If you think this is highly likely, then you should play the market and see if the "contagion" spreads around the financial markets a little more because it is possible that your mortgage rates could fall a few more basis points. Me personally, I think it's a gamble. I am still advising my clients to take the aggressive pricing while its being offered.