Mortgage Market Guide Vol. 10 Issue 17

Last Week In Review: There was a mix of good, bad, and downright ugly news. Find out how new home loans responded.

On the good side, Retail Sales in March rose by a nice 0.8%, as consumers bought all kinds of products across the board. And when stripping out autos, sales still grew. This adds to the increasing trend seen in January and February and is a good sign for our economy, as consumers don't spend when they aren't feeling optimistic about their financial situation.

"Bad news goes about in clogs, good news in stockinged feet." Welsh Proverb. And we certainly saw both good and bad news in the economic reports released last week. Here are the details...and what they mean for home loan rates.

But over in the manufacturing sector it was not as pretty a picture, as both the Empire State Manufacturing Index and the Philly Fed Index came in below expectations. This is largely being attributed to a global slowdown, and experts say that the outlook for our manufacturing remains positive…but just not accelerating at the present time. Things weren't as pretty in the housing sector either, as both Existing Home Sales and Housing Starts fell in March.

And things in the labor market were verging on ugly, as Initial Jobless Claims spiked sharply higher. The Labor Department reported 386,000 fresh Claims in the latest week, above the 375,000 that was expected...and well above the 350,000 range seen in recent weeks.

Also verging on ugly was news out of Europe. There is growing and very justified concern about Spain's ability to pay down debt, meet new budget deficit targets, and avoid a bailout or debt restructuring. The Spanish situation has prompted the G-20 (Finance Ministers and Central Bankers of the 20 largest economies) to urge the European Central Bank to do more to contain their debt crisis as it threatens global growth. And let's not forget that besides Spain, we still have France, Portugal, Ireland and Greece to deal with in future months and years.

So what does all of this mean for Bonds and home loan rates? There will likely be more safe haven trading into the relative safety of the US Dollar and US Bonds (which will benefit Mortgage Bonds, to which home loan rates are tied) as the uncertainty out of Europe escalates. And more bad economic reports here in the United States could add to this safe haven trading into our Bonds, just as more good economic news here would likely benefit Stocks at the expense of our Bonds and home loan rates.

This mix of factors will continue to impact the direction in which Bonds and home loan rates move in the weeks ahead. The takeaway is that home loan rates remain near historic lows and now continues to be a great time to purchase or refinance a home. Let me know if I can answer any questions at all for you or your clients.

Forecast For The Week: The Fed meets, plus there's news on consumer confidence, housing, the state of the economy and more.

As you can see in the chart below, the mix of news last week benefitted Bonds and home loan rates. I'll be watching closely to see what happens this week.
Chart: Fannie Mae 3.5% Mortgage Bond (Friday Apr 20, 2012)



The economic calendar this week will give the investor a broad view of the U.S. economy…but the Federal Open Market Committee (FOMC) meeting will be front and center in the minds of investors. Here's a break down of what to watch:

• Consumer Confidence will be released on Tuesday…with Consumer Sentiment set to be delivered on Friday.
• Also on Tuesday, New Home Sales for March will be released, followed by Pending Home Sales for March on Thursday.
• On Wednesday, Durable Orders - which are products that are supposed to last at least three years - will be released.
• Initial Weekly Jobless Claims will be released on Thursday. The number of new claims has been steadily rising in the past month, which is not a good sign for the labor markets. So all eyes will once again be on this report.
• On Friday, the first reading on Gross Domestic Product (GDP) for the first quarter of 2012 will be announced.

Also on Friday, we'll see the Employment Cost Index, which measures the costs of hiring and paying the American workforce. Higher costs could lead to inflation pressures, which could push Bond prices lower and home loan rates higher.

In addition to those reports, this week's FOMC meeting will be closely watched by both the Bond and Stock markets for any clues on how the U.S. economy is holding up.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart above shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.

When you see these Bond prices moving higher, it means home loan rates are improving - and when they are moving lower, home loan rates are getting worse.

To go one step further - a red "candle" means that MBS worsened during the day, while a green "candle" means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.