Townhome construction on the rise nationwide:
Supply and demand are always a sticky wicket in real estate, especially in the new homes arena. Housing demand continues to outpace supply, and nowhere is that more keenly felt that in the entry-level category. Because of it, pressure has increased on builders to deal with the ongoing high cost of land, materials and labor cuts into profitability by building more attached and semi-attached housing, such as townhomes.
According to the National Association of Home Builders (NAHB), townhouse construction is increasing and is anticipated to grow in the coming years. According to a recent article in BUILDER Magazine’s online entity, from the third quarter of 2017 to the third quarter of 2018, townhouse construction starts totaled 123,000, which is 24 percent higher than the previous four quarters. The market share of new townhouses is now 1.8 percent of all single-family house starts, the highest share since the recession. The peak market share over the past two decades was during the first quarter of 2008 when 14.6 percent of all single-family house starts were townhouses.
The NAHB goes on to report, “On a one-year moving average, new townhouses make up 13.8% of all single-family starts. This marks the highest share of townhome starts since before the recession. The last peak market share was set in Q1 2008 at 14.6% of all single-family homes built.” They add that townhouse construction is likely to expand because of the large first-time buyer market looking for walkable neighborhoods and more city-close locations.
How Rates Move:
Conventional overnment (FHA and VA) lenders set their rates based on the pricing of Mortgageand G-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Rates Currently Trending: Neutral
Mortgage rates are trending sideways this morning. Last week the MBS market improved by +40bps. This was enough to move rates lower last week. We saw moderate to high rate volatility last week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the greatest ability to mover rates this week. 1) Geopolitical, 2) Central Banks and 3) Inflation.
1) Geopolitical: Brexit continues to be a big part of global uncertainty. The latest is the British PM May is going to delay a key vote that would cancel the Bexit agreement put forth by May. She instead will travel to Brussels to try to get more concessions which are unlikely and have caused traders to hedge more towards a "no deal" scenario. The next biggest story to continue to watch is China has issued a summons to the U.S. Ambassador over the Huawei. In France, the protestors have not been calmed with promises to "delay" a tax hike as they are the most taxed nation among the developed countries. The concern is rising that this will not only be a large economic drag on France and the EU but also shape a wave of elections that would flip several countries over to not supporting an EU at all.
2) Central Banks: The biggest event will be Thursday's European Central Bank's Policy Statement and Interest Rate Decision, followed up with a live press conference with ECB President Mario Draghi. The market is not expecting any major developments though. The Federal Reserve Bank meets next week, and while the markets still believe that there will be a rate hike at that meeting, nonstop speculation and reporting have the market shifting its consensus from as many as 3 rate hikes in 2019, down to zero rate hikes in 2019. Meanwhile, the Governor of India's Central Bank has resigned causing concern over stability in one of the largest countries in the world.
3) Inflation: We get key readings with PPI and CPI with Wednesday's Core YOY reading getting the most weight. We also get the Atlanta Fed Business Inflation Index. Over the weekend, China reported lower than expected inflationary data.
Treasury Auctions this Week:
This Week's Potential Volatility: High
Rates continue to slip lower. Fundamentally, there's a lot of fear in the markets on a geopolitical and economic front. Technically, rates continue to push the bounds. Look for rates to push lower as long as there's both geopolitical and economic uncertainty. When/if any of the above issues get resolved, look for rate volatility to spike and the current trend to reverse.
If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.
Stock indexes and interest rate markets opened quietly this morning; the indexes fractionally better and rate markets unchanged from Friday. Trading in Europe and Asia US indexes were lower.
This week key data; PPI, CPI, and retail sales. Next week the FOMC will increase rates on Wednesday.
At 9:30 am ET the DJIA opened -11, NASDAQ +17, S&P unch. 10 yr 2.85% unchanged from Friday. Fannie 4.5 30 yr coupon at 9:30 +3 bps from Friday’s close and +25 bps from 9:30 Friday. 4.0 30 yr coupon at 9:30 +5 bps from Friday and +24 bps from 9:30 Friday.
