Housing Starts and Building Permits, which are leading indicators of the new home construction market, both came in below expectations that were already low. If you consider the significant amount of foreclosures and inventory overhang weighing on the market, it is no surprise to see a weak indicator on new home construction. Broadly speaking, foreclosures and short sales are expected to continue weighing on new home construction for the next couple of quarters... but as we all know, real estate is very local - so your particular market may be quicker or slower to improve.
Manufacturing reports were also disappointing last week. For example, Industrial Production, Capacity Utilization, and the Philadelphia Fed Manufacturing Index all came in below expectations - which helped Bonds last week.
So why didn't Bonds and home loan rates improve?
The recent rally in Bonds and home loan rates was partly sparked on the notion that US economic growth will slow - which the economic reports last week seemed to indicate. And when you also factor that the only two ways the government can lower the budget deficit is either by cutting spending or raising taxes - or some mix of both - the austerity measures could indeed slow the economy.
Normally, such soft economic data would help Bonds and home loan rates. But last week, Bonds had trouble making gains because - despite the negative economic headlines - some of the reports included data that was unfriendly to Bonds.
Here's an example...
Last week, the Empire State Manufacturing Index was reported a lot weaker than expected. But, when you look beyond the headline number, you see that the "Prices Paid" component of that report - which measures wholesale inflation - showed the highest rate of inflation in three years... and the second highest reading ever! Remember, inflation is the archenemy of Bonds and home loan rates.
Additionally, the employment index of the Empire State Index was positive, which suggests hiring. And, in a separate report released last week, the Labor Department's Initial Jobless Claims number also showed the lowest level of unemployment claims in a month. Not only was that a good number from the standpoint of beating expectations, but it also indicated that April's surge in unemployment claims was more likely due to temporary factors rather than a worsening labor market.
In the end, the positive employment news combined with the concerns over inflation offset some of the negative economic news last week and held Bonds and home loan rates in check. Both Mortgage Backed Securities and Treasuries traded dead on a ceiling of resistance last week. And unless Bonds can break above this ceiling, prices can't improve further. I'll be watching the markets closely this week to see if Bonds break above that ceiling this week.
Wednesday, May 25, 2011
Tuesday, May 17, 2011
Is the glass half empty... or half full?
That question is one many people are debating when it comes to our economy - yes, the economy is still sluggish... but the slow recovery has helped home loan rates improve. So what developed last week...and what was the impact on home loan rates? Let’s take a deeper look.
First, on the inflation front: 6.8%...that's the current year-over-year rate of Producer or Wholesale inflation. And that is hot - very hot! And while Producer or Wholesale inflation doesn't always get passed onto the consumer as evidenced by the relatively benign Consumer Price Index (CPI) inflation readings, at some point one of two things must happen.
The takeaway here: One of the Fed's goals for their second round of Quantitative Easing (QE2) was to create inflation and avoid deflation in the hopes of strengthening our economic recovery. It appears that they have been somewhat successful in this goal, as the risks for deflation have somewhat abated. But remember, inflation is the arch enemy of Bonds and home loan rates. If inflation continues to heat up, this could hinder further improvement in home loan rates.
It’s also important to note that inflation in China is also on the rise, and inflation abroad becomes inflation here in the US as we import so many items from China. China's buying of our debt has helped keep our home loan rates relatively low for a long time. Home loan rates would likely move higher if China not only slows buying, but were to start selling some of their near $900 Billion worth of U.S. government debt holdings.
And speaking of our debt, Republicans in the U.S. House of Representatives are increasingly dismissive of Treasury Secretary Tim Geithner's warnings that Congress must raise the debt limit prior to August 2nd or risk economic "catastrophe." This will be an important development to watch in the weeks to come.
The bottom line is that, on the glass half full side of things, home loan rates still remain near some of the best levels we’ve seen this year. If you have been thinking about purchasing or refinancing a home, call or email me to learn more about why now is a great time to benefit from today’s historically low rates
First, on the inflation front: 6.8%...that's the current year-over-year rate of Producer or Wholesale inflation. And that is hot - very hot! And while Producer or Wholesale inflation doesn't always get passed onto the consumer as evidenced by the relatively benign Consumer Price Index (CPI) inflation readings, at some point one of two things must happen.
- Businesses who are burdened with increased costs must pass the increase to the consumer by raising prices, thus boosting consumer inflation.
- If businesses aren’t in a position to raise prices because of weak consumer demand, they must absorb the increased costs...thereby lowering earnings and the ability to expand, thus furthering the present slow economic growth.
The takeaway here: One of the Fed's goals for their second round of Quantitative Easing (QE2) was to create inflation and avoid deflation in the hopes of strengthening our economic recovery. It appears that they have been somewhat successful in this goal, as the risks for deflation have somewhat abated. But remember, inflation is the arch enemy of Bonds and home loan rates. If inflation continues to heat up, this could hinder further improvement in home loan rates.
It’s also important to note that inflation in China is also on the rise, and inflation abroad becomes inflation here in the US as we import so many items from China. China's buying of our debt has helped keep our home loan rates relatively low for a long time. Home loan rates would likely move higher if China not only slows buying, but were to start selling some of their near $900 Billion worth of U.S. government debt holdings.
And speaking of our debt, Republicans in the U.S. House of Representatives are increasingly dismissive of Treasury Secretary Tim Geithner's warnings that Congress must raise the debt limit prior to August 2nd or risk economic "catastrophe." This will be an important development to watch in the weeks to come.
