Daily Commentary by Larry Baer 6.29.2012

 Daily Commentary by Larry Baer:  Virtually all of the modest upward pressure on mortgage interest rates this morning has been created by overnight news that Euro-zone leaders agreed to bend their aid rules to shore up the banks and bring down the borrowing costs of financially crippled members like Italy and Spain.  

The immediate "knee-jerk" reaction by some credit market participants was to reverse some of their outstanding "flight-to-quality" positions by selling Treasury debt obligations and agency eligible mortgage-backed securities in the mistaken belief (in my opinion) that today's agreement is a sign the financial leadership in the euro-zone is adopting a more flexible approach to solving its two-year old debt crisis.  

In my judgment, today's agreement represents nothing but one more poorly disguised attempt to buy extra time for the underlying fiscal repair efforts together with structural reforms to show results.  As I write, the details of the agreement have not been fully disclosed to the public - and the devil is always in the details.  If, as in the past 20 summits since the crisis erupted in early 2010, the structure of today's strategy is deemed by credit market participants to have too many holes in it to have any lasting effectiveness - the flow of global capital will quickly return to the relative safe haven of U.S. dollar denominated assets like Treasury debt obligations and agency eligible mortgage-backed securities.  If so, the foundation for generally steady mortgage interest rates here at home will remain firmly in place.    

In other news of the day -- the Bureau of Economic Analysis reported this morning consumer spending slipped 0.1% last month - the first decline in this measure in 11 months.  The decline in spending was almost completely related to goods while service spending growth remained healthy.  The decline in spending was a direct consequence of continued weak income growth -- which managed to muster an anemic 0.2% gain in May.  Inflation pressures at the consumer level remain very benign - the "core" (excluding volatile food and energy prices) rate of the personal consumption expenditure index rose a barely perceptible 0.1% during the reporting period.  The numbers fell within shouting distance of market expectations rendering the whole thing of little, to no consequence with respect to interest rate movement in today's mortgage market trading action.

Looking ahead to the coming holiday shortened week - Monday's June Institute of Supply Management Manufacturing Index, Tuesday's May Factory Orders figures, Thursday's weekly jobless claims number and June ISM Service Sector Index will all be sharply overshadowed by the release of the June Nonfarm Payroll data on Friday morning.  Your current rate sheets almost fully reflect mortgage investors' expectation that the headline June Nonfarm Payroll figure will post a puny 90,000 net new job gain number.  The national jobless rate is expected to remain unchanged at 8.2%.  Only in the highly unlikely event June Nonfarm Payrolls were to exceed 110,000 and/or the national jobless rate posted a reading of 8.1% or less will mortgage investors likely respond by pushing interest rates notably higher.

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

Daily Commentary by Larry Baer 6.28.2012

Daily Commentary by Larry Baer:  Uncle Sam will be in the credit markets looking to auction off $29 billion of 7-year notes today.  The auction will conclude at 1:00 p.m. ET.   Softer-than-expected demand for Tuesday's 2-year note offering and yesterday's 5-year note tender may cause investors to bid less aggressively at today's auction.  If so, look for this event to put some slight upward pressure on mortgage interest rates in the second-half of the trading day.

As you are probably aware, the Supreme Court issued a ruling earlier today upholding a key component of the Affordable Care Act (more informally know as "ObamaCare") deeming it within Congressional powers to require every American to pay a healthcare "tax."  The decision was a surprise of sorts, and as I write, mortgage investors are still collectively scratching their heads as they try to determine what, if any, the longer-term impact of the decision will have on the credit markets.

The modest rally in the mortgage market so far today is almost exclusively driven by a rather weak "flight-to-quality" shift of capital out of the stock markets and into the safe-haven of Treasury debt obligations and agency eligible mortgage-backed securities.

In other news of the day -- the Commerce Department confirmed the economy grew at a 1.9% pace during the first-three months of the year, but the mix of growth was not encouraging for the current quarter.  A separate report showed the number of Americans filing new claims for jobless benefits fell 6,000 last week.  Jobless claims have barely moved since April and the lack of improvement suggests the labor market has yet to find any meaningful traction.  Mortgage investors took a passing glance at today's collective body of macro-economic data -- and gave the whole thing nothing but a disinterested yawn.

