Wednesday, January 20, 2009

The Commerce Department reported this morning that housing starts fell 4.0% in December. Most investors shrugged the slump in home construction off - noting that much of the country was in the grips of a major cold snap during the month -- making the digging of footings and the pouring of concrete almost impossible. Even though builders were not at their construction sites they were busy - filing new building permits. Building permits soared 10.7% higher in December - strongly suggesting home builders will be very busy once the spring thaw begins.


The Mortgage Bankers of America chimed in with their standard Wednesday report regarding loan demand for the past week. The MBA said their figures showed overall mortgage loan demand surged 9.1% higher. The increase was driven by a 10.7% increase in refinance requests, while home purchase demand rose 4.4%. The contract rate for 30-year fixed rate mortgages finished at 5.0%, down 13 basis points from the prior week level.


A separate report from the Labor Department showed producer prices rose 0.2% last month as food prices rose, leading the overall index to its largest year-over year gain since October 2008. The more important core rate of inflation at the wholesale level (a value stripped of the more volatile food and energy components) was unchanged in December -- effectively counterbalancing the headline gain in the produce price index. Mortgage investors gave the bit of inflation news nothing more than a passing glance and a disinterested yawn this morning.


Much of today's price improvement is likely due to positive mortgage investor reaction regarding the news that Scott Brown, a Republican, had defeated Democrat Martha Coakley in the political race to fill the vacant Massachusetts Senate seat left by the late Senator Edward Kennedy.


Partisan politics aside - most mortgage investors are keenly aware that without filibuster-proof control of the Senate by one party, approval for new programs - such as an overhaul of the healthcare system - which could require heavy government spending -- will be harder to obtain.


The "so what" factor here is straightforward. Uncle Sam is the mortgage market's biggest competitor in terms of attracting capital from both global and domestic investors. The possibility that the capital demand coming from Uncle Sam may be diminished in coming months tends to be supportive of at least steady mortgage interest rates.


It is likely mortgage investors will take at least a passing glance at tomorrow's December Leading Economic Index presented by the private Conference Board. The Conference Board's Leading Indicator Index is intended to forecast likely economic conditions three to nine months in the future. If, as expected, the index posts a gain of 0.7% or higher, it will have fully reversed the decline seen during the Great Recession - a condition that will almost certainly exert some upward pressure on mortgage interest rates.



With nothing else to capture their attention during the run-up to Thursday's release of the Leading Economic Index - look for mortgage investors to take their interest rate directional cues from trading activity in the stock markets. Rising stock prices will tend to drive mortgage interest rates higher -- while falling stock prices will tend to be supportive of steady to perhaps fractionally lower mortgage interest rates.