The bottom line is that, on the glass half full side of things, home loan rates still remain near some of the best levels we’ve seen this year. If you have been thinking about purchasing or refinancing a home, call or email me to learn more about why now is a great time to benefit from today’s historically low rates
Monday, May 9, 2011
Find out the story behind the latest employment numbers - and what they mean to home loan rates.
"LIFE IS A MIXED BLESSING, WHICH WE VAINLY TRY TO UNMIX" - author and journalist Mignon McLaughlin. The labor market and the economy saw their own mixed blessings last week, when three different employment reports were released. Unlike Mignon McLaughlin’s quote above about life, these mixed job reports can actually be untangled. So let’s break down what we learned about employment last week...and, just as importantly, what’s going on with home loan rates.
After two disappointing employment reports earlier last week - in the form of the ADP National Employment Report and the Initial Jobless Claims Report - the labor market finally received some good news on Friday when the Labor Department released their official Jobs Report that showed 244,000 jobs were created in April. That was far above all expectations... and it was the biggest private job increase since 2006!
But where did this number come from... and is it accurate?
This headline number comes from the Current Population Survey, which uses the birth/death model to guesstimate the amount of jobs lost or gained in different industries - based on how many businesses were "born" or "died." And it isn't until we get revisions to the previous month's reports that we get a more accurate and final number.
Furthermore, history has shown that the birth/death model used to estimate is lagging - and at the start of an improving labor market, like we are seeing, the future revisions will likely show more jobs created than previously reported. This dynamic was evident in this month's Jobs Report, as revisions to March showed that an additional 46,000 jobs were created.
Despite the better-than-expected number of jobs created, the Unemployment Rate ticked up to 9% from 8.8%. The data for the Unemployment Rate comes from an entirely different survey - which is called the Household Survey - and is a bit contradictory to the headline news. This shows that the jobs being created simply aren't enough to have yet made a significant dent in the number of jobless Americans.
Also in the Jobs Report, Average Hourly Earnings were reported up by 0.1% to $22.95 per hour. Hourly earnings have increased by 1.9% year over year, just not enough to create "wage-based inflation," which is where employers have to pump up the prices of their goods and services to cover increased wages. So this was somewhat Bond-friendly news.
Although the Jobs Report was mixed, the overall positive tone does validate that the labor market is gradually improving. As the labor market improves, so will the economy and housing - and with that, interest rates will gradually rise as well. In the short run, the recent rise in Bonds is encouraging. However, after such a strong run higher, it would not be surprising to see more downside follow through in Bonds - which could mean higher home loan rates. The good news is that home loan rates recently reached some of the best levels so far in 2011 - and rumors on Friday that Greece may leave the European Union helped Bonds, as traders sought a safe haven.
That means a window has opened up... but there’s one important point you should understand.
It’s important to note that the last time rates hit this level, they jumped significantly higher from here. What’s more, signs of inflation are beginning to creep into our economy, which never bodes well for home loan rates. And if the rumors of Greece leaving the European Union turn out to be untrue (as Greece has stated), the safe haven bounce we saw last Friday could quickly be erased. That’s why it’s important to take action now.
It doesn’t cost anything to check out your situation, and the choice of moving forward or not will be up to you. Don’t miss this window of opportunity to save significantly on your monthly budget.
After two disappointing employment reports earlier last week - in the form of the ADP National Employment Report and the Initial Jobless Claims Report - the labor market finally received some good news on Friday when the Labor Department released their official Jobs Report that showed 244,000 jobs were created in April. That was far above all expectations... and it was the biggest private job increase since 2006!
But where did this number come from... and is it accurate?
This headline number comes from the Current Population Survey, which uses the birth/death model to guesstimate the amount of jobs lost or gained in different industries - based on how many businesses were "born" or "died." And it isn't until we get revisions to the previous month's reports that we get a more accurate and final number.
Furthermore, history has shown that the birth/death model used to estimate is lagging - and at the start of an improving labor market, like we are seeing, the future revisions will likely show more jobs created than previously reported. This dynamic was evident in this month's Jobs Report, as revisions to March showed that an additional 46,000 jobs were created.
Despite the better-than-expected number of jobs created, the Unemployment Rate ticked up to 9% from 8.8%. The data for the Unemployment Rate comes from an entirely different survey - which is called the Household Survey - and is a bit contradictory to the headline news. This shows that the jobs being created simply aren't enough to have yet made a significant dent in the number of jobless Americans.
Also in the Jobs Report, Average Hourly Earnings were reported up by 0.1% to $22.95 per hour. Hourly earnings have increased by 1.9% year over year, just not enough to create "wage-based inflation," which is where employers have to pump up the prices of their goods and services to cover increased wages. So this was somewhat Bond-friendly news.
Although the Jobs Report was mixed, the overall positive tone does validate that the labor market is gradually improving. As the labor market improves, so will the economy and housing - and with that, interest rates will gradually rise as well. In the short run, the recent rise in Bonds is encouraging. However, after such a strong run higher, it would not be surprising to see more downside follow through in Bonds - which could mean higher home loan rates. The good news is that home loan rates recently reached some of the best levels so far in 2011 - and rumors on Friday that Greece may leave the European Union helped Bonds, as traders sought a safe haven.
That means a window has opened up... but there’s one important point you should understand.
It’s important to note that the last time rates hit this level, they jumped significantly higher from here. What’s more, signs of inflation are beginning to creep into our economy, which never bodes well for home loan rates. And if the rumors of Greece leaving the European Union turn out to be untrue (as Greece has stated), the safe haven bounce we saw last Friday could quickly be erased. That’s why it’s important to take action now.
It doesn’t cost anything to check out your situation, and the choice of moving forward or not will be up to you. Don’t miss this window of opportunity to save significantly on your monthly budget.
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