I continue to believe trading activity in the stock markets will likely be the strongest single determinant of mortgage interest rate direction over the course of the remaining three business days.  Lower stock prices will tend to support steady to lower mortgage interest rates while higher stock prices will probably drag mortgage interest rates fractionally higher.  

I know I may sound like a broken record here - but my models are currently indicating the stock markets may be poised to begin a short-lived but rather powerful counter-trend rally, probably not later than today or tomorrow.  (I will consider this forecast invalid should the Dow close meaningfully below its June 26^th low of 12,452 this week).  It is unlikely a rally in the stock markets, should it actually develop, will prove strong enough to meaningfully eclipse the markets recent highs (12,898 for the Dow and 4459 for the Nasdaq) - but any noticeable improvement in the equities markets will probably make it difficult, if not impossible, for mortgage interest rates to move notably lower in the near-term.

  

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

Housing Bottom 'May Be a Ways Off Yet'

Housing Bottom "May Be a Ways Off Yet".

By Evan Nemeroff

JUN 22, 2012 9:27am ET

National Mortgage News

The president and CEO of RadarLogic said at the National Mortgage News Buying and Selling Distressed Mortgage Portfolios Conference in New York that the oversupply of homes currently on the market will prevent sustained home price gains for an extended period of time, possibly for at least the next 18 months.

The key drivers that lead the housing industry are supply and demand. Normal supply usually comes from new construction and household turnover, Feder said, but that is not currently happening in the marketplace.

In May, the supply of inventory for existing home sales (2.54 million) and new home construction (146,000 units) was six months, Feder said. However, he added that if seriously delinquent homes, which was 3.7 million through May and the shadow inventory of about 4 million properties, were accounted into this total, there would be 27 months of inventory.

“Shadow inventory is overwhelming and will continue to be a weight on the market,” Feder said. “Looking at the market going forward, supply will overcome demand for years to come. The activity we continue to see is coming more and more from distressed properties which will lead the industry until the inventory situation is addressed.”

Excess supply, including homes that are currently for sale and homes that will be put up for sale when prices increase, will prevent sustained home price appreciation, the New York-based analytic provider said. As buyers absorb the supply of homes for sale in a given market and prices start to firm as a result, homeowners who are eager to sell but have been unable or unwilling to do so at prior price levels will put their homes on the market. Supply will therefore increase and home price appreciation will stop, leading to more homes on the market than the current demand and eventually a decrease in home prices.

From June 2000 to June 2007, RadarLogic determined that home prices per square foot went up 106%. However, from June 2007 to January 2012, values fell by 41%.

“These are the prices that people are paying for houses that are bank-owned, Fannie Mae- or Freddie Mac-owned properties, and does not include short sales,” Feder said during his presentation at the conference. “This is a massively declining price and a massive discount.”

Sale transactions followed similar patterns to home prices. From 2000 to 2005, properties sold increased by 31%, but during the housing bust time period (2005 to 2008), transactions decreased 62%. Over the last four years, however, volume sales have gone up by 18%, Feder said.

But Feder said these figures don’t tell the “real” story because the main component that led to the rise in sale transactions was distressed properties. According to Feder, motivated transactions increased 333% from 2007 through 2011, while nonmotivated transactions were down 20% during this same time period.

Investors purchased only 5% of the distressed properties on the market in 2004, but Feder said that number has grown to be about a third of the overall activity happening today.

RadarLogic determined that there is a 35% price discount between distressed motivated sales price per square foot and all other composite sale properties.

“The growth we’re seeing in the housing market is being fueled by the sale of distressed real estate properties. The nondistressed marketplace continues to plummet,” Feder added. “The impact this will have on the industry going forward is to at-best stagnate and we will more likely begin to migrate toward that motivated segment. Our concern is that if you get an extreme shock to the housing market, like a Spanish debt crisis, it’s this motivated price and motivated buyers that are going to become the market and these prices will converge and housing will take a massive dip.”

Daily Commentary by Larry Baer 6.27.2012

Daily Commentary by Larry Baer:  The trend trajectory of mortgage interest rates here in the states remains firmly "joined-at-the-hip" with the rise and fall of "flight-to-quality" flows of capital from the global credit markets.  Currently those capital flows are rising which is contributing strong foundational support to the prospects for steady to perhaps fractionally lower mortgage interest rates from your investors.

