Mortgage Rates

Mortgage Rates Anthony Hood Equity Investment Capital Office: 949-891-0067 Email: tony@equityinvestmentcapital.com website: www.equityinvestmentcapital.com Building Strong, Lasting Relationships; One Client at a Time. Another quiet start this morning in the stock and bond markets. At 8:30 the 10 yr +2 bp at 1.58%, stock indexes mixed but essentially unchanged. At 8:30 two Q2 reports; Q2 productivity expected at +1.9% increased to +2.2% (the advance report last month had productivity at +1.6%), Q2 unit labor costs expected at +1.4% was +1.5% (in the advance report last month costs were +1.7%). Increasing productivity leads to lower unit labor costs. There was no noticeable reaction to the reports. In Europe this morning more talk from the ECB but still concerns from Germany that may scuttle Mario Draghi’s plan to buy government bonds with maturities of three yrs or less. His proposal reveled today involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money ( the ECB will remove from the system elsewhere the same amount of money it spends). The ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets. Draghi told the European Parliament the ECB needs to intervene in bond markets to wrest back control of interest rates in the fragmented euro-area economy and ensure the survival of the common currency. The plan will be debated today and tomorrow Draghi will announce what the outcome of the ECB meeting decides tomorrow. There appears to be a consensus is forming except in Germany’s Bundesbank with concerns the plan would increase inflation in the region. The ECB plan caused the euro currency to firm this morning, but not much. The US 10 yr yield increased by 2 bp on the report. The EU has had many ideas over the last three years but to no avail improving the debt crisis that threatens to drive Spain and Italy into depression unless there is some relief on borrowing costs. Markets are generally numb to news from the region as every plan or thought has been shot down. European stocks advanced on the report; US stock indexes prior to the 9:30 open little changed. An ECB spokesman referred to an Aug. 20 statement in which the Frankfurt-based central bank said it was misleading to report on decisions that haven’t been taken yet. Europe’s economies still declining; dragging global economies with it. In Germany retail sales fell 0.9% from June, when they gained 0.5%, today’s report showed. France reported a gain of 0.9%, while sales fell 1.9% in Spain. Mixed data as is the case in the US with some data better while most are slipping. The Fed is poised to ease again, pushing interest rates lower; but no one has explained to my satisfaction how keeping their historic low interest rates low will add jobs or increase business spending. In terms of improving the economy, the Fed is pushing on a string with little to show for it except a ballooning Fed balance sheet. Even Bernanke says it will take more fiscal changes to turn the economy on. Lower interest rates have stabilized the housing markets but even that isn’t much of a boost as evidenced by the MBA mortgage applications report today. Overall mortgage applications decreased 2.5% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 31, 2012 The Refinance Index decreased 3.0% from the previous week to the lowest level since May 2012. The seasonally adjusted Purchase Index decreased 0.8% from one week earlier. The refinance share of mortgage activity remained unchanged at 79 percent from the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 5.0% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.78% from 3.80% with points decreasing to 0.37 from 0.42 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 4.05% from 4.06%, with points decreasing to 0.32 from 0.34 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to 3.54% from 3.60%, with points decreasing to 0.44 from 0.48 (including the origination fee) for 80% loans. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.10% from 3.12%, with points decreasing to 0.37 from 0.44 (including the origination fee) for 80% loans. The average contract interest rate for 5/1 ARMs decreased to 2.64% from 2.68%, with points decreasing to 0.35 from 0.36 (including the origination fee) for 80% loans. At 9:30 the DJIA opened +24, NASDAQ -2, S&P +1. The 10 yr note rate at 1.59% +2 bp. 30 yr mortgage prices at 9:30 -3 bp, holding well. Treasuries and MBSs still hold a bullish technical bias, we go with the tape. BUT always nervous; buy the rumor sell the fact. Has the bond market already discounted a Fed easing at the Sept meeting? The 10 yr note rate has fallen from 1.86% to its recent low at 1.55% (1.59% this morning) over the last 10 sessions since the FOMC minutes and comments from Bernanke. The only way we will actually know is after the fact. Tomorrow’s August employment data will provide a clue on the reaction to whatever the report reveals. Just saying; keep an open mind now and don’t anticipate rates are set to fall more. We remain constructive because our technicals look good, but a little concerned about the underlying fundamentals.