Rate Sheet Rebate Reduced After Jobs Data Preview

Mortgage rates made modest improvements yesterday thanks to a rally in benchmark Treasuries and mortgage backed securities. The extension of the Monday afternoon rates rally yesterday allowed most lenders to reprice for the better which pushed mortgage borrowing costs lower. Early on today it appeared that mortgage rates would continue to benefit from more rallying in the rates market, but that didn't last long. Since starting the session with gains, MBS prices have fallen rapidly which led to a few lenders repricing for the worse. Two steps forward, two steps back!

We had several pieces of economic data released this morning. 

First, the Mortgage Bankers’ Association released their applications index. The MBA survey covers over 50 percent of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts.  The data gives economists a look into consumer demand for mortgage loans.  A rising trend of mortgage applications indicates an increase in home buying interest, a positive for the housing industry and economy as a whole.  Furthermore, in a low mortgage rate environment, such a trend implies consumers are seeking out lower monthly payments which can result in increased disposable income and therefore more money to spend on discretionary items or to pay down other debt.

Today’s release reported on data from the previous two weeks because the MBA was out on vacation for the holidays.  The report showed purchase applications dropping 4.0% in the December 25 week and then rebounding 3.6% last week.   Refinance activity plunged 30.5% two weeks ago and fell 1.6% last week.   It is not surprising to see large declines in applications during the Christmas week as most people have other concerns during the holidays.  READ MORE

The next set of data was more influential than the MBA's release: the ADP private jobs report.  This data is an unofficial preview of Friday’s Non-Farm Payrolls, it is always released on the Wednesday prior to the government’s official Employment Situation report.   Historically, the ADP report has varied greatly from the official report but its accuracy has been improving lately.  The biggest difference between the two jobs reports is the ADP numbers do not take into account government hiring, only the private sector. 

The report indicated that U.S. companies cut 84,000 jobs last month slightly worse than economists expectations of only 79,000 job losses. Consensus estimates did greatly vary though, Dow Jones predicted 90,000 job losses so overall this result is "as expected".   To put this in perspective, this was the smallest decline in payrolls since March 2008.  Last month’s report was revised for the better from  169,000 payroll cuts to 145,000.

Friday’s much more influential Employment Situation report is expected to show 8,000 jobs lost in December and an uptick in the unemployment rate from 10.0% to 10.1%.

The final data print of the day was the December ISM Non-Manufacturing Index.  This is a survey of 400 firms including agriculture, mining, construction, wholesale and retail trade on how they view the strength of their business.  Readings above 50 indicate expanding or improving conditions while readings below 50 indicate contraction.  November’s report indicated that conditions contracted in the non-manufacturing sector as the index fell from above 50 in October to 48.7.   In today's release the dip below 50 corrected with a read of 50.1, this was however slightly worse than economists expectations of 50.5. 

Since this is JOBS REPORT week, I should point out that the employment component of the survey continues to improve. While improving the employment does remain under 50, so the non-manufacturing portion of the labor market is still contracting. I also highlighted the New Orders component which is a forward looking indicator of consumer demand, notice it fell it December. Lastly, as a read on inflation, the prices paid index continues to tick higher. Although these higher costs of inputs are not likely to trickle down to cash-strapped consumers, we must pay close attention to rising prices. Notice in August that index hit 63.1. This is a function of rising commodity prices in July (oil). This same issue occurred in November, so it is not a big surprise that we saw prices paid move higher. No real threat of inflation yet, but we are watching!

Here is a table outlining the data:

At 2pm eastern, the Federal Reserve released the minutes from its last FOMC meeting which was held December 15-16.  Of particular note, there appears to be a growing debate amongts Fed officials about whether or not to extend the Federal Reserve's MBS purchase program. If the Fed does not extend the program, a large portion of support would be lost in the MBS market and mortgage rates would rise. This is a good thing for the mortgage market.

Since the release of the FOMC minutes, MBS prices have improved, however they have not improved enough to warrant reprices for the better from lenders. If anything changes I will update. For now...

Reports from fellow mortgage professionals indicate lender rate sheets are worse than yesterday's.  The par 30 year conventional rate mortgage does however remain in the 4.875% to 5.125% range for well qualified consumers, but pricing has worsened a bit so your lender may charge more points to lock in your loan.  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.  If you are seeking a 15 year term, you should expect a par rate in the 4.375% to 4.625% range with similar costs. 

While mortgage rate improvements stalled out today, lender rate sheets are still considerably better than what was being offerred in late December.  If you have been floating a rate, I would advise taking advantage of these recent improvements and lock in your rate.   Although mortgage rates may move a little lower,  there is much more room for rates to rise, and many reasons to believe they will! 

I am still locking.