Risks favor: Carefully Floating

Current Price of FNMA 5.5% Bond: $101.00, +9bp

It’s the official start of Baseball season for most of the country today. And after several “wild pitches” from Mortgage Bonds, this morning’s action has been relatively quiet. The good news is that prices are modestly higher, on the heels of a strong rally Friday.

The Chicago Purchasing Managers Index (PMI) for March showed a reading of 48.2, stronger than expectations of 46.7. Not much reaction to the number.

Treasury Secretary “Hammering” Hank Paulson is banging away at the mortgage industry and is currently speaking about a plan to have the Federal Reserve become “responsible for overall issues of financial market stability, and not just overseeing the conduct of banks”. This is sure to include the mortgage lending industry, but any proposal will likely take some time to be worked out in Congress. But not too much time, as Senator Chris “my offer is nothing” Dodd and Barney Frank have already been working on proposals that show their dislike for our industry.

At 12Noon ET, San Francisco Fed President Janet “always” Yellen will address an audience on foreclosures – she probably won’t move the markets like Loose Lips, but it may be interesting to get her read on Housing.

Mortgage Bonds are trading in the middle of a wide 135bp range between a floor of support at the 50-day Moving Average, presently $100.34, and a ceiling of resistance at the $101.69. At the moment, we will carefully float – but as you know, it can change fast.

Mortgage rates were up last week on weak housing data and a growing nervousness about mortgage bond quality.

Rates would have been up more if not for a tame inflation reading Friday.

The Personal Consumption Expenditures report fell Friday to 2.0% year-over-year, putting it back within the Federal Reserve’s comfort zone of 1-2 percent.

PCE is the Fed’s preferred inflation gauge and with inflation in check, Ben Bernanke & Co. can focus on other elements of the economy such as housing and employment.

Mortgage rates figure to be volatile (again) this week.

The first major event to strike markets is today’s release of a 200-page, government-written plan outlining sweeping reforms for the financial industry.

If markets interpret the government’s plan to be bad for bond markets, expect mortgage rates to rise as demand for bonds falls. Conversely, if the reforms are expected to benefit bonds, mortgage rates should fall.

Then, Wednesday, Fed Chairman Ben Bernanke testifies to Congress about the U.S. economy.

Expect the Fed Chief to stay on message, but mortgage rates will respond to his word choice and tone — especially in remarks about large banks and their ability to survive the current market. Traders are already on edge and will take Bernanke’s testimony very seriously.

And lastly, also moving markets this week is the March jobs report, due Friday.

Remember that job growth was negative in January and February so with a third negative month in March, the calls of recession will grow louder; the expectation is the economy shed 40,000 jobs last month. Whether a negative number will be good or bad for mortgage rates, though, will depend on the bond traders’ mood come Friday morning.

Either way, though, if the actual jobs number deviates from the expected jobs number of 40,000, mortgage rates will swing wildly starting at market open Friday and continuing into the weekend.

Risks favor: Carefully Floating

Current Price of FNMA 5.5% Bond: $100.50, +19bp

Back in the zone! The Fed’s most favored measure of inflation arrived this morning – and the Core Personal Consumption Expenditure Index (PCE) for February was reported at 0.1%, matching expectations. But more importantly, and thanks to a downward revision to the prior month’s reading, the important year-over-year Core PCE rate now stands at 2.0%, and within the Fed’s desired target zone of 1 – 2% for core inflation. The year-over-year Core rate had crept up to 2.2% in recent months, so seeing this moderation in core consumer inflation is very good news.

The overall PCE, which includes volatile food and energy costs, was also reported at 0.1% and matched expectations. This left the year-over-year headline PCE at 3.4%. Bonds had opened the day lower, but have since improved on the favorable core reading, and are now attempting to hold their ground back above the 50-day MA.

In other economic headlines, Personal Income rose 0.5%, which was better than an expected increase of 0.3%, and Personal Spending matched expectations of 0.1%. Consumer Confidence for March was reported at 69.5, which was near expectations of 70.0. None of these headlines moved the market very much this morning, and Bonds are continuing to move higher on the favorable inflation news found in the PCE.

