Mortgage Market Advisory

Last week mortgage pricing held steady under 5% for a 30-year Conforming Fixed Rate after jumping mid-week prior to the FOMC Statement that was the most upbeat review of conditions in well over a year. The FOMC noted that "economic activity continues to pick up and the deterioration in the labor market is abating." They are still committed to leaving rates low for "an extended period of time", but do feel confident enough to stay on schedule with the sunsetting of a number of financial market support programs.. ie purchasing MBS which is scheduled to end at the end of March.

At the same time the Fed and all other economic indicators are pointing to a robust recovery yet. which will likely keep mortgage pricing from jumping outside of our 60-day forecast levels anytime soon.

The Week Ahead:

This holiday-shortened trading week brings us the release of six monthly or quarterly economic reports. Only a couple of the reports being released are considered to be of high importance to the markets. With the Christmas holiday falling during the week we can expect very thin trading, meaning that we may see a larger reaction than normal to some news because there will be fewer traders working and less transactions being made.

Overall, we are expecting to see some movement in the markets and mortgage rates, but nothing drastic unless we get some surprising results from the week's data. The bond market will close early Thursday (2:00 ET) and will be closed all day Friday in observance of the Christmas Day holiday. This means that firms that trade bonds will likely be keeping only a skeleton staff the latter part of the week and raises the possibility of a stronger reaction to surprises in the economic data than we normally would see. Accordingly, proceed cautiously and stay close to your Loan Officer this week if still floating an interest rate and closing in the immediate future.

MONDAY:  There is no relevant economic news scheduled for release today, so look for the stock markets to help drive bond trading and mortgage rates.

TUESDAY: Two of the week's reports are scheduled for posting Tuesday. The first is the final revision to the 3rd Quarter GDP. We don't think this data will have an impact on mortgage rates unless it varies greatly from its expected reading. Last month's first revision showed that the economy expanded at a 2.8% annual pace during the quarter and this month's revision is expected to show the same. A significant upward revision would be considered bad news for bonds, but since this data is quite aged at this point I don't think it will have much of an impact on mortgage rates Tuesday.

The second report of the day is November's Existing Home Sales report. This release will come from the National Association of Realtors while Wednesday's New Home Sales data is a Commerce Department report. Both give us a measurement of housing sector strength and mortgage credit demand, however, neither are considered to be of high importance. And both o f the reports are expected to show a small increase in sales. Weaker than expected readings would be considered positive for bonds and mortgage rates because they hint at a weakening housing market, but unless the actual reading varies greatly from forecasts the results will probably have little or no impact on mortgage rates.

WEDNESDAY: Wednesday brings us the release of three reports. The first is November's Personal Income and Outlays data. It will give us an important measurement of consumer ability to spend and current spending habits. Since consumer spending makes up two-thirds of the U.S. economy, any related data usually has a noticeable impact on the financial markets and mortgage rates. Current forecasts are calling for a 0.5% increase in income and a 0.7% increase in spending. If this report reveals weaker than expected readings, we should see the bond market improve and mortgage rates drop slightly Wednesday morning.
The second report of the day comes late morning when the revised University of Michigan Index of Consumer Sentiment for December is posted. Current forecasts are calling for a small upward revision from the preliminary reading of 73.4. This is fairly important because rising consumer confidence indicates that consumers may be more apt to make large purchases in the near future. An unexpected upward revision could lead to slightly higher mortgage rates Wednesday.

The last report of the day is November's New Home Sales. It is this week's least important report and is unlikely to influence mortgage rates.

THURSDAY: November's Durable Goods Orders will be posted early Thursday morning. This data gives us an important measurement of manufacturing sector strength by tracking orders for big-ticket items or products that are expected to last at least three years. Analysts are expecting the report to show a 0.5% increase in new order s. A decline in orders would indicate that the manufacturing sector was weaker than many had thought. This would be good news for the bond market and should drive mortgage rates lower. However, a larger than expected rise in orders could lead to mortgage rates moving higher early Thursday morning.


Two-Month Rate Forecast:
With rates at multi-year or near historic and all-time lows, it's tough to expect that they have considerable space to decline much from here, especially in the face of a modestly improving economic climate and an improving corporate earnings picture.

It appears low mortgage rates will be with us at least until the Fed's MBS purchase program comes to an end in March 2010 as scheduled. There are many speculating that the Fed may find a way to extend this program in some form to continue to support housing as it appears to be just getting legs under it. Low market rates in general will be with us for "an extended period of time" as committed by the Fed and Ben Bernanke. While there are discussions around possible exit strategies, none of the members seem to feel that any immediate or urgent action must be taken anytime soon relative to market rates.

We expect mortgage rates to likely wander in a range from about 4.75% to 5.25% on the Conv. 30-year fixed, but to be choppy in that range as the stock and bond markets search for new trend lines. 

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