Not much news on China/US trade; the administration remains stalwart with its 90 hard deadline for progress or more tariffs will fall on China. US wanting a hard deal with China but likely not expecting it. The best we can see is a softening of China’s stance that will lead to more discussions and hopefully a trade pact later this year. Reworking a trade relationship that has been in place for decades isn’t likely to be resolved quickly. Beijing and Washington agreed that China will purchase large amounts of goods and services, with China pledging to announce soybean and natural-gas purchases in the coming weeks, officials in both nations said. Beijing is also considering reducing tariffs on U.S. automobiles. Yesterday Larry Kudlow on Fox News saying, “some very positive, promising statements” out of Beijing. He also said some 35 Chinese agencies and the country’s supreme court were “working on new legislation to deal with the IP theft issues.”
Markets were expecting a Brexit vote tomorrow in the UK; Theresa May is calling it off, however. May will make a statement to Parliament on Brexit today; her plan under pressure as the vote nears leaving her tenure as Prime Minister up in the air. May’s plan to delay the vote throws the Brexit process into further turmoil. She is due back in Brussels at a summit of EU on Thursday and is expected to ask for fresh concessions in an attempt to revive the chances of getting her deal through Parliament.
Last Thursday the bellwether 10 yr note yield fell to the next major resistance level at 2.82% the lows in July and again in late August. So far it is holding, but with the US and global equity markets in total free-fall and money moving to cash or the arms of US treasuries (where US rates are the highest of all major central banks) we can’t be sure any technical support will hold. Good for the mortgage markets but the weakening economic outlook and the time of the year may not be as positive. Refinances should improve as more look to take cash out.
Oct JOLTS job openings were expected at 7.0 mil, openings were 7.01 mil; jobs are plentiful, most and the low end but also recently seeing openings in more skilled jobs.
Stock markets around the globe are increasingly coming to the realization the economies are going to slow in 2019. How slow? That is what investors are trying to define as equity markets continue to decline.
This Week’s Calendar:
10:00 am Oct JOLTS (+7.0 mil expected, as reported 7.01 mil
6:00 am Nov NFIB small business optimism index (107.0 frm 107.4)
8:30 am Nov PPI (0.0%, the core ex food and energy +0.1%0
1:00 pm $38B 3 yr note auction
7:00 am MBA weekly mortgage applications
8:30 am Nov CPI (0.0%, ex food and energy +0.2%)
1:00 pm $24B 10 yr note auction
2:00 pm Nov Treasury budget (-$165B, debt increase so far this year, 2 months -$265B)
8:30 am weekly jobless claims (228K -3K)
1:00 pm $16B 30 yr bond auction
8:30 am Nov retail sales (+0.1%, ex autos +0.2%)
9:15 am Nov industrial production and factory use (production +0.3%, factory use 78.5% frm 78.4% in Oct.0
10:00 am Oct business inventories (+0.5%)
PRICES @ 10:10 AM
10 yr. note: +1/32 (3 bp) 2.85% unch
5 yr. note: -2/32 (6 bp) 2.71% +1 bp
2 Yr. note: unch 2.72% unch
30 yr. bond: +8/32 (25 bp) 3.12% -2 bp
Libor Rates: 1 mo. 2.400%; 3 mo. 2.771%; 6 mo. 2.885%; 1 yr. 3.100% (12/7/18)
30 yr. FNMA 4.5: @9:30 103.30 +3 bp (+25 bp from 9:30 Friday) 4.0 30 yr. coupon 101.33 +3 bp
15 yr. FNMA 4.0: @9:30 102.08 +1 bp (+3 bp from 9:30 Friday)
30 yr. GNMA 4.5: @9:30 103.51 +4 bp (+23 bp from 9:30 Friday)
Dollar/Yuan: $6.9131 +$0.0387
Dollar/Yen: 113.00 +0.29 yen
Dollar/Euro: $1.1401 +$0.0017
Dollar Index: 96.89 +0.16
Gold: $1251.40 -$1.20
Crude Oil: $51.46 -$1.15
DJIA: 24,213.29 -175.66
NASDAQ: 6972.26 +3.00
S&P 500: 2617.49 -15.59
The November employment data this morning provided a mixed bag. The unemployment rate remained unchanged at 3.7%, non-farm jobs were thought to be 190K but reported up only +155K, private jobs expected +183K but were reported up +161K, and October NFP jobs revised to 237K from the 250K initially reported. The labor participation rate of 62.9% stayed unchanged from October but was expected at 62.8%. Manufacturing jobs were expecting a +16K increase but increased by 27K. October manufacturing jobs revised lower to 26K from 32K reported. The key average hourly earnings were up 0.2% against forecasts of +0.3%; yr/yr earnings at 3.1% with estimates at 3.2%. Fewer jobs, no increase in earnings initially kept the bond and mortgage markets unchanged.
