Consumer Borrowing Costs Improve, Ignoring MBS Price Declines

Mortgage rates broke their two day losing streak yesterday after lenders repriced for the better following sobering comments from the Chairman of the Federal Reserve. In his testimony, Ben Bernanke reiterated that the Fed's economic outlook is “unusually uncertain”.   He went on to remind that inflation is trending lower, which is supportive of exceptionally low interest rates for an “extended period”.   While there was no change in the "best execution" no points mortgage rate, total consumer borrowing costs declined 0.125% to 0.25%, erasing increases seen earlier in the day. 

The economic calendar picked up this morning. We had several influential releases.  First on the docket: Weekly Jobless Claims

Released by the Department of Labor, this report provides three timely metrics on the health of the labor 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
3. Extended and Emergency Benefits: totals the number of Americans who have exhausted their traditional benefits and are now receiving extended and emergency benefits

Since our economy is driven by consumer spending, market participants track employment data to get a gauge 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 from rising.

Here are the results:

1. Initial Jobless Claims: +37,000 to 464,000 vs. estimates for a read of 445,000.  Prior week’s data was revised better to show 2,000 less claims.  WORSE THAN EXPECTED
2. Continued Claims: -223,000 to 4.49 million vs. estimates for a read of 4.62 million.  BETTER THAN EXPECTED
3. Extended and Emergency Benefits: -368,000 to 3.93million.  The plunge in emergency claims is due to the expiration of the extended unemployment benefits program last week. Congress had failed to pass legislation to extend emergency benefits beyond the current 99 month period, so some unemployed folks saw their benefits disappear.  Since this data, the legislation to extend unemployment benefits has been passed and now goes to President Obama's desk for the final phase of the process, his signature.

HERE is more commentary on Weekly Jobless Claims

Next on the calendar: Existing Home Sales. Released by the National Association of Realtors (NAR), this data totals the number of existing homes, not new construction, in which a sale closed in the prior month.  Since the expiration of the tax credit, new purchase activity in the housing market has gone stagnant. The data released today indicates nothing has changed over the last month.

Existing Home Sale fell 5.1% to an annualized pace of 5.37 million completed transactions in June. The median price rose 5.2% to $183,700 but the monthly supply jumped to 8.9 months thanks to a 2.5% increase in total inventory on the market.

Lawrence Yun, the NAR's Chief Economist said, “June home sales still reflect a tax credit impact with some sales not closed due to delays, which will show up in the next two months...Broadly speaking, sales closed after the home buyer tax credit will be significantly lower compared to the credit-induced spring surge. Only when jobs are created at a sufficient pace will home sales return to sustainable healthy levels.”

HERE is more commentary and several useful charts

Also, the Treasury Department announced the terms of the next cycle of Treasury auctions.  When our government does not have enough cash on hand to pay for current spending outlays, they borrow funds in the debt market by issuing Treasury bills, notes, and bonds.  The added supply of debt on the market can pressure yields and mortgage rates higher, however ongoing economic uncertainties have helped create a "flight to safety” into Treasuries which has helped ease the pressure that can be put on interest rates by added debt supply.

The Treasury Department said it will sell $38 billion 2-year notes next Tuesday, $37 billion 5-year notes next Wednesday, and $29  billion 7-year notes next Thursday.  These offering amounts are $2 billion less for 2-year notes and $1 billion less of both 5 and 7-year notes.  Less supply of debt is positive news for Treasury yields and mortgage rates.

Although mortgage-backed security prices moved lower today, lenders still improved consumer borrowing costs, extending the streak of irregular mortgage rate behavior. READ MORE

A well-qualified borrower,  which is basically an applicant whose credit profile and loan terms do not trigger risk-based pricing adjustments (LLPAs), should be able to lock their loan between 4.375% and 4.625%. The "best execution" mortgage rate is 4.50%.  If you have the liquidity (cash) to permanently buydown your interest rate (because you expect to live in your home for longer than the time it will take to recover the points you paid at closing to buydown your mortgage rate), 4.375% is definitely out there for the taking.  If you feel your credit profile is not what lenders consider perfect, which implies your loan pricing is subject to  a greater amount of risk-based pricing adjustments, your mortgage rate should still be under 5.00%. This includes conventional 30 year fixed rate loans and FHA fixed rate loans.

If you are floating your loan you should re-read THIS POST