Daily Commentary by Larry Baer 2.29.2012

Daily Commentary by Larry Baer: The Commerce Department released their revised "guesstimate" of fourth-quarter economic growth earlier this morning.  

According to the government, the U.S. economy grew a bit faster than initially thought during the last three months of 2011 - posting a reading of 3.0% versus the 2.8% pace first reported.  

Most investors chose to discount the much hyped headline due to the fact rebuilding of inventories added a hefty 1.88% percentage points to this morning's Gross Domestic Product figure.  It is a virtual certainty that inventories will not continue to contribute to overall growth at anything like that pace for the next several quarters.  

Excluding inventories, the economy grew at a 1.1% rate, rather than the 0.8% tempo initially projected. Even so, that is a sharp step-down from the third-quarter ex. inventory growth rate of 3.2%.  

In a nutshell, the Gross Domestic Product data continues to show the economic recovery is still very feeble.  Most analysts believe it will take a sustained overall GDP growth rate of 3.0% to make noticeable headway in absorbing the unemployed and those who have given up the search for work.  Until/unless such a steady growth rate is achieved -- the support mechanism for steady to perhaps fractionally lower mortgage interest rates will remain largely in place.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey for the prior week.  For the week ending February 24^th, the composite index (a value that includes both purchase and refinance loan requests) inched down 0.3% because of a drop in refinance demand.  The refinance index declined 2.2% on a week-over-week basis, falling back to late January levels.  The drop in the composite index masked an 8.2% increase in the number of purchase applications taken.  That was a nice bounce for this component of the report after purchase demand hit its 2012 low the week before.  

The contract rate for 30-year fixed-rate conforming mortgages finished the week at 4.07%, down 2 basis-points from its week ago level, down 2 basis-points from four weeks ago, and down 94 basis-points from the year ago mark.     

FHA is increasing their mortgage insurance premiums again

HUD announced Monday that FHA is increasing their mortgage insurance premiums for FHA case numbers pulled after 4/1/2012.  

See full announcement from HUD below.

FHA Takes Additional Steps To Bolster Capitol Reserves; New premium structure will help protect FHA’s MMI fund:
HUD No.12-037
HUD Public Affairs

February 27, 2012

WASHINGTON – As part of ongoing efforts to encourage the return of private capital in the residential mortgage market and strengthen the Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund, Acting FHA Commissioner Carol Galante today announced a new premium structure for FHA-insured single family mortgage loans.  FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount.  Upfront premiums (UFMIP) will also increase by 0.75 percent. 
These premium changes will impact new loans insured by FHA beginning in April and June of 2012.  Details will soon be published in a Mortgagee Letter to FHA-approved lenders. (Please see: http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/letters/mortgagee )
“After careful analysis of the market and the health of the MMI fund, we have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market,” said Galante.  “These modest increases are one of several measures we are taking towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain a valuable option for low- to moderate-income borrowers.”
The Temporary Payroll Tax Cut Continuation Act of 2011 requires FHA to increase the annual MIP it collects by 0.10 percent.  This change is effective for case numbers assigned on or after April 1, 2012.  FHA is also exercising its statutory authority to add an additional 0.25 percent to mortgages exceeding $625,500.  This change is effective for case numbers assigned on or after June 1, 2012.
The UFMIP will be increased from 1 percent to 1.75 percent of the base loan amount.  This increase applies regardless of the amortization term or LTV ratio.  FHA will continue to permit financing of this charge into the mortgage.  This change is effective for case numbers assigned on or after April 1, 2012.
FHA estimates that the increase to the upfront premium will cost new borrowers an average of approximately $5 more per month.  These marginal increases are affordable for nearly all homebuyers who would qualify for a new mortgage loan.  Borrowers already in an FHA-insured mortgage, Home Equity Conversion Mortgage (HECM), and special loan programs outlined in FHA’s forthcoming Mortgagee Letter will not be impacted by the pricing changes announced today.
Taken together, these premium changes will enable FHA to increase revenues at a time that is critical to the ongoing stability of its Mutual Mortgage Insurance (MMI) Fund, contributing more than $1 billion to the Fund, based on current volume projections through Fiscal Year 2013.
Read the entire press release at: http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2012/HUDNo.12-037

