Mortgage Rates Give Back Gains After Steady Winning Streak
Mortgage rates yesterday ended a rally streak that brought consumer borrowing costs back down toward their best levels of 2010. Almost erasing all the losses experienced before and after the Federal Reserve exited the secondary mortgage market. After the steady recovery run seen in MBS over the last few days, it isn’t surprising to see a pull back in mortgage loan pricing.
We have a busy day of data and events to discuss.
JP Morgan Chase released their first quarter results and they blew away expectations by posting a 74 cents per share earnings and $3.3 billion in revenue. Also announced were Intel earnings. The world’s largest computer chip maker, reported their best quarter in history. This positive news helped stocks improve which generally causes benchmark Treasuries and MBS prices to suffer, but that did not occur today because there was much more important data on the schedule.
Released at the same time was the Mortgage Bankers Association Weekly 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. As a general rule, positive economic news is bad for mortgage rates.
Recent reports from the MBA have indicated homebuyer demand has been rising thanks to the soon to expire homebuyer tax credit. Refinance demand has been steadily falling as many homeowners already took advantage of record low mortgage rates last year. If you are still sitting on the fence debating refinancing, contact a mortgage professional and allow them to show you how a refinance might benefit you.
In today’s release purchase applications fell 10.5% and refinances declined 9.0%. This is unexpected as we would have thought more people would be looking to get pre-qualified to go shop for a new home before the tax credit expires at the end of this month. The MBA cites a recent increase in FHA mortgage insurance as the reason behind the decline. Starting 4/4, the upfront mortgage insurance premium was raised from 1.75% to 2.25%. For charts and more color on this report, READ THE MND STORY.
The next two reports are of much more importance to the market.
The Bureau of Labor Statistics released the Consumer Price Index at 8:30 this morning. This index measures the price change of a fixed basket of goods and services purchased by consumers, also known as inflation, the enemy of interest rates. When judging inflation, we tend to consider consumer prices to be much more important than producer price levels. During bad economic times, producers find it difficult to pass along higher prices to the end consumer which makes tracking consumer inflation reports much more important. The Fed has stated over and over that inflation is not a concern today and past releases of this report have supported that belief.
Today’s release extends the trend of no inflation. The Consumer Price Index came in right on expectations at +0.1% in March. Excluding food and energy (core CPI), consumer level prices were unchanged in March. This was slightly better than estimates which called for a 0.1% gain. Headline inflation is up 2.3% on a year over year basis while core is up 1.1%. Yet again, we have another tame inflation reading. This will allow the Federal Reserve to maintain its current accommodative interest rate policy.
Released at the same time was the Retail Sales report from the Commerce Department. This report shows the monthly change in the total receipts at retail stores. Since consumer spending accounts for a large majority of GDP, market participants track retail sales to gauge economic growth.
Last month’s report, which covered February, retail sales blew away expectations. In March, retail sales rose 1.6%. This was better than forecasts which called for a read of +1.2% and greatly improved from February's +0.5% print. This is the third month of improved retail sales and the 9th uptick in the past 12 months.
At 10am eastern, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee on the economic outlook. In the current market environment, because rates have been so dependent on the Federal Reserve's monetary policy strategy and economic outlook, mortgage rates are much more sensitive to speeches delivered by Chairman Bernanke. His words have great potential to move markets. For the most part we didn't learn anything new from his speech today though. Ben outlined the "goods" and the "bads" of our economy, reminded that inflation was well contained, and gave no hint that the Federal Reserve was considering a rate hike anytime soon. One thing appears to be certain: the economic recovery will be slow. AQ wrote a recap of Bernanke's testimony. READ MORE
At 2pm eastern, the Federal Reserve released the “Beige Book”, called that simply for the color of its cover. This data outlines economic conditions around the United States and is used as a point of reference during the FOMC meetings where our nation’s monetary policy is set. Much of the information contained within this report is already known, but market participants will still thoroughly review it to see what Fed members are seeing. The most popular headline we saw was "Economy growing at 'somewhat' faster rate. The Beige Book was very similar to what Bernanke had to say in his testimony. HERE IS A STORY
With the Fed Chairman reiterating low interest rate policy and an uncertain economic outlook, one would have thought Treasury yields and MBS prices would have improved, but they didn't. Instead both benchmark Treasuries and MBS coupons slowly lost ground as the day progress, with the weakest levels of the day hitting near the market's close. THIS FORCED LENDERS TO REPRICE FOR THE WORSE
Reports from fellow mortgage professionals indicate lender rate sheets to be slightly worse than yesterday. The par 30 year fixed conventional mortgage rate continues to hold in the 4.875% to 5.125% range for well qualified consumers. There are a couple lenders still offering 4.75% though, but it will cost you more at the closing table. To secure a par interest rate on a conventional mortgage 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. You may elect to pay less in fees but you will have to accept a higher interest rate.
With MBS holding near the “price highs” and following the strategy of “float at the price lows, lock the price highs”, I continue to favor locking.