Uncle Sam will be in the credit markets looking to auction off $35 billion of 5-year notes today.  The auction will conclude at 1:00 p.m. ET.   Softer-than-expected demand for yesterday's 2-year note offering may cause investors to bid less aggressively for today's offering.  If so, look for this event to put some slight upward pressure on mortgage interest rates in the second-half of the trading day.

Demand for long-lasting U.S. manufactured goods designed to have a useful life of three years or more (think everything from vacuum sweepers to hydro-electric turbine engines) posted a stronger than expected gain of 1.1% in May - up noticeably from April's 0.2% decline.  Transportation orders, particularly aircraft and automobiles, made up the lion's share of the surge.  The "ex. transportation" level of demand posted a much more modest 0.4% improvement last month.  Though fundamentals in the U.S. still support mediocre demand -- most investors believe eroding conditions in Europe, anemic domestic job growth, and a slump in Chinese economic activity will soon take its toll on domestic economic activity - a view very supportive of the prospects for steady to perhaps fractionally lower mortgage interest rates - at least in the near-term.

The Mortgage Bankers of America have released their Mortgage Application survey for the week ended June 22^nd.  The composite index, representing both purchase and refinance demand, fell 7.1% during the survey period - pulled down by an 8.3% decline in refinance requests.  The number of purchase loan requests declined by a more modest 1.4%.

Refinance applications accounted for 79.5% of all applications and 77.4% of the prospective loan volume.  

The contract rate for 30-year fixed-rate conforming mortgages finished at 3.885%, up 1 basis-point from its week-ago level, down 3 basis-points from four weeks ago, and down 71 basis-points from the year ago mark.  

Trading activity in the stock markets will likely be the strongest single determinant of mortgage interest rate direction over the course of the remaining three business days.  Lower stock prices will tend to support steady to lower mortgage interest rates while higher stock prices will probably drag mortgage interest rates fractionally higher.  

My models are currently indicating the stock markets may be poised to begin a short-lived but rather powerful counter-trend rally, probably not later than Thursday or Friday.  It is unlikely a rally in the stock markets, should it actually develop, will prove strong enough to meaningfully eclipse the markets recent highs (12,898 for the Dow and 4459 for the Nasdaq) - but any noticeable improvement in the equities markets will probably make it difficult, if not impossible, for mortgage interest rates to move notably lower in the near-term.

  

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

Fannie Mae Expects Low Rates to hold through 2014

by Jann Swanson

From Mortgage News Daily  Jun 19 2012, 12:56PM 

 

Thanks to problems in Europe and the slowing of both the US and Chinese economies, consumer attitudes have plateaued after several months of improvement early in the year.  Fannie Mae's Economic Forecast for June, released Tuesday, said that the lull in employment gains is particularly troubling and while the probability of a renewed recession has not risen, the risks to growth have shifted to the side of slower growth.

Prospects for economic growth have been revised down to 1.9 percent annualized from an earlier estimate of 2.2 percent as a result of less inventory buildup and smaller consumer and government spending.  Lower inventories, however, will be positive going forward as they will not present a drag on growth.

Fannie Mae's economists see a brightening housing picture saying that after the record lows in single family home sales and housing starts last year the housing sector appeared to be turning the corner in the first quarter; the slow pace of new construction and delays in foreclosures have combined to bring about a more balanced housing market.  Indicators showed some loss of momentum late in the quarter, possibly because unseasonably warm weather pulled some activity forward but April data showed improvement in sales and starts so the housing recovery seems to be back on track.

Despite positive news on home prices, with many measures showing prices firming and distressed sales shares declining, Fannie Mae projects further declines in prices through the end of the year.

Lower mortgage rates have boosted interest in refinancing, with mortgage applications for refinancing rising to the highest level since February-although activity is still below the levels seen during the fall of 2010.  One goal of refinancing programs has been to boost economic activity but household desire to deleverage and the inability to extract equity from underwater homes has somewhat limited the stimulative effects of refinancing although it has strengthened household finances longer term.

The multi-family construction sector has improved faster than the single-family segment, with year-to-date building activity running more than 40 percent ahead of last year's activity. The sector should continue to perform well this year, as fundamentals continue to improve, with rising rents and net absorption far outpacing completions.

The continued flight to quality prompted by the European situation has kept interest rates low and Fannie Mae expects them to remain low and a support to the housing industry through the year.