Non-inflationary strength is the indication from the November employment report, as payroll growth proved favorable and moderate and wage pressures modest. The year-on-year rate for earnings held unchanged at 3.1%, again on the low side of expectations. Trade and transportation, where capacity stress has been elevated, added a very strong 53,000 jobs with professional and business services up 32,000 — solid but still low for this reading to suggest that the scramble to find full-time employees may be easing.
Before the employment report at 8:30 am ET stock indexes were lower, finding support in lower job gains (less concern over Fed increases). We still believe the Fed will increase the Federal Funds rate in 11 days at the FOMC meeting and think the Fed will not be as aggressive with the 2019 rate increases that were widely expected just two weeks ago. Still, there are some continuing to look for three more increases. “The report is not soft enough to deter a December rate hike but it will contribute to a downward revision in central bankers’ policy guidance for rate hikes in 2019,” ….“In terms of a snapshot for the economy, and while somewhat softer than consensus expectations, this is a solid November jobs report that goes counter to talk of recession,” said Mohamed El-Erian, chief economic adviser at Allianz.
By 9:30 am the DJIA opened down -30, the NASDAQ dropped -27, and S&P lost -4. The 10-yr 2.89% added +1 bp.
OPEC completed a deal to cut output, resulting in a larger cut than oil traders were expecting. Crude is trading higher this morning. They struck an accord to remove 1.2 million barrels a day of crude from the market, with non-OPEC allies including Russia taking a 400,000 barrel-a-day share; Iran was granted an exemption from curbing its output due to U.S. sanctions, which have already sharply reduced the nation’s oil shipments.
The Dec mid-month University of Michigan sentiment index was thought to be 97.4; the index was 97.5. October inventories, expected to add +0.7%, increased 0.8%, but sales declined 0.2%.
The interest rate markets are exceptionally over-bought, as we have been noting. We should see rates increase in the very near term. The wider technical outlook is still positive and can remain positive until the 10-yr moves above 3.00%. Yesterday the 10 at one point fell to 2.82% the lowest level since mid-August, a critical technical resistance level. It was unable to break through, and the 10 ended yesterday at 2.88% although MBS prices did hold well.