Mortgage Bonds are now back above the 50-day Moving Average, and if prices are able to hold their ground, we could see them trade a bit higher still. But if they are forced back under the 50-day MA, the next floor of support is another 40bp below, at the 100-day MA.

When mortgage rates change rapidly, it’s a fiscal challenge to shop for a home and/or home loan.

Lately, mortgage rates have been especially volatile, mirroring the wild moves of the stock market.

Here’s how up-and-down stock markets have been in 2008: Through last week, the S&P 500 Index changed more than 1 percent per day on 28 separate days.

This represents 52 percent of all trading days and is the most volatile measurement since 1938.

Mortgage financing is impacted by stock market changes because when money flows into stocks, it tends to come from bond markets. And, when money leaves stocks, it tends to “gets parked” in bond markets.

Because mortgage bonds set mortgage rates, you can understand how stock market volatility can make it difficult to predict what home loan payments might look like.

Volatility is expected to continue for the next several quarters so if you see a mortgage rate you like today, consider locking it right away — it probably won’t last long.

Source
U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says
Jeff Kearns
Bloomberg, March 20, 2008
http://www.bloomberg.com/apps/news?pid=20601213&sid=av840GLwE4UA&refer=home

Risks favor: Carefully Floating as Bond has bounced off 50-day MA

Current Price of FNMA 5.5% Bond: $100.50, -28bp

Bonds are trading lower, however, they are significantly improved from their worst levels of the day. The improvement occured right after the Bond tested its 50-day Moving Average floor of support.

In today’s economic headlines, the final reading on Fourth Quarter GDP was unrevised at 0.6%, and caused no market reaction. Initial Jobless Claims were reported at 366,000 – and while this is not a great number, it is an improvement from last week, and slightly worse than market expectations of 371,000. The four week moving average was reported at 358,000, which remains near levels seen prior to each of the last two recessions. Stocks actually moved higher on this news because it wasn’t as bad as anticipated. And as we typically see, the improvement in Stocks pressured Bond prices lower.

At 12 Noon ET, a parade of Fed officials will hit the mic – Fed President Dennis “the Spider” Lockhart, Fed President Sandra Pianalto and Fed President Gary Stern will be speaking, and their comments could potentially move the markets a little later today.

Bonds briefly dipped below support at the 50-day Moving Average before modestly improving. Hopefully, you locked on yesterday’s Alert and avoided this morning’s price loss. But now that the price damage is already done, we can Float very carefully on brand new transactions to see if Mortgage Bonds can remain above important support at the 50-day MA.

Each month, the Commerce Department and the National Association of REALTORS release national housing data.

The former’s release is called the New Residential Sales report and the latter’s is called the Existing Home Sales report.

Both reports highlight the “median sales price”, the point at which half of the homes in the U.S. sold for more, and half sold for less.

Last month, the median sales prices were as follows:

• Existing homes: Down 8.2 percent
• New homes: Down 2.7 percent

The very definition of “median”, however, makes this data point useless for national housing statistics.

If a large amount of homes are sold in regions where home prices are traditionally high, the median sales price will trend higher.

If a large amount of homes are sold in regions where home prices are traditionally low, the median sales price will trend lower.

Again, all that the median sales price tells us is the price point at which half the homes in the country sold for more, and half sold for less.

Real estate is a local phenomenon and so grouping the entire country’s supply of homes together makes little sense. A home in San Francisco has little to do with a home in Omaha.

To get a true gauge of your local market, talk to a real estate agent that knows the local market well. You’ll not only get meaningful statistics about a neighborhood, but you’ll get good insights, too.

Consumer Confidence fell to its lowest point in three years and anybody who watches the evening news can understand why.

Each day, news programs barrage Americans with tales of economic woe and American Opinion is largely shaped by the media.

After enough time, the reporting becomes a self-fulfilling prophecy.

But, in the Consumer Confidence report, there was a choice piece of data that isn’t getting reported by the news programs and it’s a rather important piece.

