MBS MID-DAY: Another Slow Start

Existing Home Sales declined by 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April. This is the slowest annual pace of EHS since November 2010 and 15.3 percent below a 5.68 million pace in May 2010 (when sales were surging to beat the deadline for the home buyer tax credit). Lawrence Yun, NAR chief economist, said temporary factors held back the market in May, as implied from prior data on contract signings. “Spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to soft figures for actual closings in May,” he said. “Current housing market activity indicates a very slow pace of broader economic activity, but recent reversals in oil prices are likely to mitigate the impact going forward. The pace of sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year.” When calling attention to high gas prices and severe weather MND says Yun is referencing the economic connection between falling Consumer Confidence and weak housing demand. We have described it as a "negative feedback loop" but it's essentially the same thing. In both viewpoints the underlying theory is.... When the ability to accumulate wealth through saving is seen as a better investment than owning a home, housing demand suffers. The national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. “The price decline could be diminishing, as buyers recognize great bargain prices and the highest affordability conditions in 40 years; this will help mitigate further price drops,” Yun said. Again....When consumers aren't feeling positive about their home as an investment because of falling home prices, housing demand suffers (not rentals!).The point: Housing has a long road to recovery ahead...

Rate sheet influential MBS prices are falling after slightly better than expected Existing Home Sales data hit news wires at 10am. The Fannie Mae 4.0 MBS coupon is currently -5/32 at 100-14. While this is only 4/32 under the morning price high of 100-19, the timing of this unfriendly directional reaction is poor as many lock desks are taking down MBS indications to build loan pricing for the day. Barring an immediate reversal in the stock market, rate sheets will deteriorate on first release today. If you've already been issued your rate sheet for the day and loan pricing improved, you are in danger of seeing that sheet recalled and repriced for the worse.

At the second anniversary of the current economic expansion, housing remains stuck in a rut according to Fannie Mae's Economic Outlook for June which notes that most housing indicators started the second quarter with little momentum. Housing starts and builder's confidence are still at depressed levels and the sluggish construction activity reflected in both measures is one of the reasons that the current economic recovery is less robust than previous ones have been. Total construction spending improved in April but it was driven by home improvements rather than single or multifamily construction, both of which declined below the first quarter's average. Single-family construction spending fell for the third consecutive month to reach the lowest level since June 2009. The report says that market conditions continue to favor multifamily and rental housing with demand outpacing supply in some markets. Consequently, rents are beginning to rise. The strong multifamily figures in the first quarter had already moved Fannie Mae to revise higher its multi-family starts projections for the year. Total housing starts are now expected to increase 3.5 percent solely because of the multi-family sector. Single-family starts will fall "modestly" in 2011 compared to 2010. On the broader economy Fannie Mae believes the likelihood that "the economy will slip into another downturn within a year is still quite low, but has risen slightly." Still Fannie Mae did downgrade their economic growth outlook for 2011 from +2.9 percent to +2.5 percent in the previous forecast, which is more than a full percentage point lower than their forecast at the start of this year. Several reasons for the downgrade were cited including continued European sovereign debt problems, a marked slowdown in growth in China as it fights rising inflation, the trade-related effects of reduction in Chinese economic activity , and dampening effects surrounding U.S. monetary and fiscal policy.

Until the debt ceiling is raised, the chance that it may not be raised remains a constant threat to interest rates.....(Reuters) - Ratings agency Fitch said on Tuesday it would place the U.S. credit rating on watch negative if its debt ceiling is not raised by Aug. 2, when the U.S. Treasury has warned that it may not be able to borrow more. "If we reach the second of August without a lifting of the debt ceiling, Fitch would assign a rating watch negative to the U.S. sovereign ratings," Andrew Colquhoun, head of Asia-Pacific sovereign ratings with Fitch, said at a conference. CHECK OUT A TIMELINE OF THE US DEBT DEBATE: http://www.reuters.com/article/2011/06/20/usa-debt-idUSN1E75J11U20110620

Treasury Secretary Geithner expressed an increased level of confidence that US will not default on its debt. "We're going to avoid a default crisis, no doubt about that," he told a group of CFOs at a WSJ sponsored event this morning. This is a more confident, more certain Geithner than the one seen in early June who, by contrast, said merely that he was "confident" that a long term fiscal plan could be reached to avoid a debt crisis. Supporting his evolving "no doubt" assertion, he said congress "must not" cut spending so much as to hurt growth, and that a budget plan "must include" a modest revenue increase through tax reform.

Rates rose yesterday in a quiet trading environment largely thanks to gains in the stock market. The S&P closed +0.54% at 1278.36. The 10yr note finished 7/32 lower in price at 101-16 and 2.3bps higher in yield at 2.949%. This pulled production MBS prices lower. The Fannie Mae 4.0 MBS coupon went out -3/32 at 100-22. In the absence of new economic data, stocks drove directionality in the bond market yesterday and they're doing it again this morning. S&P futures are 0.53% higher at 1280.50 and benchmark 10yr Treasuries are down 6/32 at 101-08 yielding 2.978% (+2.2bps). As a result, "rate sheet influential" MBS coupons are -1/32 at 100-18. Quick Catch-Up on Greece...Greek officials have said the country will face default by mid-July if the European Union and the International Monetary Fund do not release the next phase of bailout funds by then. Over the weekend Euro-zone finance ministers delayed a final decision on extending those emergency loan funds to Greece until they agree on an aggressive plan to pay back their debt (austerity measures). Since restructuring government leadership positions largely failed to improve national sentiment surrounding tough spending cut decisions, Greek Prime Minister George Papandreou is now seeking government approval to enact his own austerity plan through a "vote of confidence", which will be taken on Tuesday night around midnight in Greece (5pm eastern). Investors believe this vote will pave the way for Greece to receive the next installment of its emergency bailout payments. Prospects for this vote to pass Greek Parliament seem to be strong at the moment as equities are green around the globe, but failing to agree on deep spending cuts would be a signal that the Greeks are not serious about making long-term concessions to pay back their debt, which could lead to sharp declines in global equity markets and a flight to safety in U.S. government bonds.