So far this morning, mortgage backed securities are unchanged from where they closed on Friday. For new readers, mortgage rates are based on the buying and selling of mortgage backed securities or mbs by investors. As mbs move higher in price, the yield they pay moves lower. As the yield moves lower, mortgage rates move lower as well. As mbs move lower in price, mortgage rates move higher so we would like to see mbs move higher in price so we can continue to enjoy low mortgage rates. We should see par interest rates from lenders anywhere from 4.75% to 5.125% for a conventional 30 year fixed rate mortgage.
Here are the upcoming economic reports for this week.
- Consumer Confidence, economists expecting a 36.0 after last months 37.7. Lower readings show that the consumer is not confident with the current economic conditions thus will be less likely to spend money which our economy needs to grow, so lower confidence generally leads to lower mortgage rates.
- Existing home sales, economists expecting 4.8million after last months 4.74m. A higher number is seen as a positive for future economic spending, thus mbs tend to move lower and rates higher with a higher reading.
- Durable orders, economists expecting a -2.3% reading after last months -2.6%. This report is a measure of new orders placed by manufacturers for equipment that is expected to last several years such as autos, large appliance, etc… If companies are increasing orders for large items that is a positive signal of future economic growth and activity which might lead to inflation and the biggest enemy to mortgage rates is inflation, so a lower then expected number is seen as a positive for lower mortgage rates.
- Jobless claims, economists expecting 625,000 first time filers after last weeks 627,000. Higher unemployment allows businesses to attract new labor without increasing pay keeping wage based inflation in check. In times of low unemployment, companies must pay new hires more money to attract them which then increases payroll costs. To make up for the higher payroll costs, companies increase the price of the goods and services they offer to the consumer which causes inflation.
- New home sales, economists expecting 329,000 after last months 331,000.
- Preliminary Gross Domestic Product(GDP), economists expecting a -5.4% after last quarters estimate of -3.8%. GDP is the broadest measure of total economic activity including every sector of the economy. Weaker then expected numbers is generally a positive for mbs and lower mortgage rates.
- Chicago PMI, economists expecting a 34.0 reading after last months 33.3. This report measures the strength of the manufacturing sector of the economy around the Chicago area. Readings above 50 indicate an expanding economy and readings below 50 indicate an economy that is contracting. Lower than expected readings is generally a positive for mbs.
- Consumer sentiment, economists expecting a 56.5 after last months 56.2. This report gives investors insight into how likely consumers are to spend money in the future. Lower reading is seen as a positive for mbs.
The biggest impacting reports will be on Thursday and Friday when we get the durable orders, GDP and Chicago PMI. Mortgage backed securities are still holding at unchanged levels from Friday. Early reports show most lenders are priced the same today as they were on Friday. If you do not have access to mbs pricing, keep an eye on treasuries and the stock market. The stock market is in negative territory, and if it can turn around and rally, it could cause mbs to sell off which could lead to worse pricing later today. Also, keep an eye on the 10 yr treasury. Current yield is 2.79 and if that can hold or move lower, mbs should follow. As stated earlier, mortgage rates follow the trading of mbs by investors; however, there is no free service that gives you access to this pricing so it is important to understand the relationship between equities and fixed income debt markets. Keep in mind, I speak in real general terms since this blog is intended for the average consumer who only thinks about mortgages every 5 years or so. As an investor, you can either by equities or debts. Equities are stocks you buy in companies and debts are treasuries and mortgage backed securities. Both of these markets compete for the same investor dollar, so usually when the equity market is up, the debt market is down(we want the debt market to move higher which lowers mortgage rates). This is due to there is only so much money to be invested, and this is usually referred to as the flow of money. When the economy is bad, investors don’t want to own stocks because the value of them will most likely move lower. Think about it, if consumers are not confident with our economy, then they are less likely to spend money. So what happens to companies profits when people are not spending? They go down which causes the value of the stock to move lower; thus in bad economic times investors sell equities(stocks) and move their money to fixed income(debt markets). That is why bad news for the economy is generally good news for lower mortgage rates. If we start to see a big move in one direction or the other, I will get back to you. Until then, watch the stock market and treasuries for a sense of how well mbs are doing today.