Huge Home Buying Activity

May 31 2016

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Despite stronger than expected housing data and a nice rally in the stock market, investors showed significant demand for bonds, including mortgage backed securities (MBS). As a result, prices for MBS improved, causing mortgage rates to end the week a little lower.

The housing data released this week showed that home buyers were busy in April signing contacts to purchase homes. The market for both previously owned homes and newly built homes saw their best activity in years. Improved labor market conditions and low mortgage rates are a great combination to support a very active housing market.

The Pending Home Sales Index, which measures the number of contracts signed to buy previously owned homes, jumped in April by 5% over March, to the highest level of activity since February 2006. Similarly, the New Home Sales report, which measures the number of contracts signed to buy newly built homes, surged by 17% over March, to its best level since January 2008.

The Fed has stated that the decision on when to next hike the federal funds rate will depend on the incoming economic data. This week's data certainly increases the chance of a rate hike in the near term. Besides the strong housing data, Durable Goods orders rose in April by much more than expected. Orders jumped 3.4% from March when an increase of only 0.5% was expected. March orders were revised higher as well. Although the durable orders data is volatile from month to month, the April data does show that demand for big ticket items is high and that there is confidence in improved future economic activity.

Looking ahead, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the core PCE price index, an inflation indicator favored by the Fed, will come out on Tuesday. The ISM national manufacturing index will be released on Wednesday, and the ISM national services index will come out on Friday. Mortgage markets will be closed on Monday in observance of Memorial Day.

Topics: The Money Source, mortgage news, employment report, housing data, federal funds rate, mortgage rates, labor market conditions, unemployment rate, new home sales report, pending home sales

Shift in Outlook for Fed Policy

May 20 2016

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Stronger than expected economic data and a shift in expectations for Fed policy were negative for mortgage rates over the past week. As a result, mortgage rates ended the week higher.

Speeches made by Fed officials during the first part of the week alerted investors that the Fed may be much closer to another federal funds rate hike than investors expected. On Wednesday, the release of the minutes from the April 27 Fed meeting confirmed this. In the minutes, Fed officials made it clear that they will consider raising rates as soon as June if economic conditions continue to improve. Investors currently view tighter Fed policy as negative for mortgage rates, so rates rose as the Fed's position became better understood.

One factor supporting the case for tighter monetary policy is stronger than expected improvement in the recent housing data. Existing home sales in April rose for the second straight month and were 6% higher than a year ago. Inventories of existing homes available for sale jumped 9% from March. Sales of existing homes make up about 90% of the market. Housing starts, an indicator of future sales activity for newly built homes, increased 7% in April from March. 

Complicating the decision for the Fed a little is the recent inflation data. The core consumer price index (CPI) in April was 2.1% higher than a year ago, down from a multi-year high of 2.3% in February. After rising significantly for several months, core inflation has declined for the last two months. If this trend continues, it would make the Fed less likely to raise rates. 

Looking ahead, the new home sales data will be released on Tuesday. Durable orders and the pending home sales data will come out on Thursday. The second estimate of first quarter GDP, the broadest measure of economic growth, will be released on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Several Fed officials are scheduled to make speeches next week as well. Mortgage markets will close early on Friday in observance of Memorial Day. 

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Topics: Ali Vafai, The Money Source, mortgage news, consumer price index, economic data, housing data, inflation data

No New ECB Stimulus

Apr 22 2016

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After spending the last couple of weeks at or near the lowest levels of the year, mortgage rates rose this week. The cause came from investor disappointment with Thursday's European Central Bank (ECB) meeting. The U.S. economic data contained few significant surprises and had little effect.

At its last meeting in March, the ECB announced significant new stimulus measures to spur economic activity and inflation in the eurozone. In speeches following the March meeting, ECB President Mario Draghi emphasized the ECB's readiness to do more if needed. Investors liked what they heard and pushed interest rates around the world lower in anticipation of more stimulus. This week, however, the ECB chose to add no new measures, and some of the improvement in rates was reversed. 

The recent housing data was mixed. The existing home sales data for March revealed a solid increase of 5% from February, and they were higher than a year ago. Also notable, inventories of existing homes for sale increased 6%. Tight inventories have been a big factor holding back home sales activity in many regions. National median sale prices were 6% higher than a year ago.

In contrast to home sales, housing starts declined 9% from February, but they still were 14% higher than a year ago. The drop was evenly split between single-family and multi-family units. Building permits, a leading indicator of future activity, fell 8% in March but also remained above year ago levels.

Looking ahead, the next Fed meeting will take place on Wednesday. No change in rates is expected, but the statement could have an impact on mortgage rates. This will be followed by a Bank of Japan meeting which could influence U.S. markets on Thursday. Before the meetings, durable orders will come out on Tuesday. The first reading for first quarter gross domestic product (GDP), the broadest measure of economic activity, will be released on Thursday. The core PCE price index, the Fed's preferred measure of inflation, will come out on Friday.

Topics: Ali Vafai, The Money Source, mortgage news, housing data, economic stimulus, existing homes, economic inflation

Data Exceeds Expectations

Mar 01 2016

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The major U.S. economic data released over the past week was stronger than expected. Upside surprises were seen in GDP, durable orders, housing, and inflation. The impact on mortgage rates was small, however, and rates ended the week just a little higher. 

The Core PCE price index is the monthly inflation indicator preferred by the Fed, and the readings for January showed that inflation is rising more quickly than expected. Last week's CPI inflation report contained a similar message. 

Core PCE, which excludes the volatile food and energy components, was 1.7% higher than a year ago, up from 1.3% just two months ago, and the highest level since February 2013. Low levels of inflation have helped keep mortgage rates low. If the trend toward higher inflation continues, it would be negative for mortgage rates. 

The housing data released over the past week was mixed, but the much more significant report was encouraging. January existing home sales, which make up about 90% of all home sales, increased to near the best level in seven years. They were 11% higher than a year ago. New home sales, which make up the rest of the market, declined in January. Low mortgage rates and solid job gains are having a nice effect on home sales. 

Fourth quarter GDP was revised higher from 0.7% to 1.0%, above the consensus for a decline to 0.4%. GDP, the broadest measure of economic activity, recently has been volatile from quarter to quarter. The consensus is that 2016 will start on a better note. First quarter GDP growth is expected to rise to 2.0%, well above the levels seen during the first quarters of 2014 and 2015. 

Looking ahead, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, Pending Home Sales will be released on Monday. The ISM national manufacturing index will come out on Tuesday, and the ISM national services index will come out on Thursday.

Topics: The Money Source, Pink Unicorn, Core PCE, employment rate, housing market, housing data, mortgage rates, US economic data

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