Mortgage Rates Lower After Treasury Auctions

The roller coaster theme continued yesterday but in reverse from the prior two days.   If you recall, on both Tuesday and Wednesday mortgage backed securities rallied early on but gave back all the gains following disappointing treasury auctions of 2 and 5 year notes.  Yesterday, MBS moved lower in the morning but following a successful auction of 7 year notes they managed an impressive rally closing higher on the day and at the highest levels of the week.  A few lenders repriced for the worse in the morning as MBS moved lower ahead of the auction; however, after MBS moved higher and held onto the gains into close most lenders repriced again but this time for the better.  To remind readers, mortgage rates are set by the trading of mortgage backed securities (MBS) in the secondary market.  As investors buy MBS, the price of the security moves higher which lowers mortgage rates but as investors sell MBS, the price moves lower to attract buyers which increases mortgage rates. 

Today is the busiest day of the week for economic data.  The first report out this morning was the advanced read on Gross Domestic Product data for the second quarter.   GDP is the broadest measurement of total economic activity across all sectors of our economy.  This report lets market participants know the pace at which our economy is growing or contracting.  A fast growing economy is good for higher corporate profits which is good for stocks; when money flows to stocks, fixed income usually suffers. Economists expectations call for an ease in our contraction from first quarter’s output of  -5.5% to -1.5%.  The report has shown that second quarter GDP contracted at a -1.0% pace, basically in line with expectations; however, first quarter numbers were revised worse to -6.4% marking the largest contraction to economic growth in 27 years!  The GDP price index which gives a measure on inflation, came in much lower than expectations at only a 0.2% increase and the prior quarter’s reading was revised lower to 1.9%.   This is yet another report indicating that inflation is not a concern at present time. READ FULL STORY

Also out this morning from the U.S. Department of Labor is the Employment Cost Index which measures the total employee compensation costs.   If employment costs are increasing, companies tend to pass along that higher expense onto the consumer.   The report has indicated that employment costs rose 0.4%, slightly higher than expectations of 0.3%.  The year over year reading declined from first quarter’s 2.1% to 1.8%.  Even though the headline number was slightly worse the year over year decline is offsetting that news.

Lastly today we get the monthly Chicago PMI which is a survey of both manufacturing and non manufacturing firms around the Chicago region on the strength of business conditions.  Readings above 50 indicate expanding business conditions while readings below 50 indicate contraction.   Last month’s report posted a 5 point gain to 39.9 and expectations for this month’s report is for continued improvement with a 44.0 reading.  The report has shown that business conditions are still contracting coming in a touch lower than expected at 43.4.

Early reports from fellow mortgage professionals are indicating that rates for 30 year fixed conventional mortgages have improved to the 4.875% to 5.125% range for the best qualified consumers.  In order to qualify 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 1 point loan origination/discount/broker fee.  For intraday updates regarding the movement of MBS and for price alerts make sure you check out Matt and AQ's MBS Commentary blog.

If you are currently floating an interest rate, you might want to consider locking as rates approach 5.00%.  Recent history has shown that each time rates break below the 5.00% level, they do not remain there very long.  Of course, we could buck that trend this time but a bird in hand is worth more than two in the bush.  I received many emails from readers wishing they would have locked a couple months ago when rates where even lower than today.  Each of them stated that they thought rates would move even lower so they waited and missed the bus.  Mortgage rates could move lower, but I have stated many times in this blog that anytime you can lock a 30 year fixed rate under 5% that is hard to pass up.  With most lenders 30 year, 25 year and 20 year fixed rate mortgages are the same interest rate.  If you prefer a 15 year term or 10 year term, you should expect a rate around 4.375%.   To qualify for a par rate on a 15 year term you must have a FICO credit score of 620 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.