Mortgage Rates Hold Ground Against Stock Rally. Lenders On The Defensive
Yesterday I wrote that mortgage rates were under pressure because stocks were rallying. Yes stocks were indeed on a winning streak, but the bond market hasn't done all that bad...all things considered. Don't get me wrong, mortgage rates are definitely higher than they were last week, but by pricing losses haven't been dramatic enough to increase the par 30 year fixed mortgage rate. More than anything, loan pricing weakness should show up on the HUD via more expensive closing costs. (discount points. less lender credit)
Mortgage rates had plenty of opportunities to react to economic data today, the calendar was busy! First to be released was the weekly Loan Applications Report.
The Mortgage Bankers Association application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. Survey data gives economists a sample of consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications would imply consumers are seeking out lower monthly payments. If borrowers are able to qualify for lower payments, their disposable income would rise which could lead to increases in consumer spending (or give consumers a chance to pay down other debts like credit cards). A falling trend of purchase applications indicates consumer demand for new and existing homes is on the decline, a negative for the housing industry and the economy as a whole.
Since the homebuyer tax credit expired on April 30, purchase applications have declined sharply. This was to be expected though. On the other hand, a global stock market sell-off and “flight to safety” into risk averse assets like U.S. Treasuries has helped push mortgage rates almost as far as the record lows we witnessed last spring. Low mortgage rates have led more borrowers to consider a refinance which has helped lead the MBA's refinance application index on a rally of its own over the past month. Last week’s report was quite disappointing though. Not only did purchase applications nosedive, but so did refinance activity. This lead many market watchers to believe the pool of qualified and willing borrowers had already refinanced their loan, leaving very few home owners left to pull the trigger on a refi.
Today’s applications index release held great news! In the week ending June 11, purchase applications rose 7.3%. This was the first increase in purchase applications since the end of the home buyer tax credit, six weeks ago. Refinance demand rose 21.1%. READ WHY. If you’ve been considering a refinance, now is the time! Mortgage rates are not far from all-time lows.
Next to be released was New Residential Construction, by the Department of Commerce. This report is more commonly known as 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 do not count, the builder must be constructing a new home. Building Permits data provides an estimate on the number of homes planning on being built…a forward looking indicator of economic momentum.
Like many other housing related releases (except loan apps this morning), this report was very disappointing. Housing starts in May fell 10% to an annualized pace of 593,000 units, much worse than the 3.3% decline that was expected. Building permits fell 5.9% to an annualized pace of 574,000, also much lower than forecast. Single-family housing was clearly the weakest part of this data. Multi-family starts and permits actually rose in May. READ MORE. SEE CHARTS
Released at the same time was the Producer Price Index. PPI measures the monthly change in prices paid by manufactures and wholesalers for the goods they consume to produce their product. If businesses are paying more for the materials they use to produce their widgets, they may be forced to pass along those additional costs to the consumer. This would be bad for the economy right now because it would force the Federal Reserve to consider raising overnight borrowing costs to fight inflation. A bump in the Fed Funds Rate would send mortgage rates higher. However, our concerns are soothed because unemployment is high consumer spending power has faded, the generally reduction in demand forces producers to stay price conscious as consumers seek out bargains.
Overall, the Producer Price index fell 0.3% in May. This was less than the 0.5% decline economist were expecting. Even when you exclude the volatile food and energy categories (the core rate), the Producer Price Index rose a larger than anticipated 0.2%. While the month over month read on producer level prices failed to match expectations, the index still fell, indicating deflation is still a bigger concern than inflation. Tomorrow we get to see if producers are passing along higher costs to consumers. The Consumer Price Index will flash at 8:30am. Economist forecast a 0.2% decline in the Consumer Price Index.
Our final economic data of the day was the release of the Fed's Industrial Production report. This report gives Federal Reserve economists a measure of the strength of the national manufacturing sector by measuring output at U.S. factories, utilities and mines. Higher industrial production is a positive economic indicator so improvements benefit the stock market...at the expense of mortgage rates. Economists were calling for Industrial Output to increase at a month over month rate of 1.0%. The report was better than expected, registering a month over month gain of +1.2%. Industrial Production continues to improve.
The day looked promising for mortgage rate watchers as stocks started the session in the RED. As you know mortgage rates have basically mirrored the movements of the stock markets lately. As stocks rally, mortgage rates rise. As stocks sell, mortgage rates rally. This relationship has dictated the direction of mortgage rates since early April. Stocks started slow but eventually regained their footing and had rallied to the highs of the day by early afternoon. While benchmark rates once again managed to hold their ground against the effects of the "stock lever", yields still rose, and mortgage rates suffered.
Here is the good news: ONLY A FEW LENDERS REPRICED FOR THE WORSE! Here is the bad news: THIS PUTS LENDERS ON THE DEFENSIVE. Unless stocks are red hot tomorrow morning, the reprices for the worse that were due today, will likely be passed along in loan pricing tomorrow. If you are floating, you need stocks to sell! We dodged a bullet today....
Most lender rate sheets have improved vs. loan pricing yesterday but are still worse than what was being offered yesterday morning. The par 30 year conventional rate mortgage remains in the 4.50% to 4.75% range for well qualified consumers. Higher consumer borrowing costs will show up via more expensive closing costs (bigger discount point or less closing cost credit) 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 looking for a 15 year term, you should expect par in the 4.00% to 4.25% range with similar costs but lower FICO score requirements.
Yesterday stocks broke an important level of resistance, indicating investor optimism is improving. While most market watchers are skeptical of a continued stock rally, the risk of equities extending their recent uptick is greater now than it has been since early May. If stocks do extend their rally, it would lead to an unwinding of the “flight to safety” trade that pushed mortgage rates to the best levels of 2010. The par 30 year fixed mortgage rate would rise and so would total consumer borrowing costs. With mortgage rates not far from all-time lows, I cannot justify floating my locks, especially on loan closings scheduled in the next 30 days.