Rates Holding Steady, Happy Friday

Yesterday, mortgage backed securities managed to close up on the day by almost a .25 in discount.  So far this morning, MBS prices are continuing to climb higher so we should see borrowing cost improve by an .125 to .25. This should keep par 30 year fixed rate mortgages in the 4.625% to 4.875% range while some more aggressive lenders will offer incentives for more pristine loan files.  Most of these incentives require credit scores over 750 and loan to values under 70%. 

This morning the Commerce Department released personal income and outlays economic data.  Personal income was expected to show a drop in income of .2% while personal spending was expected to register a .3% increase.  The actual figures came in very close to expectations.  Personal Income recorded 0.2% drop and spending rose 0.2%.  Consumer are making less money and therefore spending less money.  Fundamentally, negative economic data is good for mortgage rates.  After this data was released, MBS did move slightly higher. 

A part of the Personal Income and Outlays report is the Personal Consumption Expenditure(PCE) which is measures the rate of change of consumer price levels.  The core inflation rate was expected to show an increase of .2% and the number came in right on expectations.  The year over year core PCE is currently at 1.8% which is within the comfort range of the Federal Reserve. The Federal Reserve would like for the core PCE reading to be fall in the zone of 1% to 2%, this is another economic report that confirms inflation is not a near term concern.  With no concern of inflation and the continued support of government MBS purchases, mortgage rates should stay near current 30 day averages.  Don’t forget that inflation is our biggest enemy.  Why?

Let’s say that inflation is at 5%.  If an item today is $100, if the expected rate of consumer inflation is 5% than that item would increase to a price of $105.  If someone loans you money for a mortgage at 4.5% that means the end investor is earning a 4.5% rate of return on the investment (your mortgage is a liability to you but an investment to the owner of the mortgage).  Well, if inflation is at 5%, but the investor is earning 4.5% they are actually losing money because the money they are earning is lower than the increasing prices they are paying for goods and services.  In this example, they are making 4.5% but everything they buy is 5% more expensive.  This is why mortgage rates have to be higher than the rate of inflation.  This is also the reason why in the late 70’s early 80’s that mortgage rates where double digit, we had double digit inflation.

The other piece of economic data released today was consumer sentiment.  This report gives investors insight into how the consumer is feeling about their own personal finances and the economy.  An optimistic consumer is more likely to decrease savings and increase spending which is positive for the economy.  Expectations were for a 56.7 following last months 56.6.  The actual reading came in at 57.3, close to expectations.  No reaction from the markets.

Friday’s are generally conservative days for lender, especially near month end when there is an increased level of anxiety to squeeze in as many closings as possible.  Early reports from fellow mortgage professionals are showing rates about .125 to .25 better in discount.

Matt and Adam over at the MBS Commentary blog tell me that mortgage backed securities continue to show signs of isolation from the “feelings” of stock traders.  They do however believe that MBS is nearing a point where a period of lower MBS prices would not be a surprise.  If you are closing in the near term, less than 1 week, you might want to consider locking this morning, especially when you consider that you can still lock in at 4.625% for a 30 year mortgage(if you are considered credit worthy borrower by underwriters).  If MBS start moving lower, lenders will not be hesitant to raise borrowing costs.  I will update if need be, and if you are interested in following intraday mortgage market moves remember Matt and Adam’s MBS Commentary follows the market throughout the day.