How Did the FOMC Meeting Affect Mortgage Rates?

After moving higher following a worse than anticipated read on Retail Sales last Friday, mortgage rates made modest improvements yesterday.  Activity in the fixed income marketplace was pretty boring though. Mortgage backed securities traded in an extremely tight price range as market participants sat on the sidelines in anticipation of the release of the FOMC Statement today.  

Before talking about the Federal Reserve, we have a few economic indicators to recap. First out this morning Housing Starts and Building Permits.

Housing Starts data estimates how much new residential real estate construction occurred in the previous month. New construction means digging has begun. Adding rooms or renovating old ones does not count, the builder must be constructing a new home (can be on old foundation if re-building). Although the report offers up single family housing, 2-4 unit housing, and 5 unit and above housing data...single family housing is by far the most important as it accounts for the majority of total home building.  Building Permits data provides an estimate on the number of homes planned on being built. The number of permits issued gauges how much construction activity we can expect to take place in the future.  This data is a part of Conference Board's Index of Leading Economic Indicators.

Today’s release, which reported on February data, indicated both Housing Starts and Building Permits took a step back from January.  

Housing Starts were down 5.9% to 575,000 annual units, this was better than consensus expectations for a read of 570,000. January was revised for the better, from 591,000 annualized units to 611,000. That's a big revision for the better.  Building Permits also came in better than expected at an annualized pace of 612,000 vs forecasts for a read of 610,000.  

The 5.9% decline in housing starts was overlooked by market watchers because economists blamed the weakness on horrible winter weather in February. For more on this report, check out AQ’s morning commentary.

We also got a reading on inflation with the release of Import/Export prices.   This report is not as important as the Producer Price Index and the Consumer Price Index, which come out tomorrow and Thursday, respectively.  Today’s report showed prices of items we export fell 0.5% last month while prices of items we import fell more than expected by 0.3%. This is the first month over month decline in import prices in 7 months.  Economists expected only a 0.2% decline.   This follows last month’s report which indicated export prices rose a revised 0.7% and import prices rose a revised 1.3%, fueled by the increase in the price of petroleum products.   We have another report validating the Fed’s position that inflation is not a concern today. 

The Federal Open Market Committee (FOMC) met for a one day meeting today. Usually they meet for two. At 2:15, the FOMC released their statement on monetary policy. The statement was very similar to the FOMC statement released after the January meeting. They reiterated the need for low rates for an "extended time" and that inflation is not a concern today.  There were two changes made that relate to housing. First, the verbiage referring to the MBS Purchase Program, which is scheduled to run out of funding at the end of March, added what may be a door to extend the program in some capacity.  Additionally, the Fed inserted a few words that imply they are concerned about the health of housing, stating: "Housing starts have been flat at depressed levels". This adds some hope that the Fed may need to add funds to the MBS Purchase Program if mortgage rates move higher following their withdrawal at the end of March. Read the story HERE.

HOW DID MORTGAGE RATES REACT TO THE FOMC STATEMENT???

They moved a few basis points lower!

Leading up to and following the release of the statement, both benchmark Treasury yields and MBS prices improved, with much of the gains after the FOMC statement was released. This led to most lenders repricing for the better.  Reports from fellow mortgage professionals indicate lender rate sheets to be better than yesterday.  While the par 30 year conventional mortgage rate does remain in the 4.75% to 5.00% range for well qualified consumers, more lenders are now offering these rates.  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. 

Today’s Fed Statement has helped lower consumer borrowing costs a few basis points.  While there is room for benchmark Treasury yields to improve further, the same story cannot be told for mortgage rates. I still feel there is much more to lose than to gain as lenders have proven unwilling to drop mortgage rates below 4.75%. If you are being quoted these best rates, I would lock, especially if you are within 30 days of closing.  If you are not, I am comfortable floating overnight to see if the recent rally in rates can extend.