Although fewer consumers expect to buy automobiles and appliances over the next six months, those with plans to buy homes is actually higher by 14 percent.

In other words, despite weakening confidence in the economy, an increasing number of Americans are planning to buy homes this season and next.

Consumers may be motivated to buy this year by a number of factors:

• Lower home prices nationwide
• Affordable mortgage rates
• Fear that mortgage products will require larger downpayment

Regardless, the media is choosing to ignore this part of the story. Instead, the news programs are focusing on the negatives – just look at the headlines.

It’s no wonder that confidence is down — bad news is all the American Public tends to hear.

Each quarter, the Census Bureau releases the Homeowner Vacancy Rate, a housing statistic the measures the percentage of homes for sale that are vacant.

A home listed for sale may be vacant for several reasons including:

1. The home has been foreclosed and the owner has moved out
2. The home seller moved into a new home and not sold his former home
3. The home was a rental property and is being sold without a tenant

In Q4 2007, the Homeowner Vacancy Rate matched its all-time high of 2.8 percent.

The statistic can be misleading, however, because Homeowner Vacancy Rates appear to be seasonal and the fourth quarter is more prone to high figures.

As evidence: In 6 of the last 7 years, Q4 posted higher vacancy rates than for the preceding three quarters.

Vacancy rates may increase in the fall because homesellers without a “need” to sell tend to take their properties off the market during the Holiday Season. That leaves an over-weighting of empty homes for sale — precisely what the Homeowner Vacancy Rate measures.

For an interactive version of the chart above, visit the Wall Street Journal Online.

Source
Housing Markets: A Vacant Look
The Wall Street Journal Online
March 21, 2008
http://online.wsj.com/public/resources/documents/retro-VACANCY08.html

Risks favor: Cautiously Floating, as damage is already done

Current Price of FNMA 5.5% Bond: $100.56, -69bp

Last Thursday’s Alert to Lock was a bit on the cautious side, but it is paying huge dividends this morning as Bond prices have been battered lower in the early going due to Stock prices surging higher. Bond prices dove down to hit support at the 50-day Moving Average, but have since rebounded slightly.

The reason for the move higher in Stocks is the expectation that the buyout price of beleaguered Bear Stearns will likely be raised from $2 per share to $10 per share. This is an overall boost to the financial sector, which has been the hardest hit area in the latest Stock market downturn.

Encouraging news for the housing market, as Existing Home Sales for February were reported at a better than expected pace. February’s inventory of unsold homes fell to a 9.6 month supply, down from January’s 10.3 month supply. The median home price was reported at $195,900. The market had been expecting a far worse report, so this surprisingly decent read on housing is helping Stocks move higher, and pressuring Bonds lower still.

Six for six…last Tuesday’s cut to the Fed Funds Rate was the sixth in the most recent cycle that began on September 18th. And once again, Bond prices are worse off, with home loan rates moving higher after the Fed rate cut. The media and your uninformed competition still seem baffled by this – although it makes perfect sense when you understand that Fed rate cuts spur on inflation, the arch-enemy of Bonds.

Conforming mortgage rates edged slightly lower for the second week in a row.

Mortgage rates fell for two main reasons:

1. The Federal Reserve offered fiscal support for troubled mortgage-backed securities
2. A government group gave Fannie Mae and Freddie Mac permission to lend more of money to American homeowners

These two actions combined to make mortgage-backed securities safer for mortgage bond investors and when mortgage bonds are safer, their required rate of return (i.e. interest rate) comes down.

This is the financial concept of Risk vs. Reward in action.

Expect mortgage rates to be in flux and highly volatile again this week, however.

Aside from housing and consumer confidence data, markets will respond to Friday’s Personal Consumption Expenditures data. PCE is a “Cost of Living” index that the Federal Reserve watches very closely.

PCE is different from other Cost of Living indices because it accounts for “substitutes”. For example, if beef is getting too expensive, PCE will substitute chicken — much like a regular person would.

In this way, PCE better reflects the true cost of living for the average American.

PCE is expected to show 2 percent growth year-over-year. If the actual figure is higher, expect mortgage rates to rise on inflation concerns.