This Week’s Market Commentary

This week is extremely active with seven relevant economic reports in addition to another FOMC meeting and two fairly important Treasury auctions. The economic reports range from low importance to extremely high importance with the majority being in between those two.

 

There is relevant economic data being posted each day of the week, making it likely that we will see a fair amount of movement in mortgage pricing over the next several days.

March’s New Home Sales will be released late this morning. It gives us an indication of housing sector strength and mortgage credit demand, but is the week’s least important report. Unless it varies greatly from analysts’ forecasts, I am not expecting the data to cause much movement in mortgage rates. Analysts are currently forecasting a sizable increase in sales of newly constructed homes.

The Conference Board will post April’s Consumer Confidence Index (CCI) late Tuesday morning. This index is a key indicator of future spending by consumers. The group surveys 5000 consumers from across the country about their personal financial situations. If sentiment is strong or rising, it is believed that consumers are more apt to make large purchases in the near future. However, if they are concerned about issues such as job security and investments, they will probably delay making large purchases. The latter is better for the bond market and mortgage rates because the expected slowdown in spending would keep inflation and economic growth concerns to a minimum. But, a sizable increase could hurt the bond market, pushing mortgage rates higher Tuesday. It is expected to show a reading of 64.4, which would be an increase from March’s 63.4 reading. The lower the reading, the better the news for mortgage rates.

March’s Durable Goods Orders will be released early Wednesday morning. This report gives us an indication of manufacturing sector strength by tracking orders for big-ticket items at U.S. factories. These are products that are expected to last three or more years, such as appliances and electronics. Current forecasts are calling for an increase in new orders of 1.9%. This would be a sign of manufacturing sector growth, but this data can be quite volatile from month-to-month. Therefore, a small variance between forecasts and the actual results will not heavily influence the markets or mortgage rates. A decline would be considered good news, while a large increase would indicate manufacturing sector strength. A sign of solid manufacturing growth could lead to higher mortgage rates Wednesday.

This week’s FOMC meeting will begin Tuesday but will not adjourn until Wednesday afternoon. It will likely adjourn with an announcement of no change to key short-term interest rates, but we may see some volatility in the markets following the 2:15 PM ET post-meeting statement. There appears to be more and more discussion about when the Fed will have to start raising key interest rates to prevent inflation from strengthening. If the statement gives any hint of when that may be, or there is a change in the regular canned portions of the statement, we could see a sizable change to mortgage rates Wednesday afternoon.

In addition to this week’s economic reports, there are two relatively important Treasury auctions that may also influence bond trading enough to affect mortgage rates. There will be an auction of 5-year Notes Wednesday and 7-year Notes on Thursday. Neither of these sales will directly impact mortgage pricing, but they can influence general bond market sentiment. If the sales go poorly, we could see broader selling in the bond market that leads to upward revisions to mortgage rates. However, strong sales usually make bonds more attractive to investors and bring more funds into bonds. The buying of bonds that follows usually translates into lower mortgage rates. Results of the sales will be posted at 1:00 PM ET each auction day, so look for any reaction to come during afternoon hours.

Thursday has the single most important data of the week. That would be the preliminary version of the 1st Quarter Gross Domestic Product (GDP). This is arguably the single most important report that we see on a regular basis. The GDP is the sum of all products and services produced in the U.S. and is considered to be the best measurement of economic growth or contraction. I expect this report to cause major movement in the financial markets Thursday and therefore the mortgage market also. Analysts are expecting it to show that the economy grew at an annual rate of 1.7%, which would be a sizable drop from the final quarter of last year. A smaller increase would be considered good news for mortgage rates. But, a stronger than expected reading would almost certainly cause stock prices to rise and bond prices to fall, leading to higher mortgage rates Thursday morning.

The week does not close quietly with three reports scheduled for Friday morning. March’s Personal Income & Outlays is the first of them, coming early Friday. It helps us measure consumers’ ability to spend and current spending habits, which is important to the mortgage market due to the influence that consumer spending-related data has on the financial markets. If a consumer’s income is rising, they are more likely to make additional purchases in the near future. This raises inflation concerns and has a negative impact on the bond market and mortgage rates. Current forecasts are calling for a 0.4% increase in the income reading and a 0.5% rise in spending. If we see smaller than expected readings, the bond market should open higher Friday morning, making an improvement to mortgage rates a good possibility.

The second report of the day is the 1st Quarter Employment Cost Index (ECI), which tracks employer costs for wages and benefits. This gives us a measurement of wage-inflation. If it shows a large increase, we may see wage inflation concerns cause the bond market to fall and mortgage rates to rise. A smaller than expected increase would be good news for the bond market and mortgage pricing. Current forecasts are showing a rise of 0.5%.

The last piece of a data is the University of Michigan’s update to their Index of Consumer Sentiment for April. This report gives us an indication of consumer sentiment. I don’t expect it to have a significant impact on bonds and mortgage pricing unless it varies greatly from forecasts. Current forecasts are calling for little change from the preliminary reading of 69.6. This means that surveyed consumers were just as optimistic about their own financial situations as they were earlier this month.

Overall, look for plenty of movement in the financial markets and mortgage rates several days this week. Wednesday will likely be the most important day of the week with the FOMC adjournment and the fairly important Durable Goods data, but we may also see noticeable changes to rates Thursday after the GDP is posted. If this week’s reports reveal weaker than expected economic conditions, the bond market should extend its rally and mortgage rates should fall for the week.

This Week’s Market Commentary

This holiday-shortened week is pretty light in terms of economic news scheduled for release. There are only three economic reports scheduled and none of them are considered to be highly important to the financial or mortgage markets.

