Tuesday, March 23, 2010

Trading activity in the mortgage market is thin and sporadic this morning. Uncle Sam is looking to borrow $44 billion in the form of 2-year notes today. The short duration of this investment vehicle and the lack of other competing high-quality, low-risk investment alternatives in the global marketplace should produce solid demand at this afternoon's debt auction. If so, this event will not exert any discernible influence on the trend trajectory of mortgage interest rates today.


As expected, mortgage investors gave the February Existing Home Sales report nothing more than a passing glance. The National Association of Realtors said existing home sales fell 0.6% on a month-over-month basis -- while the pace of existing homes sales is 7.9% higher compared to a-year-ago. The median sales price decreased to $165,000 from $168,200 last year. The Realtors said winter storms did not affect existing home purchases much, with the worst-hit regions of the country actually posting sales increases during the month.



Mortgage investors made note of the fact the government's extended tax credit program has not made an impact on existing home sales so far. The April 30th deadline to sign a sales contract in order for the homebuyer to be eligible for tax break is fast approaching -- and may yet push the pace of sales higher. The challenge here is that most households who already own a home and wish to take advantage of the government's tax incentive to purchase a new home will, by necessity, have to sell their existing property in one of the weakest real estate market in decades in order to complete their purchase transaction. I don't know about you - but this sounds like one of those -- "I want you to learn to swim but don't get in the water" things to me. I think it can probably be safely assumed the impact of the extended tax credit program will likely fall short of the lofty expectations government data wonks have projected.



So now what?


The pace of sales for both new and existing home sales is far more dependent on job creation -- and improved job security for those currently employed -- than it is on government tax incentives and progressively lower mortgage interest rates.


One needs to simply note than in January new home sales touched their lowest level since records began in 1963 -- while the pace of existing home sales is running at late 1990's levels. The "so what" factor here is that housing sales are not improving even though the interest rate on a 30-year fixed-rate more was 4.96% during the week ended March 18th -- not far from the 4.71% reached on December 3rd -- which marked the lowest mortgage interest rate level in Freddie Mac's history going back to 1972. At this juncture it is readily apparent to even casual observers the level of mortgage interest rates is certainly not a significant impediment to housing sector sales growth.



From this point forward a strengthening job market will be required to drive a notable acceleration in the pace of new and existing home sales. That's the bad news part of today's housing news. The good news is that most analysts broadly expect sustained job growth to will begin to materialize in the second-half of the year.