The consumer price index Thursday will be the most important event this week. Be cautious heading into the other data releases as they still have the potential to result in market volatility.
As we all know, mortgage interest rates change on a daily and intra-day basis. With so much volatility, it is often difficult to make the right decision regarding floating or locking. What is important to remember is the fact that there is a difference between gambling and taking a calculated risk when making mortgage interest rate decisions. Floating into an economic release such as the employment report is usually a gamble. In addition, floating over a span of more than a few days is also a gamble. Unforeseen events can cause instability in the financial markets that results in mortgage interest rate gyrations. On the contrary, floating on a day of positive market movement with no economic data the following day, while such action is still vulnerable to market movements, can be considered a calculated risk.
The potential for mortgage interest rates to push lower is real considering the tremendous uncertainty of the US economy. However, interest rates could also rise considering looming inflation fears. Energy prices remain volatile. Inflation, real or perceived, can erode the value of bonds causing prices to fall and rates to rise.
It is important to remember that interest rates tend to improve slowly while negative movements tend to happen fast and furiously. Capitalizing on interest rates at the current levels protects against uncertainty surrounding future interest rate developments.
Rate Probability: Volatile
After the roller coaster ride ended last week, rates managed to end up slightly better than where they began. Although the week ahead is jam packed with high impact economic news, it's likely the big market mover this week will be other financial headlines. So what's the skinny with the GSEs (Freddie and Fannie) and just how will it impact rates?
Last week, almost all the positive rate movement earlier in the week was nearly erased as continued speculation as to the financial health of Freddie and Fannie was brought into question. Investors wrestled with the idea that the two mortgage giants that collateralized over $5 trillion in mortgage debt may become insolvent and require a government bail out. Considering that the national debt is less than double the total amount Freddie and Fannie are on the hook for, speculation that even the Federal Government might have trouble raising the necessary capital weighed heavy on investors minds.
Over the weekend, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke outlined a plan to bail out Freddie and Fannie if necessary. Although the plan would require congressional approval. It remains to be seen if investors will feel comforted by the plan.
To make matters even more volatile, the week ahead is jam packed with high impact economic reports that will indicate whether inflation is still a concern. Add to that the Fed's FOMC meeting minutes being released and we have what might be the most volatile week in recent history.
The bottom line: Expect the market to be extremely volatile.
New and existing home sales moved in opposite directions in April. New home sales posted a rare 3.3% increase in April to a seasonally-adjusted 526,000 homes, up from a revised March figure of 509,000. This is the first time since October 2007 in which seasonally-adjusted annualized sales have posted a monthly increase. Sales for the previous three months, however, were revised lower by 30,000 units. At the current sales pace, there are 10.6 months of new homes supply on the market. The number of new homes for sale continued to decline as builders continue to scale back production. New home inventory declined to 454,000 which is the lowest it has been since May 2005. In April, median new home prices rebounded from its lowest levels since September 2006 in March to $246,100 in April. It was also the first time since November that median new home prices recorded a year-over-year gain.
Annualized sales of total existing homes declined 1.0% in April to 4.89 million units. Sales of existing homes are down 17.5% from the 5.93 million units in April 2007. Median existing home prices in April increased for the second straight month to $202,300 from a revised $200,100 in March. The number of existing homes for sale increased jumped 10.5% to 4.552 million units in April. At the current sales pace, there are 11.2 months of existing homes supply on the market. Existing home affordability declined slightly in March due to the increase in median existing home prices..
The producer price index Tuesday will be the most important event this week. Housing starts, industrial production, capacity use, and leading economic indicators data may also move the market. Expect oil and stocks to continue to factor into trading, as inflation fears remain.
For the week, interest rates on government and conventional loans rose by about 7/8's of a discount point.
The employment report Friday will be the most important event this week. The ADP employment release and revised productivity data will also be important. Expect oil and stocks to continue to dominate trading as inflation fears remain a concern.
Last Week in Review…
"INFLATION IS AS VIOLENT AS A MUGGER, AS FRIGHTENING AS AN ARMED ROBBER, AND AS DEADLY AS A HIT MAN." ~ Ronald Reagan. And although you might not describe the effects of inflation in such strong terms yourself...rest assured that the effects of inflation have crept into your home, your gas tank and your wallet. And inflation is also the nemesis of Bonds and therefore home loan rates, because just like inflation erodes the value of the dollars you spend, inflation erodes the value of the fixed return a Bond provides. And last week, Bond pricing worsened on news of inflation, causing home loan rates to move higher by about .25% across the board and reaching the highest levels seen in weeks.
The week was shortened by the Memorial Day holiday, but right out of the gates, inflation concerns abounded. The Consumer Confidence Report indicated that consumer inflation expectations are at an all-time high...meaning that consumers are seeing inflation as a real threat to their own financial situation. Rising energy costs and worldwide inflation fears continued to pummel Bonds lower - in fact, so low that they moved below a tough technical floor of support at the 200-Day Moving Average. This is important because Bonds have made a decisive cross over the 200-day Moving Average on only three separate occasions within the past three years. This means that barring a timely reversal, we are likely seeing a shift in the market towards higher home loan rates.
Friday brought a little good news on inflation, as the Core Personal Consumption Expenditure (PCE) Index showed that inflation does remain within the Fed's comfort zone. While Bonds and home loan rates improved somewhat on the news, the trend for the week was definitely worse overall, as the big picture on inflation cost Bonds and home loan rates some hard earned ground.
Forecast for the Week…
This coming week, one economic report in particular bears inflated significance...Friday's release of the infamous monthly Jobs Report. It will reveal, among many other things, the number of jobs lost or gained during the month of May. Last month's Jobs Report indicated that 20,000 jobs were lost in April, and while this was better than the expected job losses of 75,000, it is possible that the reported number understated the actual number of jobs lost, due to how the Department of Labor averages their count. And part of each month's report is "revisions" to the several prior months' numbers...which this could be quite a wild card for Bonds and home loan rates.
Last month's Jobs Report, which was indeed more positive than expected, caused Bonds to fall a whopping 134bp in a matter of minutes, and home loan rates worsened quickly. Why? Because even though the news wasn't great, it sure was better than anticipated...and this caused money to flow out of Bonds, and into Stocks...which caused Bond prices and home loan rates to worsen. This week's Jobs Report could sure be another mover, and if the report or revisions indicate positive news on the jobs front, home loan rates will likely worsen in response.
Remember when Bond prices move higher, home loan rates move lower...and vice versa. And as you can see in the chart below, Bonds moved lower for most of the week, and actually closed below an important technical level at the 200-day Moving Average. This is a very important level, as it can act as either a very strong floor of support helping Bond prices not to fall below it...or as an equally strong ceiling of resistance, preventing Bonds and home loan rates from improving above it. And with Bonds currently having fallen beneath it, I'll be watching closely this week to see if Bonds have indeed fallen and can't get up...or if they can break above that tough level later this week and help home loan rates improve.
Chart: Fannie Mae 5.5%% Mortgage Bond (Friday May 30, 2008)
It is everywhere, the internet, national news, local news, ect. Who is to blame? ....The housing boom. Everybody got greedy, Home buyers were buying more house than they needed, banks made lending easy, Home sellers were asking more for their homes because they could. When the dust settled home owners were upside down in their properties, Banks made lending harder, Home buyers could not buy.
This cycle is not new it happens over and over again. Just not as extreme as today's. The next one will probably be bigger than this one. Sit tight and hang on this roller coaster is on its way up soon.
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