 

Accordingly, there is a decent possibility of seeing a relatively calm week in the mortgage market, assuming that the stock markets do the same.

There is nothing of importance scheduled for release today. March’s Housing Starts is the first data, coming early Tuesday morning. It gives us a measurement of housing sector strength and mortgage credit demand by tracking starts of new home construction and the number of permits issued for future starts.

This data usually doesn’t cause much movement in mortgage pricing unless it varies greatly from forecasts. It is expected to show an increase in construction starts of new homes. Good news for the bond market and mortgage rates would be a decline in home starts, indicating housing sector weakness.

Wednesday’s only data is March’s Existing Homes Sales numbers from the National Association of Realtors. This report also gives us an indication of housing sector strength and mortgage credit demand. It is considered to be moderately important to the markets, but can influence mortgage pricing if it shows a sizable variance from forecasts. Ideally, the bond market would like to see a drop in home resales because a soft housing sector makes a broader economic recovery difficult. Analysts are expecting to see an increase in sales between February and March. The larger the increase, the worse the news for bonds and mortgage rates.

The third and final report of the week will be posted late Thursday morning when the Conference Board releases their Leading Economic Indicators (LEI) for March. This data attempts to measure economic activity over the next three to six months. This is considered to be a moderately important report, so we may see a slight movement in rates as a result of this report. It is expected to show an increase of 0.2%, meaning it is predicting slight growth in economic activity over the next several months. A smaller increase, or a decline would be considered good news for the bond market and could lead to slightly lower mortgage rates.

The bond market will close early Thursday and will remain closed Friday in observance of the Good Friday holiday. The stock markets will be open Thursday for a full day of trading, but will also be closed Friday. The markets will reopen for regular hours Monday morning. The early close and Friday holiday may lead to some volatility in bonds Thursday afternoon as investors protect themselves over the long weekend. I don’t believe that this volatility will necessarily impact mortgage rates, but the possibility does exist, especially if the preceding days were active.

Overall, it is difficult to label one particular day as the most important of the week with no key economic data or other events scheduled. A good part of the week will likely be heavily influenced by the stock markets. If the major stock indexes rally, bonds will likely suffer and mortgage rates will move higher. If stocks fall, we could see mortgage rates move lower the next few days. There is nothing on the agenda that is of much concern, but keep an eye on the markets and maintain contact with your mortgage professional if still floating an interest rate as conditions can change at any time.

The Complicated World of Credit Scores

Lenders use different credit scores for different purchases.

 

If you have successfully navigated a website that offers to sell you your credit score, you may think you have all the information you need in order to apply for a loan or new credit card.

Not necessarily. The score you received could be quite different from what a lender receives.

Different scores are offered for mortgages, car loans, insurance and more.

Under the Fair Credit Reporting Act that took effect January 1, lenders must either tell those who apply for credit what score was used, or tell them how it was used if the applicant doesn’t receive the best terms available.

Here are some reasons why a credit score (a number between 300 and 850) still won’t tell you how a lender evaluates of you:

* Some lenders give the best rates to people with a score of 740, others may use 760 or higher. Some give credit to people with scores in the high 500s, but others require 620 or more.

* Credit scores don’t reflect whether you are making good financial decisions or poor ones.
If you refinance your home at a lower interest rate, inquiries could show up on your report. Inquiries lower a score.

* Late payments show up on your score for a couple of years, but paying down a high balance has an immediately beneficial impact.

* If you pay your credit card bill in full every month, you don’t get a zero balance on your credit report. The report shows the balance at the end of the billing period, before the payment.

* Rather than checking your score frequently, you are better off making sure the information on your report is correct. Make your payments on time and reduce monthly balances for a month or two before applying for a loan or mortgage.

Lower Loan Limits Coming October 2011

At the beginning of the mortgage meltdown a couple of years ago, Congress enacted emergency legislation raising the limits on High Balance Conforming Loans.

 

These loans are designated “conforming,” meaning lower interest rates and typically a slightly easier transaction to get approved and closed when compared to Jumbo (or non-conforming) financing.  The High Balance variety is only available in designated high cost areas, like the San Francisco Bay Area.

Currently the “temporary” limit on these loans is $729,750.  This means that if you put 20% down on a $900,000 home, you can get a conforming loan in the amount of $720,000.  Effective October 1, 2011 the emergency legislation expires and is not expected to be extended.  This lowers this High Balance Conforming Loan to $625,500.

So, what does that mean to you?  If you buy the same $900,000 home and put 20% down, your loan will now be considered a Jumbo loan.  Rates on Jumbo loans are typically 1-1.5% higher, so if today you could get that loan for, say, 5% your payment would be $3865.12.  The same loan amount using the Jumbo rates would be 6-6.5%, bringing your payment to $4550.89.  Over 30 years, that totals over $246,000!  The other option would be to put a larger down payment on the property, to the tune of nearly $100,000.

The important thing to note is that if you are looking for a loan to purchase a home, or refinance the one you already have, now is the time to move forward. The limit will remain at the higher point until the first of October, giving home buyers the spring and summer seasons to purchase a property before the high limits are gone.

To find out what the current loan limit is in your area, you can access the Fannie Mae website to see a county-by-county spreadsheet.

According to Alan Russell, a local mortgage professional, “The higher limits have really helped people get into homes here in the Bay Area.  Once those limits reduce, there will be fewer options for those trying to get into the real estate market.  I’ve been talking to all my buyers and giving them fair warning that the time to move is definitely now.”