Mortgage Borrowing Costs Still on the Rise

Mortgage rates continued to rise yesterday as benchmark Treasury yields moved higher and prices of mortgage backed securities fell. MBS opened the day weaker and extended losses all the way into the close, forcing most lenders to reprice for the worse. By the end of the day, the par 30 year fixed mortgage rate had climbed to 4.875% (a couple of lenders had 4.75 but only a few). Unfortunately weakness in the rates market has carried over into today...benchmark Treasury yields are still on the rise and mortgage rates continue to creep up. To remind readers, as MBS prices move lower, lenders are forced to increase consumer borrowing costs.

While no economic data was released yesterday, a few reports hit news wires this morning.

First out this morning was the release of final third quarter Gross Domestic Product (GDP).  The initial reading indicated our economy grew 3.5, which was then revised lower to 2.8%.  The final reading, released today,  indicated our economy grew less than economists expectations at 2.2% from July through September. Included within this report is a measure of iconsumer price levels, which indicated inflationary pressures are less than first thought. 

Also out this morning was Existing Home Sales data from the National Association of Realtors.  This report totals the number of existing homes, not new construction, in which a sale closed in the prior month.  Recent reports have shown an increasing trend in home sales with last month’s report indicating  record month over month increase of 10.1% to an annualized pace of 6.10 million.  Economists surveyed prior to this report were expecting continued improvement to an annual pace of 6.25 million sales, which is a function of government stimulus and near record low mortgage rates.  Increasing home sales are a positive economic indicator and generally benefit the stock market as the purchase of a home will lead to other purchases to fill the home...which should lead to higher corporate revenues.  Additionally, consumers would have to feel pretty good about their own personal financial position and the overall economy to take the large step of buying a new home. 

The release indicated that Existing Home Sales increased much more than expected to an annualized pace of 6.54 million. This is a 7.4% month over month increase, much better than the 2.9% economists had forecast.  Following the data, MBS prices have continued to move lower.

Tomorrow  will be a busy day for data.  First we get Personal Income and Outlays which shows the month over month change in the amount of money Americans are earning and spending.  Included within this data is the Fed’s favorite gauge of inflation with the Personal Consumption Expenditure.    Both personal income and spending is expected to post monthly gains of 0.5% and 0.6% respectively, while the core PCE is expected to post a modest 0.1% increase.   Since the bond market prefers slower growth which keeps inflation in check, MBS generally benefit when income and spending are lower than expected.  Additionally, since inflation is the biggest enemy of mortgage rates, higher than expected PCE will pressure rates higher.   Later in the morning we get another reading on how the consumer feels with Consumer Sentiment which is expected to post no gain from the prior month.  The final report for the day gives us another peek at the housing sector with New Home Sales.  This report totals the number of newly constructed homes with a committed sale during the prior month.   Expectations call for a modest increase from last month’s 430,000 to an annual rate of 440,000.

Also on Wednesday, the Department of Treasury will announce the size of next week’s auction of treasuries.  They will offer up new supply of 2 year, 5 year and 7 year notes.  The added supply of debt on the market will continue to pressure bond yields higher which can negatively impacts mortgage rates. 

Reports from fellow mortgage professionals indicate lender rate sheets to be worse this morning.  The par 30 year conventional rate mortgage has risen again to the 4.875% to 5.125% range for well qualified consumers.  To secure a par interest 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 an estimated one point loan origination/discount/broker fee.

Hopefully most readers have locked in their loans at this point, for the people who haven’t, what are your thoughts? Do you feel MBS have given up much ground due to the low trading volumes and losses will be corrected once traders come back from vacation in January? If you are still floating...why are you still floating?