For FHA technical support on this or any other FHA issue, please contact the FHA Resource Center at: www.hud.gov/answers   You can also get email technical support at: answers@hud.gov

Daily Commentary by Larry Baer 2.24.2012

 Daily Commentary by Larry Baer: Sales of new single-family residences fell 0.9% in January, but an upward revision to the prior months' data and a drop in the supply of properties on the market painted a picture of a housing sector beginning to show signs of finding a bottom. Demand is getting a boost as more homes become affordable.  The National Association of Realtors' measure of whether households earning the median income can buy a median-price property at current interest rates reached record levels in the last three months of 2011.

The median price for a new home rose 0.3% to $217,000 in January - the highest since October -- while the months' of supply of homes on the market fell to 5.6% -- the lowest mark since January 2006.  The actual number of new homes for sale slid to a record low of 151,000.  More than half of all the new home sales in January took place in the South where the fourth-warmest January on record probably contributed to the strong pace of sales.  The improvement is welcome - but the pace of new home sales is still within shouting distance of all-time lows - a condition that continues to be supportive of the prospects for steady if not fractionally lower mortgage interest rates.

The coming week's economic calendar will feature Wednesday's revised fourth-quarter Gross Domestic Product number and Thursday's January Personal Income and Spending data.  Both reports are expected to be mortgage interest rate neutral.  

In my judgment the performance of the stock markets over the coming week will exert a far stronger influence on the trend trajectory of mortgage interest rates than will the headlines surrounding the economic news.  As we go into the last month of the quarter -- mortgage interest rate levels will be largely determined by investors' sentiments related to domestic and global economic growth prospects.   If the majority of market participants begin to see reasons to believe growth will slow dramatically across the globe as consumer spending softens in the face of a lethargic labor market and rising energy prices - stock prices will probably begin to fall at an accelerating pace.  The "flight-to-quality" movement of capital from the riskier assets classes like stocks into the relative safe-haven of Treasury debt obligations and mortgage-backed securities is virtually certain to support mortgage interest rates very near current levels.

On the other hand, if the majority of market participants see reasons to believe economic growth here at home and internationally will continue to show improvement - capital will begin to move in ever larger quantities out of safe-haven assets like Treasury debt obligations and mortgage-backed securities into riskier but much higher yielding assets like stocks.

For what it is worth -- as I mentioned in my Long-Term Strategy recommendations above - I see the probabilities favoring a coming period of slumping stock prices (beginning in either March or April) that will support steady to perhaps fractionally lower mortgage interest rates through at least the Fourth-of-July holiday break.   I will keep you up to speed as this picture continues to develop.     

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.23.2012

Daily Commentary by Larry Baer: Initial weekly jobless claims held their ground in the latest week, counter to consensus expectations for a mild increase.  New first-time claims for government unemployment benefits were unchanged last week, holding at the lowest level since the early days of the 2007 - 2009 recession.  The last two weekly readings have been the lowest since March 2008.  The four-week moving average for new claims, a measure of labor market trends, fell 7,000 to 359,000 - also the lowest since March 2008.

Businesses are showing greater resiliency than expected and currently appear willing to hold on to more workers following the traditional holiday spike. While labor conditions are far from healthy, they are moving in the right direction across the board.  Employers are not swiftly cutting positions as during the height of the recession, but none appear to be switching gears to consistently add headcount to their ranks.  Considerable slack remains in the job market, with 23.8 million Americans either out of work of underemployed.  At this juncture, there are no job openings for nearly three out of every four unemployed.  

The good news is there was nothing in this morning's weekly initial jobless claims report to induce mortgage investors to nudge rates higher.  The bad news is while labor market conditions have improved - economic growth and the attendant improvement in job creation is still well below levels where a marked acceleration in residential sales is expected any time soon.