10 yr. note: -3/32 (9 bp) 2.89% +1 bp
5 yr. note: +2/32 (6 bp) 2.74% -1 bp
2 Yr. note: unch 2.76% unch
30 yr. bond: -12/32 (37 bp) 3.18% +3 bp
Libor Rates: 1mo 2.386%; 3 mo. 2.767%; 6 mo. 2.889%; 1 yr. 3.111 (12/6/18)
30 yr. FNMA 4.5: @9:30 103.05 -6 bp (-8 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 102.05 +8 bp (+14 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 103.28 -3 bp (-8 bp from 9:30 yesterday)
Dollar/Yuan: $6.8774 -$0.0057
Dollar/Yen: 112.77 +0.10 yen
Dollar/Euro: $1.1402 +$0.024
Dollar Index: 96.75 -0.03
Gold: $1248.70 +$5.10
Crude Oil: $53.71 +$2.22
DJIA: 24,966.03 +18.36
NASDAQ: 7166.40 -21.86
S&P 500: 2696.17 +0.22
Tuesday the DJIA declined 800 points. The NASDAQ lost -283, and this morning in futures trade the DJIA dropped -373, NASDAQ -117. The 10-yr note at 8:30 am ET was down -2 bps to 2.89%. Yesterday China agreed to the 90-day moratorium on additional tariffs and signaled it was willing to begin serious discussions. This morning a possible setback on news that the US asked Canada to arrest Wanzhou Meng, chief financial officer of Huawei Technologies Co. in order to extradite her to the US. Huawei is the world’s largest supplier of telecommunications network equipment and second-biggest maker of smartphones. The US is saying the company is violating sanctions against Iran. Meng is the daughter of the founder of Huawei, a national champion at the forefront of Xi’s efforts for China to be self-sufficient in strategic technologies. It’s not clear yet, but her arrest is seen as a setback for trade discussions.
OPEC members agreed on a cut in output today and we're waiting now for Russia to announce its intentions. Possible output cuts by OPEC and its allies ranged from 0.5-1.5 million bpd, oil traders appear to not be buying any serious cuts. Crude this morning was down $1.74 at 8:00 am.
At 7:30 am Challenger Job cuts of 53,073 were down from 75,644 in October. The average over the last three months is 61,344 in a reading last approached in early 2016. Auto layoffs totaled 14,040 in November with healthcare a distant second at 4,300, followed by retail at 3,769.
At 8:15 am the Nov ADP private jobs were expected +175K, but as reported added +179K.
At 8:30 am weekly jobless claims, expected at 225K, reported in at 23K, down -4K; the 4-week average increased to 228K from 223.75 the prior week. The October US trade deficit, expected to be down -$55.0B, was in line at -$55.5B; the widest deficit in 10 yrs.. Final Q3 productivity and unit labor costs: productivity expected +2.3% and reported at 2.3%, unit labor costs expected 1.1% was +0.9%. The lower labor costs is another way to look at inflation, declining from +1.2% to +0.9%, is helpful.
At 9:30 am the DJIA opened down -450, the NASDAQ lost -134, and S&P dropped -46. The 10-yr 2.87% was down -4 bps from Tuesday. MBS prices added +15 bps from Tuesday’s close and +11 bps from 9:30 Tuesday.
At 10:00 am November the ISM non-manufacturing index was thought to be at 59.0 from 60.3; the index reported at 60.7. October factory orders dropped -2.1%, in line with the -2.0% expected.
The yield curve is continuing to invert; the 2/5 inverted by 1 bps, and the 2/10 is still holding un-inverted, but the spread is narrowing this morning to 13 bps to the 10-yr. Debate continues whether the historical outcome of inversion is a precursor to recession or just technical factors. No matter the debate, US and global interest rates are declining rapidly; over the last few weeks, there has been an escalation in the outlook that the US is headed to a recession in 2019. JP Morgan earlier this week advised its clients that cash is better now than equity markets leading to the strong move lower in rates. Goldman recently essentially advised the same moves and forecasted a recession. The momentum tilting to that view has been escalating at increased speed over the last month. US/China trade, US/EU trade fueling the drive to treasuries and cash.
