Following better than expected manufacturing data, domestically and abroad, Treasuries and Mortgage Backed Securities sold off yesterday, returning all the gains mortgage rates enjoyed from Friday’s rally. The selloff in secondary markets moved the par 30 year fixed mortgage rate back over 5.00% after it reached 4.875% on Friday. Once again, rates fail to remain below 5% for an extended period of time.
We do have some data this morning that will affect the flow of investor money. The U.S. Department of Commerce released the monthly Personal Income and Outlays report. This data set tracks the monthly change in personal income which represents the income that households receive from all sources and personal spending. If income is rising, that is a positive sign of economic growth since consumers will have more money available to spend in the economy. Also, as part of this report we recieve a read on inflation with the Personal Consumption Expenditure (PCE) index. The PCE index is the Federal Reserves’ preferred gauge of inflation, it measures the monthly change in price of a basket of goods and services.
Last month’s report indicated a surge in personal income of 1.4%, this increase was mostly a function of one time payments generated from the Obama’s Administration American Recovery and Reinvestment Act of 2009. Following last month’s surge, personal income was expected to post a decline of 1.1% while consumer spending was expected to increase by 0.3%. Lastly, the PCE index was expected to indicated a 0.2% rise in consumer prices following last month’s 0.1% increase.
Actual data indicated that personal income fell 1.3% while spending increased 0.4%. On a year over year basis, income is down 3.4% and spending is down 2.2%. On the inflation front, the core PCE index came in right on expectations at 0.2%, making the year over year reading of 1.5% well within the Fed’s comfort zone for inflation...providing further evidence that inflation is not an immediate concern. The increase in consumer spending is attributed to a surge in gasoline prices. Today’s report shows that Americans are making less but spending more due to rising commodity prices.
The last piece of economic data today was a read on the real estate sector...the National Association of Realtors’ (NAR) Pending Home sales index. A pending home sale is one in which a contract has been signed but the loan has not closed. With tougher underwriting conditions, a weak labor makretm, and falling home prices (HVCC) many sales are not closing. Since many economists believe that our economy will not recover until housing stabilizes, this report carries more weight than usual.
May's reading came in pretty much unchanged from the prior month, implying that housing was beginning to stabilize. Today's release has indicated that pending home sales for the month of June posted a month over month increase of 3.6%, beating expectations. This was the fifth straight month of improvement, but the first noticeable increase in that time fram. We must remember a pending home sale does not equal an actual closed sale as was pointed out by the NAR President Charles McMillan. Immediately following the release, MBS have given back all of their early morning gains and have fallen lower than the lowest levels seen yesterday as investors have more ammo to support the green shoots economic recovery theory.
I do receive quite a few good faith estimates from readers asking me to review to make sure they are getting a fair offer. First, GFE’s are 2 to 3 pages in length which contain numbered lines from 100 to 1400. The most important part you want to check to make sure the offer you are getting is competitive is the 800 lines. Third party and origination fees are listed in this section. Here are a few examples of third party fees: appraisal, credit report, tax service, MERs, condo warrants, and flood certifications. Here are a few examples of origination fees: origination fee, discount points, processing fee, underwriting fee, administration fee, broker fee (if you use a broker), and application fee. These are the fees you need to check on to see how competitive your offer is when shopping interest rates. A very typical good faith estimate will show 1 point loan origination, a processing fee of $500 and lender fees of around $900 (this varies from lender to lender and often times are just another name for processing and underwriting fees). If the quote you received does not include these fees than you are being premium priced. This means the lender or broker is building your costs into your rate instead of charging them upfront. This practice is under scrutiny at the moment and may be banned if HR 1728 is passed.
After the better than expected Pending Home Sales Data was released, lenders repriced rate sheets for the worse. Consequently increasing the par 30 year conventional rate mortgage to the 5.125% to 5.375% range for well qualified consumers. In order 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. As always, you can elect to pay less in fees but your interest rate will be bumped higher. To remind readers securing a mortgage rate is like buying anything else, the more you pay the better the rate.