The week ahead is full of economic reports which have historically moved the markets. We are also supposed to get the details of President Obama’s Homeowner Affordability and Stability Plan which is going to outline some of the guidelines for how the government is going to stabilize the housing market and help homeowners refinance to a more affordable payment. The details of the plan are supposed to be released on Wednesday and I will post the details once we receive them.
Onto the economic reports:
- Personal Income, which measures the change in income from month to month. Economists where expecting a -.2% drop after last months -.2% drop; however the number came in with a positive month over month increase of .4%. Usually higher income leads to higher consumer spending which is a positive for the economy, but there was really no reaction on the news in the mbs market.
- Personal Spending, which measures the change in consumer spending from month to month. Economists where expecting a .3% increase but the number came in stronger at a month over month increase of .6%.
- ISM Manufacturing Index, which is a survey of more than 300 manufacturing firms that gives investors insight into the strength of the manufacturing segment of our economy. Economists are expecting a 34.0 reading after last months 35.6. Readings above 50 indicate an expanding economy and readings below 50 indicate a contracting economy. MBS tend to move higher(lower rates) when the reading is worse than expected.
- Construction Spending, which measures the amount of new construction activity on residential and non residential projects. Economists are expecting a -1.5% drop after last months -1.4% decline. With a glut of existing homes already on the market, I would like to see this number in the negative.
- Pending Home Sales which measures housing activity, specifically existing home pending sales. A pending sale is one in which a contract has been signed but the loan has not closed. With a glut of existing homes available for sale, I would like to see this number come in better than expected. Economists are expecting an 85.1 reading after last months 87.7.
- ISM Non-Manufacturing Index, which gives investors insight into the strength of our non-manufacturing segment of our economy. Economists are expecting a 41.0 reading after last months 42.9. Readings below 50 indicate a contracting economy and readings above 50 indicate an expanding economy. MBS tend to rally with a worse than expected reading.
- Jobless Claims, economists expecting 675,000 first time claims to have been filed last week after the prior weeks 667,000 claims. Higher unemployment allows companies to hire new employees without increasing pay which keeps wage based inflation in check. MBS tend to rally with a weaker number.
- Productivity which is defined as the ratio of output to input or how efficient labor is at producing goods and services. Higher productivity allows companies to produce more goods and services with the same amount of labor which keeps wage based inflation in check. If productivity is high, companies do not need to hire more people to produce more goods which keeps labor costs down and inflation in check. Economists are expecting a 1.6% increase after last months 3.2% increase. Since inflation is the biggest enemy to mortgage rates, a higher than expected number is seen as a positive for mbs.
- Factory Orders, economists are expecting a -2.1% drop in orders after last months -3.9% drop. Factory orders represent the level of new orders for both durable and non durable goods ordered by factories. MBS tend to rally with a lower reading since higher factory orders is a sign of companies expecting future spending and growth.
- Unemployment Rate, economists expecting an increase from last months 7.6% to 7.9%.
- Nonfarm Payrolls, which measures the amount of jobs created or lost from the prior month. Economists are expecting a loss of -615,000 jobs after the previous month’s loss of -598,000. Generally speaking a higher loss is seen as a positive for mbs and other fixed income. However, if consumers are not working they will not be able to make a mortgage payment, so I would like to see this number come in close to expectations. There is a fine line between worse than expected numbers and horrible for everyone numbers meaning, mbs tend to rally with higher job loss but much higher than expected numbers is bad for everyone.
So far this morning, mortgage backed securities are up slightly on the day. We have regained the minimal loss from Friday and are slightly higher by 1 tick. We should see par 30 year conventional mortgages anywhere from 4.875% to 5.125% depending on the lender. When I quote par rates, I make several assumptions. First, I assume you are in Texas and in Texas we do get slightly better pricing than other states. Next, I assume your credit score is over 740. If your credit score is under 740, you will have either higher fees associated with your loan or you will take a higher interest rate. This is due to the new Loan Level Price Adjustments set forth by fannie mae and Freddie mac. To see these price adjustments, < CLICK ME>. These fees where recently instituted by Fannie Mae and Freddie Mac to allow them to charge higher fees to consumers with lower credit scores. Next, I also assume your loan to value is at 80% or less and you can document you income. Lastly, to get the par rate you would be required to pay all closing costs, any LLPA fee charged and 1 point origination.
If you do not have access to live mbs pricing, you can probably keep an eye on treasuries again today for a sense of how the mbs market is doing. Currently the yield on the 10 yr treasury is down to 2.95 from its close on Friday of over 3.00. If the 10 yr yield continues to move lower, it should help mbs to move lower in yield as well. Remember, yield and price move in different directions so as treasuries or mbs move higher in price, the yield moves lower which brings mortgage rates down as well.