The bond market has experienced a huge "flight to safety" over the last seven days. This "flight to safety" has led mortgage rates to new lows.
The economic calendar was quite busy this morning. First out was Housing Starts & Building Permits from the Department of Commerce. Housing starts data estimates how much new residential real estate construction occurred in the previous month. Building Permits data provides an estimate on the number of homes planning on being built, a forward looking indicator of economic expansion. Recent reports on housing have been very disappointing, especially since the homebuyer tax credit expired in April.
Today’s report showed a modest improvement in July but still less than economists had expected. Housing Starts rose 1.7% to a annualized pace of 546,000 vs expectations of 565,000. This follows last month’s report which showed Housing Starts plunging 8.7% from the prior month. The improvement was led by multifamily starts which rebounded 32.6% from last month. Single family housing starts declined 4.2% after falling 1.7% in June. Building permits fell 3.1% to an annualized pace of 565,000 also short of economists’ expectations and to the lowest level in over a year. Single family building permits declined 1.2% to 416,000, the slowest pace since April 2009. On a year over year basis, permits are down 3.7%. Residential construction reports continue to indicate new building activity is slow.
Released at the same time was the Producer Price Index. The PPI measures the monthly change in prices paid by manufactures and wholesalers for the goods they consume to produce their product. If businesses are paying more for the materials they use to produce their widgets, they may be forced to pass along those additional costs to the consumer. During periods of economic stagnanation, when unemployment is high, producers find it difficult to pass higher costs along to consumer because demand is already below average. This report gives us two measure on inflation… the overall read and the core read. The core rate strips out food and energy due to their monthly volatility.
The overall Producer Price Index rose 0.2%, matching economists’ expectations. Year over year, overall producer prices are up 4.1%. The core level, on the other hand, rose more than expected by 0.3%. Economists had only expected a 0.1% increase. Year over year, core producer prices are up 1.5%. Despite the higher core level, this report continues to show that inflation is in check which should allow the Fed to maintain the current accommodative stance on monetary policy. Additionally, higher producer prices helps ease the concerns of deflation, which can be a bigger problem to an economy than inflation.
Our final economic release of the day was the Industrial Production report. This data gives Federal Reserve economists a measure of the strength of the national manufacturing sector. It measures output produced by U.S. factories, utilities and mines. Higher industrial production is a positive economic indicator as it implies consumer demand is improving. In that sense, this report tends to benefit the stock market, at the expense of mortgage rates. Economists were calling for Industrial Output to increase at a month over month rate of 0.5%. The report was much better than expected, registering a month over month gain of +1.0%. The prior month’s data was revised worse from +0.1% to -0.1%.
Following the release of Industrial Production data, stocks extended overnight gains and benchmark interest rates rose. This pressured mortgage backed securities prices lower...before most lenders published loan pricing. Consequently, consumer borrowing costs increased slightly today. The losses were not large enough to say the par 30 year fixed mortgage rate moved higher though.
The best execution 30 year fixed conventional mortgage rates remain in the 4.25% to 4.50% range for well qualified consumers. We still have a few small independent mortgage bankers and brokers offering 4.125% but less than yesterday. 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 seeking a 15 year term, you should expect a rate in the 3.75% to 4.00% range with similar costs but lower FICO score requirements.
We don't see today's sell off as a major cause for concern yet, but still feel anyone floating their loan within 30 days of closing should lock. We will alert if the tide turns...