Mortgage Rates Teetering on Breakdown; Should the FTHB Tax Credit Be Extended?

Mortgage rates were pushed higher yesterday after benchmark Treasury yields moved higher, outside the well defined range that has kept rates relatively stable since August. New supply of Treasury debt combined with several psychological factors pressured MBS prices lower and forced lenders to reprice for the worse. Despite this move lower, we are not yet convinced this a long term move outside the range. The market is still very nervous about a stock sell off and another dip lower in the recession. This will likely keep demand for AAA rates Treasury debt high, which would foster a steady interest rate environment.

Following yesterday’s data free day, today we get a few economic reports to digest.  First out this morning was the S&P Case Shiller Home Price Index which tracks the monthly change in values of residential real estate in 20 metropolitan regions across the country.   Rising home values encourage new construction which creates jobs and more consumer spending.  Conversely, declining home values causes consumers to be more cautious about spending, instead favoring an increase in their savings rate.   Many economists believe that until home prices start to move higher, it will be extremely difficult for our economy to sustain any acceptable growth, thus data on home sales and home prices has become quite relevant to market participants. 

The data shows that home prices rose 1.2% in August from, beating economist expectations for a rise of only 0.7%.   This is the fourth month in a row of improvements in home values.  The biggest movers in August were Minneapolis up 3.2% and San Francisco up 2.8% while the biggest decliner continues to be Las Vegas with a decline of 0.3%.  On a year over year basis, Dallas(my town) posted the smallest drop at 1.2% while Las Vegas leads with a 30% decline.

The final report of the day was the Consumer Confidence Survey. The Conference Board questions 5,000 consumers on their attitudes on present economic conditions and their expectations of future conditions.   An optimistic consumer is much more likely to spend money while a pessimistic consumer is more likely to save.  Since our economy is driven by consumer spending, the stock market likes to see optimistic consumers and the fixed income market prefers more pessimistic consumers.  This data has been showing growing optimism among consumers but last month’s report fell back from the prior month’s reading as consumers became more concerned about the jobs outlook. 

Today's report indicates that consumers continue to lose confidence, the survey fell for the second month in a row and was much lower than expectations.  The jobs outlook was the main cause for a lack of confidence among consumer.

At 1pm eastern, the Department of Treasury will auction off $44billion of 2 year notes to the highest bidder.  For the auction to be deemed successful, market participants look to the demand.  Strong demand, especially from foreign accounts, is one of the many factors that have kept treasury yields and mortgage rates near historic lows despite record amounts of U.S. borrowing.   Matt and AQ will cover the auction once it is complete on the MBS Commentary blog.

Reports from fellow mortgage professionals indicate lenders rate sheets to be similar to yesterday’s.  This keeps the par 30 year conventional rate mortgage in the 4.875% to 5.125% range for well qualified consumers.  To secure a par rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including one point loan origination/discount/broker fee.  You can elect to pay less in fees and secure a higher rate which is a good option for homeowners that do not plan on keeping their home for more than 3 years. 

Following the release of the morning data, MBS have moved back into the trading range which has kept rates stable over the last few weeks.   Since we are near the bottom, I will continue to advise cautiously floating for now but be ready to lock.  If the auction today has weak demand, MBS will be pressured to move lower in price which causes rates to move higher. 

I have been writing often about the expiration of the First Time Home Buyer Tax Credit at the end of next month.  As it stands right now it is still set to expire; however, there is growing momentum on Capitol Hill for its extension.  There are two plans that are being considered.  One calls for a phased out expiration of the current credit through the end of 2010 where the tax credit gets smaller and smaller as the year progresses.  The other plan is calling for an extension through at least June of next year but also wants to increase the amount of money the homeowner can make to qualify and to extend to any home buyer and not just first time buyers.   Some people feel that the housing market will suffer another setback if the credit is allowed to expire while others say it is a bad idea to extend the credit.   To read opposing views, click here for an article on why it should be extended and here is a link on why it shouldn't be extended.

What is your opinion on the tax credit?  Should it be extended or allowed to expire? Why?