Market Recap

Market Recap

December 9, 2013

 New Homes Sales Gain Biggest in 30 Years:

Sales of new U.S. single-family homes recorded their biggest increase in nearly 33-1/2 years in October, suggesting the housing market recovery remains intact despite higher mortgage rates.

The Commerce Department said on Wednesday sales jumped 25.4 percent to a seasonally adjusted annual rate of 444,000 units. It also said new home sales fell 6.6 percent in September.

The strong rise in new home sales, which are measured when contracts are signed, suggested higher mortgage rate had not derailed the housing market recovery.

Strong new home sales in October saw the stock of houses on the market falling 3.7 percent after touching their highest level in nearly three years in September. Despite the tight supply of properties, the median price of a new home slipped 0.6 percent from a year-ago.

At October’s sales pace it would take 4.9 months to clear the houses on the market, down from 6.4 months in September. A supply of 6.0 months is normally considered as a healthy balance between supply and demand.

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What happened last week?

Mortgage backed securities (MBS) lost -70 basis points (BPS) from last Friday’s close which caused 30 year fixed rates to move higher for the third consecutive week. We saw our best rates on Monday and our worst rates on Friday morning.

Last week was all about jobs and the labor picture. And the picture certainly brightened.  With ADP Private Payrolls, Initial Weekly Jobless Claims and the Non-Farm Payroll report all coming in better than market expectations.  Friday’s Non-Farm Payroll Report came in at 203K vs market expectations of only 180K.  It marked the second straight reading of 200K or more.  The Unemployment Rate fell from 7.3% to 7.0%.

Why do more people going back to work make mortgage rates go up?  Mortgage rates have been artificially too low for two primary reasons.  First, the Federal Reserve purchases $85 billion of Treasuries and MBS each month which creates higher than normal demand for mortgage bonds which in return pushes down mortgage rates.. The Fed has made it very clear that they will begin to lower that amount of monthly purchases once the labor market improves enough.  Most economist are now projecting that the Fed will begin to “taper” in the first quarter of 2014. During this summer (when rates were lower) it was projected that the Fed would begin to taper in the second  half of 2014.

Secondly, an improvement in the labor sector means economic growth and growth leads to inflation.  While there is certainly no  threat of inflation in the short term, bond holders look long-term and any inflationary threat is always negative for bonds and therefore bad for mortgage rates.