Consumer Borrowing Costs Rise Ahead of Jobs Data

Mortgage rates were under a modest amount of pressure yesterday but generally held near the most aggressive levels of our lifetime. The economic calendar was a busy today, starting with Jobless Claims. 

Released by the Department of Labor, this report provides three timely metrics on the health of the job market:

1. Initial Jobless Claims:  totals the number of Americans who filed for first time unemployment benefits in the previous week
2. Continued Claims:  totals the number of Americans who continue to file for benefits due to an inability to find a new job in the previous week
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits, in the previous week

Since our economy is driven by consumer spending, market participants track employment data to get a sense of future economic momentum.  Higher jobless claims imply less consumers have jobs and therefore less money to spend.  This is a negative for the economy...but generally helpful in keeping consumer borrowing costs down.

Here are the results:

1. Initial Jobless Claims: +13,000 to 472,000 vs. estimates for a read of 450,000.  Prior week’s data was revised worse to show an additional 2,000 claims.  WORSE THAN EXPECTED
2. Continued Claims: +43,000 to 4.62 million vs. estimates for a read of 4.54 million.  WORSE THAN EXPECTED
3. Extended and Emergency Benefits: -376,000 to 4.92million.  The plunge in emergency claims is due to an expiration of the emergency unemployment benefits program.  Congress failed to act on a plan to extend emergency benefits beyond the current 99 months, so some unemployed folks have finally run out of benefits. 

Our next report looks at the strength of the manufacturing sector.  The ISM Manufacturing Index is based on a survey conducted by the Institute for Supply Management.  It covers more than 300 manufacturing firms and reports on their feedback of business conditions.  Readings above 50 indicate economic expansion or improving conditions while readings below 50 indicate economic contraction or deteriorating conditions.   The ISM index has held above 50 for the last ten months with the reade last month coming in at a better than expected 59.7.  Economists surveyed prior to today’s release expected a slight pullback to 59.0.   The report indicated business conditions came in WORSE THAN EXPECTED with a read of 56.2.

The next economic report released today was Construction Spending.  This data shows the monthly change in the amount of money spent on construction for public and private residential and non residential projects. Increasing construction spending is a positive economic indicator as it could lead to additional job creation and increased consumer spending on items needed to complete construction projects.  This report has a two month lag so it generally does not affect the market.

Construction spending during May 2010 was estimated at a BETTER THAN EXPECTED annual rate of $841.9 billion, 0.2% below the revised April estimate of $843.3 billion. The May figure is 8.0% below the May 2009 estimate of $915.4 billion. During the first 5 months of this year, construction spending amounted to $314.2 billion, 12.0%  below the $356.9 billion for the same period in 2009. Private residential construction was at a seasonally adjusted annual rate of $260.8 billion in May, 0.4% below the revised April estimate of $261.7 billion.

NAR's Pending Home Sales Index measures the number of home purchase contracts that were signed in the monthly reporting period.  Once "pending" sales contracts are closed, they are considered an existing home sale. Because the Pending Home Sales index tells us how many contracts were signed, it is consider a forward indicator of existing home sales.  A signed contract is not counted as an  existing home sale until the transaction actually closes.  In developing the model for the index, it was demonstrated that the level of monthly pending home sales parallels the level of closed existing-home sales in the following two months.

The Pending Home Sales Index dropped 30.0 percent to 77.6 in May from a reading of 110.9 in April, and is 15.9 percent below May 2009 when it was 92.3. The falloff comes on the heels of three strong monthly gains as home buyers rushed to take advantage of the tax credit. HERE are some charts

While on the subject of housing, we did get good news regarding the Home Buyer Tax Credit.  To qualify for up to an $8000 tax credit you had to have signed a sales contract by April 30 and close by June 30.   Congress has however passed a bill to extend the closing date to September 30 because many borrowers have had their closing delayed by lenders.  If you were not under contract by April 30, you're not eligible for the credit. FULL STORY

The par 30 year conventional rate mortgage remains in the 4.375% to 4.625% range for well qualified consumers but borrowing costs were slightly higher today. The uptick was minimal though, rising costs are most apparent via higher closing costs as opposed to an increase in the actual rate (less lender credit or larger discount fee). 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 closing costs, but you will have to accept a higher interest rate.

All eyes are now focused on the release of the Employment Situation Report tomorrow.  Economists expect 110,000 job losses and an increase of the employment rate to 9.8%.