Mortgage Rates

Anthony Hood
Equity Investment Capital
Office: 949-891-0067
Email: tony@equityinvestmentcapital.com
website: www.equityinvestmentcapital.com



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Wednesday, December 22, 2010


Prior to 8:30 the interest rate markets were a little weaker; Q3 final GDP was released at 8:30 and wasn't as strong as forecasts. Q3 GDP at +2.6% was revised from +2.5% on the advance report last month, estimates were for the revision to increase to +2.8%. The 10 yr and mortgages still traded a little soft by 9:00 but off the worst levels at 8:25 this morning. Recapping; Q1 GDP +3.7%, Q2 +1.7%. Q3 personal consumption expenditures fell from +2.8% on the advance to +2.4%. At a 2.4% pace last quarter it was the fastest since the first three months of 2007. Spending added 1.67% points to GDP from July through September. Inflation is also lower than the policy makers’ long-term forecast. The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 0.5% annual pace, the slowest since record-keeping began in 1959. We know the Fed wants inflation up to its normal target at +2.0% annually, that isn't happening becomes an increasing concern that the US economy may slip into deflation if economic improvement in 2011 isn't stronger.

A word on inflation, we agree with Rick Santelli on CNBC; that the government excludes food and energy from its inflation gauge may have been working in the past but now with commodity prices and energy prices increasing as demand outpaces supply globally, excluding those components may be mis-leading. If included in inflation the level would be slightly above 2.0%. What's more, with the costs of food and energy increasing ($3.00+ for gas and food prices increasing) consumer discretionary spending may be negatively impacted. Regardless, economists and analysts insist that those components be removed to get a truer measure of inflation, based mostly on the volatility in the two components.

Early this morning the weekly MBA mortgage applications for last week took a big tumble; the overall index at -18.6%, the purchase index -2.5% but the re-finance index fell 24.6%. In a way not surprising with the recent spike in rates and this time of the year when home sales and re-financings normally tapper off. It isn't news that re financing has accounted for about 80% of all mortgages in 2010, unless interest rates fall back that percentage is certainly going to decline.

At 9:30 mortgage prices -2/32 (.06 bp), the 10 yr note -2/32 at 3.31% unch. The DJIA opened +3. Financial markets working on thin volume through the remainder of the year.

At 10:00 Nov existing home sales, expected up 6.6% to 6.8%, increased 5.6% to 4.68 mil unit annualized; sales down 27.9 yr/yr, median sales price $170,600.00. Single family sales up 6.7% while condo sales -2.0%. Inventory levels surprisingly down 4.0% with a 9.5 month supply based on Nov sales pace. Overall a weaker report but there was no initial reaction to the data in the bond market. At 10:05 mortgage prices -6/32 (.18 bp) and -4/32 (.12 bp) frm 9:30.

Volatility marks the trading over the past few days; today no different with big swings in prices on any buying or selling. It doesn't take much to move mortgage prices as we saw yesterday in the afternoon when prices increased on some MBS buying in markets razor thin. Expect the same today. Still a bearish outlook as long as the outlook for economic improvement in 2011 dominates as it is now with investors and traders. We believe investors are going to be disappointed with 2011 growth, but right now we will not fight the tape, have to respect what the consensus is until it changes.