Mortgage Rates Improve But End Session Under Pressure

Mortgage rates moved a few basis points higher for the second day in a row yesterday after several lenders were forced to reprice for the worse. The culprit was a modest stock market rally which led  investors to sell their "flight to safety" positions.

A flight to safety happens when investors are nervous about owning risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. To remind readers, as benchmark Treasury yields fall, prices of mortgage-backed securities move higher, which allows lenders to offer lower mortgage rates. As Treasury yields rise, mortgage-backed security prices are led lower, which forces lenders to push mortgage rates higher.

We have two economic reports and a Treasury auction to discuss today....

First out was the S&P/Case Shiller Home Price Index.  This data tracks the monthly change in the value of residential real estate across the U.S.  During periods of rising home values, home owners are more likely to spend money as they see the value of their largest asset moving higher.   In contrast, during periods of declining home values, home owners are much more likely to save money to offset the losses in home equity.   Many economists believe that until home prices fully stabilize it will be extremely difficult for our economy to sustain growth.  This makes tracking home sales data much more important than usual.

This morning’s release indicated home prices fell month over month but are higher year over year on a non-seasonally adjusted basis.  The report showed home values in the 20 city index rose +2.3% from last year while the 10-city index posted a +3.1% year over year increase, both slightly lower than what was expected.   On a non-seasonally adjusted basis, the 20 city home price index fell -0.5% in March following February’s -0.9% decline while the 10-city home price index fell -0.4%.  The data also showed 13 of the 20 cities posted monthly declines led by Detroit which registered a -4.1% drop. READ MORE ABOUT THE HEALTH OF HOUSING

Our final scheduled economic release of the day gave us a measure on how consumers are feeling: Consumer Confidence.   This is a survey conducted by the Conference Board, they ask consumers questions about their present economic attitude and expectations of future economic conditions.   Since our economy is driven by consumer spending, market participants track consumer confidence to get  a gauge on how the consumer is feeling.  An optimistic consumer is much more likely to spend money while a pessimistic consumer is more likely to save or pay off debt.

The report indicated consumer attitudes are still improving. The data was better than economist forecasts and the highest read since early 2008! 

At 1pm, the Treasury Department auctioned $42 billion 2 year Treasury notes. Auction demand was poor as it looks like market participants would like to have seen higher investment yields (returns). Remember low benchmark yields are a function of the recent flight to safety into U.S. Treasuries. Since the life of a mortgage is much closer to 5 to 7 years, this auction did not have as big an impact on mortgage rates today,  but it may have offered some hints as to how the 5 and 7 year auctions will go on tomorrow and Thursday, respectively.  READ MORE

Overnight, stock markets around the world sold off due to continued debt concerns across Europe and tensions between North and South Korea. Stocks opened lower and another flight to safety led Treasury yields fell which pushed MBS prices higher. However before the day ended the stock market recovered all its losses to close flat on the day. Consequently both Treasuries and MBS closed near their weakest levels of the session.  No lenders repriced for the worse though...but we did end the day on a sour note.

Reports from fellow mortgage professionals indicate lender pricing to have improved slightly from yesterday’s repriced for the worse rate sheets. The par 30 year conventional rate mortgage remains in the 4.625% to 4.875% range for well qualified consumers.  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. 

I continue to favor locking as rates are back at historic low levels this morning.  Typically, I am not a fan of extended locks, but I would also encourage you to consider longer term locks of up to 60 days.