PRICES @ 10:00 AM
10 yr. note: +18/32 (56 bp) 2.85% -6 bp
5 yr. note: +12/32 (37 bp) 2.70% -9 bp
2 Yr. note: +7/32 (22 bp) 2.71% -9 bp
30 yr. bond: +30/32 (94 bp) 3.12% -5 bp
Libor Rates: 1 mo. 2.383%; 3 mo. 2.765%; 6 mo. 2.891%; 1 yr. 3.125%
30 yr. FNMA 4.5: @9:30 103.13 +15 bp (+11 bp from 9:30 Tuesday) 4.0 coupon 110.11 ( +19 bp from 9:30 Tuesday)
15 yr. FNMA 4.0: @9:30 101.91 unch (-1 bp from 9:30 Tuesday)
30 yr. GNMA 4.5: @9:30 103.36 +7 bp (+12 bp from 9:30 Tuesday)
Dollar/Yuan: $6.8822 +$0.0254
Dollar/Yen: 112.42 -0.77 yen
Dollar/Euro: $1.1392 +$0.0048
Dollar Index: 96.74 -0.26
Gold: $1248.30 +$5.70
Crude Oil: $51.80 -$1.03
DJIA: 24,571.96 -455.11
NASDAQ: 7042.28 -116.14
S&P 500: 2652.36 -47.70
Early this morning, 6:00 am ET the 10 yr yield fell to 2.95%, by 9:00 am 2.96%. (see below for 10:00 am level) MBS prices in early trade didn’t change much from yesterday’s close. The yield curve is inverting, investors and analysts seeing the inversion as the historical signal that the economy may be heading for a recession. The inversion between the 2 and 5 isn’t much, but it is supporting the long end of the curve; 2 yr note at 2.831%, the 5 at 2.822%, the first inversion, albeit not much, the first since Sept 2007. The 10 yield down 3 bps from yesterday’s close at 9:00 am. The German 10 yr bund 0.289%, Japan’s 10yr 0.069%. The spread between the 2 and the 10 yr at 9:00 am 20 bps.
More unsettling news coming from the housing sector; Toll Bros. the luxury-home builder gave weaker-than-expected guidance for the first quarter, pointing to reports about a souring housing market as the cause of the slowdown. "In November, we saw the market soften further, which we attribute to the cumulative impact of rising interest rates and the effect on buyer sentiment of well-publicized reports of a housing slowdown," Toll Brothers Chairman and CEO Douglas Yearley said in a statement.
Yesterday the stock market rallied on the knee-jerk reaction to the weekend meeting between Trump and Xi; apparently, the two agreed to lower tariffs on China’s US auto imports and Trump agreed to hold off any additional tariffs for 90 days beginning on January 1st, not Dec 1st as was initially thought. In the meantime, the idea is that serious negotiations would begin to chisel out a new broad-based trade pact. Today cooler heads are saying (and believing) that any major trade deal is a long way off; it isn’t going to happen in the next four months. Traders watching for Dec 18th as the potential next hint from China; the date marks the 40th anniversary of China’s economic reforms. There is a thought that it would be a perfect time for China to send a signal about trade with the US; some think if China refrains from any remarks it would be seen as cooperation still lacking and more evidence that a trade pact is way off. In the meantime, the White House is grappling to explain the agreement Trump made with Xi, there isn’t anything on paper, and China still has not confirmed what the president has said.
The only data today; Nov auto and truck sales expected 17.2 mil down from 17.5 mil in October.
Reuters reporting today OPEC and its allies are working toward a deal this week to reduce oil output by at least 1.3 million barrels per day, four sources said, adding that Russia's resistance to a major cut was so far the main stumbling block.
Interest rates continuing to fall, an easy trade in hindsight but at the moment we still are concerned the move has been too orderly so far; almost a straight line down from 2.23% on the 10 to 2.95% this morning. Saying that, doesn’t change the reality, however, we are expecting an increase in volatility, how much longer though before some backing and filling. There is an increasing view the US and global economies may slip into a recession (2 consecutive quarterly declines in GDP), and little to no inflation are driving investors to treasuries. The US treasury market rates so much higher than other major economies and central banks. Mix in the growing belief that the Fed will hold off rate increases after the hike later this month.
