Mortgage Rates Inch Upward In Volatile Environment
Mortgage rates inched lower yesterday morning after rising modestly on Monday. While consumer borrowing costs did improve, the day ended with rates under pressure as stocks made a late afternoon comeback from the lows of the session. No lenders repriced for the worse but these events were an omen for what unfolded today.
Let's review the day that was....
The Mortgage Bankers Association released their weekly Mortgage Applications Survey bright and early. The Weekly Applications Survey covers over 50% 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. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out lower monthly payments which can result in increased disposable income and consumer spending (or give consumers a chance to pay down other debts like credit cards). A rising trend of purchase applications indicates an increase in home buying interest, a positive for the housing industry and the economy as a whole.
The report offered no surprises as the end of the Home Buyer Tax Credit continues to drain homebuyer demand. There was some good news though. While purchase applications fell 3.3% to their lowest level since April 1997, refinance applications rose 17.0%. This was the third consecutive increase in refinance applications and the highest the refinance index has been since October of 2009. Now loan originators must get these deals closed, which might prove difficult given the trouble we've seen with appraisals. READ MORE
Next on the schedule was Durable Goods Orders. This data measures the number of new orders placed at U.S. factories for products that are expected to last at least three years. This would include items such as computers, appliances, and electronics. This report tells economists how busy factories will be in the months ahead. Increasing orders implies there is more potential for higher corporate revenues and profits. It could also imply that firms would need to hire additional staff to ensure they keep up with growing orders. This is a positive for the overall economy and stocks...but a negative for the fixed income sector/interest rates.
The report indicated Durable Goods Orders rose 2.9% in April. This crushed the consensus estimate of +1.3%. The increase in orders was primarily due to a 16.1% rise in transportation equipment. When excluding transportation orders, the durable goods figure was 1.0% lower vs. March. The prior month’s report was however revised for the better, from an originally reported 1.3% decline to unchanged (+0.0% from Feb).
Our final report on the day was April New Home Sales. The Census Bureau considers a new home sold when the buyers sign the sales contract. The house can be in any stage of construction: not yet started, under construction, or already completed. Typically about 25% of the houses are sold at the time of completion. The remaining 75% are evenly split between those not yet started and those under construction.
The report indicated New Home Sales in April (when the tax credit expired) improved 14.8% to an annualized sales pace of 504,000 units. This beat expectations and was the fastest pace of New Home Sales seen since May 2008. March and February data was revised better which added 42,000 to total sales numbers. The surge in sales did lower the supply of available new homes to the lowest level in 42 years from 6.2 months in March to 5.0 months in April, but this is not significant yet because builders haven't been restoring inventory as new homes have sold, so inventory was already low. The only negative in this report was a 9.7% decline in new home prices to a median price of $198,400. This is the lowest price level since 2003. While this was a great report, most analysts are skeptical that homebuyer demand momentum will carry over into the summer months without the tax credit incentive. HERE IS A CHART
The last event on the calendar to discuss is the $40 billion, 5-year Treasury note auction. Yesterday’s 2-year note auction was not well received because yields were too low to draw robust demand. This was a function of the recent “flight to safety” which has driven Treasury yields significantly lower over the last few weeks. Today's 5-year note auction was also sloppy but mortgage rates did not have a bad reaction. READ MOREABOUT THE AUCTION RESULTS. Tomorrow the Treasury will sell $31 billion 7-year notes. This will be the most mortgage rate influential auction of the week.
The stock market rally that began yesterday afternoon extended into overseas trading last night and into this morning's trading session. Optimism in equities led investors to sell flight to safety positions in risk free Treasuries which pushed benchmark interest rates higher and led mortgage-backed security prices lower. This forced lenders to offer higher mortgage rates this morning. However, the day did end on a positive note for mortgage rates as the S&P slide from the highs of the day and closed in the red. The late day sell off helped MBS rally off their price lows all the way back to their high of the day. While no lenders repriced for the better, we avoided reprices for the worse. I would like to say the stock sell off set us up for a mortgage rate rally tomorrow, but that would be guess work in this volatile environment.
Reports from fellow mortgage professionals indicate lender rate sheets to be slightly worse from yesterday. The par 30 year fixed conventional mortgage rate 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. If you are seeking a 15 year term, you should expect par in the 4.125% to 4.375% with similar fees but lower FICO score requirements.
We could see minimal mortgage rate improvements in the near term future but they would not be worth the risk of floating. It would take another huge stock market sell off for mortgage rates to move lower, even then the improvement would only be a few basis points. I still favor locking over floating.