Fannie Mae says they expect Operation Twist to be completed at the end of June as planned and that the target Fed funds rate will remain unchanged until at least late 2014.  While additional easing in on the table it will likely require significant deterioration in the economy before it is implemented and the company does not expect an asset purchase program.

Daily Commentary by Larry Baer 6.26.2012

Daily Commentary by Larry Baer:  The trend trajectory of mortgage interest rates here in the states remains firmly "joined-at-the-hip" with the rise and fall of "flight-to-quality" flows of capital from the global credit markets.  Currently those capital flows are rising which is contributing strong foundational support to the prospects for steady to perhaps fractionally lower mortgage interest rates from your investors.

Uncle Sam will be in the credit markets looking to borrow $99 billion over the course of a three-day period stretching from today through Thursday.  The Treasury Department will auction off $35 billion of 2-year notes this afternoon at 1:00 p.m. ET, $35 billion of 5-year notes on Wednesday and they will wrap-up this week's borrowing spree with the sale of $29 billion of 7-year notes on Thursday.  

Also on tap this week will be the release of the May Durable Goods Orders data on Wednesday followed by the weekly jobless stats and the final revision of the Q1 Gross Domestic Product figure on Thursday.  The release of the May Personal Income and Spending data will round out the macro-economic news for the week on Friday.  

Trading activity in the stock markets will likely be the strongest single determinant of mortgage interest rate direction over the course of the remaining four business days.  Lower stock prices will tend to support steady to lower mortgage interest rates while higher stock prices will probably drag mortgage interest rates fractionally higher.  

My models are currently indicating the stock markets may be poised to begin a short-lived but rather powerful counter-trend rally, probably not later than Thursday or Friday.  It is unlikely a rally in the stock markets, should it actually develop, will prove strong enough to meaningfully eclipse the markets recent highs (12,898 for the Dow and 4459 for the Nasdaq) - but any noticeable improvement in the equities markets will probably make it difficult, if not impossible, for mortgage interest rates to move notably lower in the near-term.

  

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

Daily Commentary by Larry Baer 6.25.2012

Daily Commentary by Larry Baer:  The mortgage market is once again the beneficiary of global investors' skepticism will respect to European financial leaders' ability to make meaningful progress in solving the regions debilitating debt crisis.  Hopes are fading that a meeting of finance ministers, scheduled for Thursday and Friday, will produce any substantive measures to tackle the looming financial disaster for several of the members of the single-currency union.        

The trend trajectory of mortgage interest rates here in the states remains firmly "joined-at-the-hip" with the rise and fall of "flight-to-quality" flows of capital from the global credit markets.  Currently those capital flows are rising which is contributing strong foundational support to the prospects for steady to perhaps fractionally lower mortgage interest rates from your investors.

Speaking of investors -- the majority of them shrugged off news from the Commerce Department this morning indicating new-home sales were higher by a strong 7.6% in May.  Historically low mortgage interest rates and a 0.6% drop in the median new-home sales price were cited as the primary driver behind the improved May new-home sale pace.

Looking ahead to the balance of the week -- Uncle Sam will be in the credit markets looking to borrow $99 billion over the course of a three-day period stretching from Tuesday through Thursday.  The Treasury Department will sell $35 billion of 2-year notes on Tuesday, $35 billion of 5-year notes on Wednesday and will wrap-up the coming week's borrowing spree with the sale of $29 billion of 7-year notes on Thursday.  

Also on tap this week will be the release of the May Durable Goods Orders data on Wednesday, and the weekly jobless stats and the final revision of the Q1 Gross Domestic Product figure on Thursday.  The release of the May Personal Income and Spending data will round out the macro-economic news for the week on Friday.  

Trading activity in the stock markets will likely be the strongest single determinant of mortgage interest rate direction over the course of the week.  Lower stock prices will tend to support steady to lower mortgage interest rates while higher stock prices will probably drag mortgage interest rates higher.  

My models are currently indicating the stock markets may be poised to begin a short but rather powerful short-term counter-trend rally, probably not later than Thursday or Friday.  It is unlikely a rally in the stock markets, should it actually develop, will prove strong enough to meaningfully eclipse the markets recent highs (12,898 for the Dow and 4459 for the Nasdaq) - but any noticeable improvement in the equities markets will make it difficult, if not impossible, for mortgage interest rates to move notably lower in the near-term.

  

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