10 yr. note: +6/32 (18 bp) 2.94% -3.5 bp
5 yr. note: +1/32 (3 bp) 2.82% -0.5 bp
2 Yr. note: -1/32 (3 bp) 2.84% +0.5 bp
30 yr. bond: +30/32 (94 bp) 3.21% -6 bp
Libor Rates: 1 mo. 2.378%; 3 mo. 2.751%; 6 mo. 2.895%; 1 yr. 3.138% (12/3/18)
30 yr. FNMA 4.5: @9:30 103.02 +5 bp (+18 bp from 9:30 yesterday)
15 yr. FNMA 4.0: @9:30 101.92 +1 bp (+4 bp from 9:30 yesterday)
30 yr. GNMA 4.5: @9:30 103.24 unch (+14 bp from 9:30 yesterday)
Dollar/Yuan: $6.8321 -$0.0513
Dollar/Yen: 112.84 -0.81 yen
Dollar/Euro: $1.1387 +$0.0034
Dollar Index: 96.65 -0.30 (dollar continuing to weaken)
Gold: $1246.60 +$7.00 (weak dollar)
Crude Oil: $53.13 +$0.17
DJIA: 25,646.90 -179.53
NASDAQ: 7401.82 -39.70
S&P 500: 2774.75 -15.62
Mixed bag for buyers and sellers forecast for 2019
It’s that time of year when people look back on the past year but also like to take a leap forward, trying to take a peek at what 2019 has in store for real estate. If your dreams include buying your own home, it’s wise to keep an eye on the ever-changing tides of the housing market.
In a recent report by the Realtor.com economic research team using a wealth of housing data, here what they came up with as a forecast for 2019 home buyers and sellers—a year not without its potential challenges.
There will be more homes for sale, especially in luxury markets. The persistent super-tight home inventory will get some relief, even though the surge may not be enough to keep up with the demand. According the report, the nationwide inventory actually hit its lowest level in recorded history last winter. This year, however, it finally started to recover with that expected to continue into next year, even if at a mild 7% gain.
While this is welcome news for buyers, sellers will not have it as easy. “More inventory for sellers means it’s not going to be as easy as it has been in past years—it means they will have to think about the competition," says Danielle Hale, realtor.com's chief economist. She continues, "It’s still going to be a very good market for sellers but if they’ve had their expectations set by listening to stories of how quickly their neighbor’s home sold in 2017 or in 2018, they may have to adjust their expectations.”
Pricier markets that typically have strong employment economies will see the most growth, with the biggest increases in high-end inventory in the metro areas of San Jose, CA; Seattle, WA; Worcester, MA; Boston, MA; and Nashville, TN. All of those metro markets, which may include neighboring towns, could see double-digit gains in inventory in 2019.
According to the latest California Association of Realtors (CAR) report, outmigration will also be a primary concern for the California housing market in 2019. “The high housing cost is driving Californians to leave their current county or even the state. According to C.A.R.’s 2018 State of the Housing Market/Study of Housing: Insight, Forecast, Trends (SHIFT) report, 28 percent of homebuyers moved out of the county in which they previously resided, up from 21 percent in 2017. The outmigration trend was even worse in the Bay Area, where housing was the least affordable, with 35 percent of homebuyers moving out because of affordability constraints. Southern California did not fare any better as 35 percent of homebuyers moved out of their county for the same reason, a significant jump from 21 percent in 2017.”
Much of the nation is looking for a break for homebuyers, as sellers have had it easy for the past few years, but it’s mixed bag. “In some ways, life is going to be easier for home buyers; they’ll have more options," Hale says. "But life is also going to be more difficult for home buyers, because we expect mortgage rates to continue to increase, we expect home prices to continue to increase, so the pinch that they’re feeling from affordability is going to continue to be a pain point moving into 2019.”
Millennials are the biggest generational group of home buyers, accounting for 45% of mortgages (compared with 17% for baby boomers and 37% for Gen Xers). Some are now even buying move-up homes. Slightly older move-up buyers will reap the benefits of both their home equity and the increased choices in the market.
“They’re going to be more price-conscious than any other generation," says Ali Wolf, director of economic research at Meyers Research. He cites this because millennials, who typically carry student debt, will want to be able to spend on experiences, like travel, taking away from the funds they can put aside for a down payment or a monthly mortgage payment. "They want to maintain a certain lifestyle, but they still see the value in owning a home.” Millennials are likely to make up the largest share of home buyers for the next decade. The year 2020 is projected to be the peak for millennial home buying—the bulk of them will be age 30.