Uncle Sam will wrap up a three-part auction schedule today with the sale of $29 billion worth of 7-year notes.  Demand for this offering will likely be mediocre - but sufficient enough to avoid creating a noticeable impact on the current trend trajectory of mortgage interest rates.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.22.2012

Daily Commentary by Larry Baer: The Greek government clinched a major financial bailout agreement with the European Union and International Monetary fund yesterday.  The financing facility will ensure the Greeks avoid a messy sovereign debt default - at least for the near term.  The majority of global investors still harbor grave concerns over the public and political will of the Greeks to implement the tough reforms and cost-cutting measures required by the terms of the freshly signed bailout agreement.  This on-going story is almost certain to influence the trend trajectory of mortgage interest rates here at home for several more months.    

The National Association of Realtors reported earlier this morning existing home sales surged to an 18-month high in January and the supply of properties on the market was the lowest in almost seven years.  The initial euphoric response headline was sharply muted when the Realtors' statisticians sharply downwardly revised the prior month's report - with sales in December actually falling 0.5% from November, instead of jumping 5.0% higher as initially reported.  Whoops.  

Distressed properties, foreclosures and short sales, which typically occur at deep discounts, accounted for 35% of overall sales, up from 32% in December.  Investors accounted for 23% of purchases, while first-time buyers were 33% of the market. A third of pending existing home sales contracts were cancelled during the month.

As they do every Wednesday, the Mortgage Bankers of America have released their Mortgage Application Survey figures for the week ended February 17^th.  The composite index, a value representing both purchase and refinance applications, declined 4.5% over the past week.  The index is down 1.2% over the past four weeks but is still up 69.0% from a year ago.  

Purchase applications were down 2.9% from the prior week, down 12.4% from four weeks ago, and down 9.3% from the year ago mark.  Refinance applications dropped 4.8% for the week, and were down 1.3% from four weeks ago but up 111% from this time one year ago.

Refinance requests represented 8 out of every 10 loan applications taken during the week and currently compose 79% of the national pipeline.  

The contract rate for 30-year fixed-rate conforming mortgages finished at 4.09%, up 1 basis-point for the week, down 2 basis-points from four weeks ago and down 98 basis-points from year ago levels.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME

Daily Commentary by Larry Baer 2.17.2012

Daily Commentary by Larry Baer: Mortgage investors continue to deal with headlines from Greece and today those headlines are shaded towards the possibility that the long awaited financial rescue agreement will be in place before the end of the day on Monday.   Investors will likely be hesitant to move mortgage interest rates lower as the long weekend approaches and negotiations over Greece's debt restructuring are still unresolved.  The risk of a Greek sovereign debt default is not yet off of the table.  

Here at home the Labor Department reported a 0.9% spike in gasoline prices in January pushed the overall consumer price index up to its fastest clip in four months.  The 0.2% increase in the headline Consumer Price Index was just below most economists' projections calling for a 0.3% surge in the pace of inflation at the consumer level.  The so called "core rate", a value that strips out the more volatile food and energy components, rose 0.2% -- generally in-line with expectations.  Most mortgage investors were quick to note the rate of core price increases over the 12-month period ending in January unexpectedly climb to 2.3%.  

Here's the "so what" factor buried within this pile of statistical mumbo-jumbo - the increase in the 12-month core reading, which is viewed by most investors as a barometer of inflation trends, is starting to suggest the underlying pace of inflation pressure may not be as benign as previously thought - a condition that is almost certain to make investors think twice before considering a move to nudge mortgage interest rates noticeably lower from current levels.

Looking ahead to the coming holiday shortened trading week Uncle Sam will be in the credit markets from Tuesday through Thursday conducting auctions to sell a total of $99 billion worth of debt in the form of 2-, 5- and 7-year notes.  This week's sell-off in the Treasury market has probably pushed the price of these three securities down to levels that will likely prove attractive to the global investment community.  If so, well bid auctions will tend to be supportive of steady mortgage interest rates.

In terms of macro-economic data -- mortgage investors will get a look at the condition of the single-family housing sector when the National Association of Realtors releases their January Existing Home Sales figures on Wednesday. On Friday the government will release last month's New Home Sales figures.  Both reports are expected to show demand in the housing sector remains soft - a condition that will not likely influence the trend trajectory of mortgage interest rates one way or the other.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME