Monday 6/30/08 ..... A wild week gives way to slight improvements

By: Matthew Graham •
A lot could have gone wrong last week.  Several variables indicated that mortgage rates would be worsening by the end of the week.  Also, we had the Federal Reserve's announcement on Tuesday afternoon regarding the decision to keep the benchmark lending rates unchanged.  Although the financial community had more or less already planned on the rate staying unchanged,  the actual statement that accompanies the decision is the item of importance , especially when rates are not deviating from expectations.  All in all, there was a lot of potential for things to go wrong last week, but they did not.  And so we are found this week with improved mortgage pricing, albeit slightly.
 
The Numbers:
 

We're approaching territory again where the best qualified borrowers with  certain scenarios may begin to see rates around 6 percent again which we have not seen for several weeks.

 See Rates from Lenders in Your Area

The News:

  • A report that tracks the business conditions in the Chicago area rose slightly, but remains at levels which indicate slight economic contraction.
    • As we often discuss, economic weakness is generally good for mortgage rates whereas positive economic outlook is usually bad.  This Chicago report was a bit of mixed blessing.  One one hand, at least it was showing contraction, but on the other hand, it was the highest it's been since January and additionally it was slightly higher than analysts had predicted
    • All in all, we did not see a big impact from this report on mortgage backed securities.
  • Stocks and Oil
    • As you may have heard, we briefly touched a point on the Dow where we had fallen 20% from a closing high, otherwise known as a bear market.  This is a little bit of an odd thing to grasp, but basically it means that, regardless of the time frame, if the Dow loses 20% from a high point without creating a new high point (which would reset the definition anyway), we are in a bear market.
Conclusion:
Stock weakness was a key factor that buoyed bond prices last week, helping mortgage rates to stay in check.  Oil is widely blamed as the culprit for stock prices, and although nothing in the stock market is ever really that simple, there's not doubt that oil is playing a large role.  But even as stocks march upwards in price this morning, bonds have failed to turn negative on the day.  This is a good sign for mortgage rates for the rest of the day as long as stocks can stay under 100 pts on the Dow.  Even if stocks rise above that level, we may not see a mortgage rate reprice, and if we do, it will likely be the minimum .125% change to the cost at first.

Lock or Float:

Now, despite the fact that MBS have put on a much more impressive showing than anyone expected, we can faintly hear the dulcet tones of "The Gambler" in the background.  I'm not saying that we indeed should be "folding 'em" now, but certainly that the assertion should be borne in mind through July.  The peak summer months are historically the very worst for bonds.  With stocks at the years lowest levels, inflation a concern, and bonds recently having a winning streak, the stage is certainly set for some big potential losses. 

However, with many analysts predicting further declines for the Dow, relatively low bond prices compared to the Dow given the trends of the last 6 months, and what should emerge as improving loan quality for investors, the stage--one might argue--is almost equally set for stability.  So, as is almost always the case, no one is going to come right out and tell us when to hold 'em or fold 'em in the upcoming weeks.  So although we can not know when the "when" will occur in the future, it is our task to be able to identify the "when" when it comes.  If you are closing in the short term, your "when" may be very soon.  Nonetheless, keep an eye on the 5 year treasury note for a preliminary indication of changes in the mortgage rates.  If you see the yield moving up, check back with the professional version of this blog to see if there is reason to believe that mortgages will worsen as well.