This year is truly a crapshoot for how the new tax law will affect the home buying market, as most taxpayers won't be filing taxes under the new law until April 2019. “And while some people might have a savvy tax adviser giving them a better idea of what's in store,” the report says, “for many, the reality check will come in the form of a bigger tax bill—or a bigger refund. “Renters are likely to have lower tax bills, but might not be tempted to buy while affordability remains a challenge, and with the new, increased standard deduction reducing the appeal of the homeowner's mortgage-interest deduction.”
Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I’m among few mortgage professionals who have access to live trading screens during market hours.
Mortgage rates are trending sideways to slightly lower so far today. Last week the MBS market improved by +39bps. This was enough to move rates lower last week. We saw mostly moderate rate volatility last week.
This Week's Rate Forecast: Neutral
Three Things: These are the three areas that have the highest potential to impact mortgage rates this week. 1) Jobs, 2) Geopolitical and 3) Fed.
1) Jobs: We get a ton of jobs related data this week with the bond market focusing on Friday's Average Hourly Earnings data. Last month, it broke above 3.0% on a YOY basis with a 3.1% reading. The market is expecting a reading at least as strong as that. If moves higher than 3.2%, it would spark a selloff (higher rates).
2) Geopolitical: This is a TON of big global stories this week, and any one of them could easily push pricing higher or lower. The news over the weekend is the "truce" between China and the U.S. with a 90 day period of tariff freezes while the two groups negotiate a new trade deal. While Brexit is still very much in the news, it is actually France that is stealing the European headlines with massive demonstrations of 100,000 protesting rising taxes and gasoline prices. OPEC is also taking center stage as falling oil prices has been a big factor in keeping inflation at bay in the U.S. Their is an OPEC meeting on Thursday, and already we have one member, Qatar saying that it will officially leave the cartel on January 1.
3) Fed: We have a very big week that is stuffed full of speeches as we near the media blackout period before their December meeting. Fed Chair Powell was originally scheduled to speak on Wednesday, but that has been canceled due to the market being closed on Wed...we are waiting to see when it will be rescheduled for.
This Week's Potential Volatility: Average
Mortgage rates have a lot to chew on this week on the geopolitical front. There's a lot hanging out there that can move rates higher or lower. While we have some economic releases that can drive rates, look for markets to focus on trade, Brexit, and most of all France.
Stock indexes looked better this morning. The rate market prices were slightly weaker. The much-anticipated meeting over the weekend between President Trump and China’s President Xi is seen as progress by the majority, but naysayers still have doubts. Investors are encouraged with the DJIA at 8:00 am ET up +430 points. Trump tweeted a claim that China agreed to “reduce and remove” tariffs on imported American-made cars, raising more questions about the outcome of his meeting. So far it is a one way street with no comments coming from China officials. The president’s tweet: “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.” Meanwhile, what we are reading from the White House reports is that his optimism may exceed what China will actually do. It’s a step forward, but a long way to travel for any major breakthroughs. His bold remarks likely reflect the fact that he's under pressure from American businesses to resolve the trade fight.
The meeting ended with a truce in the trade war — stocks rallying, the rate markets increasing and crude oil improving. It is unclear now on what will occur next. The truce likely will stave off the president’s recent threats to increase tariffs and add $200B more tariffs. 90 days of backing away, it’s all a breath of fresh air for now, but huge hurdles await. China likely will be hard pressed on is intellectual piracy and hurdles for US companies operating in China. China’s yuan climbed with emerging-market assets. Gold and copper rallied, as did most other commodities.
At 9:30 am the DJIA opened up +403, the NASDAQ added +134, and S&P was up +37. The 10-yr at 9:30 am stood at 3.20%, up +2 bp.
At 10:00 am November’s ISM index rose to 59.3 from 57.7 the previous month. The new orders index rose to 62.1 in November from 57.4 a month earlier. The employment index increased to 58.4 last month from the prior 56.8. The prices paid index decreased to 60.7 in November, from the previous reading of 71.6. Analysts had forecast the reading to fall to 70.0. Economists had predicted a drop to 56.5 for the overall index.
