Will Summer Be Stormy for Rates?

June 16, 2014 at 11:25 AM

"You've got to be careful if you don't know where you're going, otherwise you might not get there." Yogi Berra.

It's safe to say the Fed is closely watching where our economy is going, as economic reports continue to be mixed.

Retail Sales for May rose by 0.3 percent, led by demand for cars, trucks and home improvement products, though spending eased at most other retailers. The 0.3 percent was less than the 0.7 percent expected and was the lowest level since January's reading. Retail sales account for about one-third of consumer spending, and are the main driver of U.S. economic activity. Growth in this area is a key factor in our economic recovery.

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In housing news, RealtyTrac reported that there was a 5 percent decrease in all types of foreclosures from April to May, with a heavy concentration in the northeast and along the west coast. There was also a 26 percent decrease from May 2013 to May 2014. In addition, Fannie Mae's May 2014 National Housing Survey revealed that tepid household income and concerns surrounding the U.S. economy are weighing on the housing sector.

And in labor market news, after hitting lows not seen since 2007, weekly Initial Jobless Claims rose by 4,000 in the latest week to 317,000. While the labor markets continue to overcome obstacles, the sector is still under a cloud of uncertainty with so many people looking at long-term unemployment.

What does this mean for home loan rates? Remember that home loan rates are tied to Mortgage Bonds, so when Bonds improve, rates improve. The weakened Euro, the Fed's Bond-buying program and the tepid economy have been key factors in helping Bonds and home loan rates improve this spring. While Bonds and home loan rates struggled in the latest week, they remain at some of their best levels of the year.

The takeaway is that now remains a great time to consider a home purchase or refinance. Let me know if I can answer any questions at all for you or your clients.

Housing and manufacturing data dominate the headlines. Plus, the Fed meets.

Manufacturing data from the Empire State Index will be reported on Monday, followed by the Philadelphia Fed Index on Thursday.

The National Association of Home Builders Housing Market Index will be released on Monday, while Housing Starts and Building Permits follow on Tuesday. These reports will be closely scrutinized for any signs of a slowdown.


The Consumer Price Index, which measures consumer inflation, will be delivered on Tuesday.
Weekly Initial Jobless Claims will be announced on Thursday.

In addition, the two-day Federal Open Market Committee meeting begins Tuesday, with the monetary policy statement being delivered on Wednesday. Currently, the Fed is purchasing $20 billion per month in Mortgage Bonds and $25 billion per month in Treasury securities in an effort to spur on both economic and job growth. If the Fed further eases back on its purchases, it could spell trouble for Bonds and home loan rates.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond on which home loan rates are based.

When you see these Bond prices moving higher, it means home loan rates are improving—and when they are moving lower, home loan rates are getting worse.

To go one step further—a red "candle" means that MBS worsened during the day, while a green "candle" means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.

As you can see in the chart below, Bonds and home loan rates stabilized in the latest week due to weaker than expected reports on Retail Sales and Consumer Sentiment. I'll be watching the markets closely this week, as the Fed meeting could lead to volatility.

This column takes a look at current mortgage rates, market trends and indexes.  Jon Lamkin is Vice President of Mortgage Lending for Guaranteed Rate, 322 Route 46 W Suite 170 • Parsippany, NJ • 07054.  He may be reached at 973.939.8661  /  jon.lamkin@guaranteedrate.com  /  www.guaranteedrate.com/jonlamkin

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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