Last week ended on a very sour note for mortgage rates...
After a better than expected read on 2nd quarter GDP and a not so scary speech from the Federal Reserve Chairman, the 10 year Treasury note yield rose 16.6 basis points and mortgage-backed securities prices fell significantly. This forced lenders to reprice for the worse, which increased mortgage rates. Although consumer borrowing costs rose by about 10 basis points on the week (0.10% of the loan amount), the best 30 year fixed mortgage rates remained in a range between 4.25% and 4.50%.
The economic calendar is quite busy this week. The most influential report will be released on Friday; the Employment Situation Report. Because this data provides an in-depth look at the health of the driving force behind consumer spending, the labor market, investing sentiment is highly dependent on the findings of the Employment Situation Report. While this data is the most anticipated event of the week, the economic calendar is filled with several potential market movers including three reports on housing and the minutes of the August 10th FOMC meeting.
Here is a look at what might impact mortgage rates in the week ahead:
- S&P/Case-Shiller Home Price Index. This data tracks the monthly change in the value of residential real estate across the United States. (medium impact)
- Chicago Purchasing Managers Index (low to medium impact)
- Consumer Confidence (medium impact). An optimistic consumer is more likely to spend money which benefits stocks while a pessimistic consumer is more likely to save or pay off debt which benefits the bond market.
- FOMC Minutes (potential for high impact)
- MBA Applications Index (low impact)
- ADP Employment Report (medium impact) This data is not as influential as the official Employment Situation Report but it does provide market participants with a sneak peak of the health of the labor market. The farther away this number is from expectations, the more important it will be to investors.
- ISM Manufacturing Index (medium to high impact)
- Construction Spending(low impact)
- Weekly Jobless Claims (low to medium impact)
- Productivity and Costs (low to medium impact)
- Factory Orders (low to medium impact)
- Pending Home Sales Index (medium impact)
- Announcement from Department of Treasury of new debt supply. Issues to be sold: 3 year notes, 10 year notes (biggest impact on mortgage rates), and 30 year bonds. (more of an impact next week)
- Employment Situation (HIGH IMPACT). The data is expected to show our economy lost 99,000 jobs last month following the prior month’s worse than expected loss of 131,000 jobs. The unemployment rate is expected to climb from 9.5% to 9.6%.
- ISM Non-Manufacturing Index(low impact)
HERE is the full calendar including economist expectations and more color on the week ahead.
We had one economic release today, Personal Income and Outlays. This monthly report provides market watchers with a view into the strength of consumers by tracking what Americans earn and what they spend. A stronger consumer benefits the stock market while a weaker consumer helps keep mortgage rates low.
This data contains three separate reads on the health of consumers.
1. Personal Income: the monthly change in income that households receive from all sources (before taxes).
2. Personal Outlays (consumer spending): the monthly change in the amount of money consumers are spending on durable and non-durable goods and services.
3. Personal Savings Rate: the monthly change in the amount of money consumers are saving instead of spending
From the Bureau of Economic Analysis:
1. Personal Income: Increased 0.2% in July, less than the 0.3% that was expected.
2. Personal Outlays: Increased 0.4% in July, better than the 0.3% that was expected. This was the largest increase in spending since March.
3. Personal Savings: Decreased from 6.2% in June to 5.9% in July. Less savings by consumers might indicate more confidence in the economy.
This data also provides a read on consumer level price inflation: the PCE price index. The price index for PCE increased 0.2% helping to ease concerns of deflation. At this point we need to see price levels move a bit higher because deflation doesn't bode well for any asset, especially a house! The core PCE price index, excluding food and energy, increased 0.1% after no change in the prior month. Year over year, headline PCE rose from 1.4% in June to 1.5% in July while the core rate held steady at 1.4%.
The week began with mortgage rates continuing to inch higher, however the tide turned just before lunch when Treasuries started to rally and mortgage-backed securities prices followed. This led lenders to reprice for the better. After all was said and done, the rise in consumer borrowing costs that occurred on Friday was essentially erased today.
The best 30 year conventional mortgage rates remain in the 4.25% to 4.50% range for well qualified consumers. 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. You may elect to pay less in costs but you will have to accept a higher interest rate.
I continue to see very little benefit in floating. Mortgage rates appear to have bottomed out for the time being and the prospects for them going lower are still small. If you want to gamble on lower rates, keep an eye on stocks. If stocks rally, rates will be pressured higher. If stocks sell off, rates will either hold steady or move lower. But again, there really isn’t much room for mortgage rates to drop. The reward is definitely not worth the risk.