October construction spending, expected to add +0.4%, declined 0.1%; yr/yr spending +4.9% down from 7.2% in September.
Markets are going to close on Wednesday in remembrance of George H W Bush. The New York Stock Exchange, NASDAQ Inc.’s U.S. equities and options markets and CME Group Inc.’s U.S.-based equity markets will shut, the companies said. They will also observe a moment of silence on Monday. The Securities Industry and Financial Markets Association has also recommended that fixed-income cash markets close on Wednesday, according to a statement. A National Day of Mourning is always followed when a former President dies.
This is employment week; unemployment is expected to be unchanged, and job gains are forecast about 185K. The markets will be closed on Wednesday but there is a major speech scheduled. Jerome Powell’s testimony to the Congress's Joint Economic Committee will be re-scheduled. Also Wednesday there are a number of key data points scheduled.
The meeting between Trump and Xi is hopefully a start but moving forward any concrete trade pact is not likely for months as China isn’t likely to roll over without a protracted series of negotiations. Already after 30 minutes, the stock indexes have backed off the opening levels.
3.00% for the 10-yr note is a stone wall. Last Friday it briefly dipped below 3.00% to 2.996%, but there isn’t anything significant to it other than a test that failed. As previously noted, the push below 3.00% will likely take a major change in sentiment and global economic outlooks; at the present there isn’t anything out there that has the momentum to change the outlook for US and global interest rates.
10:00 am Nov ISM index (57.2 expected, as reported
Oct construction spending (expected +0.4%, as reported
No Time November auto and truck sales
7:00 am weekly MBA mortgage applications
8:15 am Nov ADP jobs (+175K)
8:30 am Q3 productivity and unit labor costs (productivity +2.3%, unit labor costs +1.1%)
10:00 am Nov ISM non-manufacturing index (59.0 from 60.3)
2:00 pm Fed Beige Book
8:30 am weekly jobless claims (225K -9K)
October US trade deficit (-$54.7B)
10:00 am Oct factory orders (-2.0%)
8:30 am November employment data (unemployed 3.7%, NFP jobs +189K, private jobs 185K, average hourly earnings +0.3%, labor participation rate 62.8% from 62.9% in October)
10:00 am University of Michigan consumer sentiment index (97.5 unchanged)
3:00 pm October consumer credit (+$15.3B)
PRICES @ 10:15 AM
10 yr. note: -7/32 (22 bp) 3.02% +2 bp
5 yr. note: -6/32 (18 bp) 2.86% +2 bp
2 Yr. note: -2/32 (6 bp) 2.82% -1.5 bp
30 yr. bond: -16/32 (50 bp) 3.32% +2.5 bp
Libor Rates: 1 mo. 2.346%; 3 mo. 2.736%; 6 mo. 2.894%; 1 yr. 3.120%
30 yr. FNMA 4.5: @9:30 102.84 -6 bp (-8 bp from 9:30 Friday)
15 yr. FNMA 4.0: @9:30 101.88 -2 bp (+8 bp from 9:30 Friday)
30 yr. GNMA 4.5: @9:30 103.10 -5 bp (+5 bp from 9:30 Friday)
Dollar/Yuan: $6.8847 -$0.0743
Dollar/Yen: 113.48 unch
Dollar/Euro: $1.1349 +$0.0030
Dollar Index: 97.04 -0.05
Gold: $1239.00 +$13.00
Crude Oil: $52.97 +$2.04
DJIA: 25,825.46 +287.00
NASDAQ: 7436.63 +106.10
S&P 500: 2786.90 +26.73
Maximum Loan Amount for 2019
Maximum Loan Amount for High-Cost Areas for 2019
+A number of states (including Alaska and Hawaii), Guam, Puerto Rico, and the U.S. Virigin Islands do not have any high-cost areas in 2019.