Wednesday, August 25, 2010

To no one's surprise -- other than a few breathless television commentators -- new home sales in July fell sharply lower, posting a month-over-month decline of 12.4%. Following yesterday's massive swoon in the pace of the July existing home sales most investors had already priced-in expectations for a puny new home sales performance. Until/unless the pace of job creation improves -- demand for housing will remain weak - even in the face of historically low mortgage interest rates.


The July new home sales report fits like a glove with the latest loan application data released today by the Mortgage Bankers Association of America. According to the MBA, overall mortgage loan application activity increased 4.9% during the week ended August 20th. Refinancing activity was up 5.7% while requests for purchase money posted a frail gain of 0.6%. Refinance applications accounted for 82.4% of all mortgage loan requests and they represented 82% of the prospective loan volume.



Earlier this morning the Commerce Department reported orders for long lasting (three-years or more) manufactured goods slumped notably last month. Durable goods orders are a leading indicator of manufacturing activity. The July data shows that the main engine driving the economy's recovery from the worst downturn since the great Depression is starting to sputter.
The scrawny durable goods report and the outright weakness represented in the new home sale data sent global and domestic fixed-income investors diving in droves into the relative safe-haven of Treasury obligations and mortgage-backed securities. Slowing economic growth means there will be little inflationary threat to drive the price of these assets lower - which certainly makes them an appealing place to store cash as the deteriorating domestic and global economy eliminates investment opportunities elsewhere.


Against that credit market background Uncle Sam will once again be conducting a debt auction - this time looking to borrow $36 billion in the form of 5-year notes. Today's five-year note auction may not be a blockbuster, but it will likely draw decent demand. This event is unlikely to create much, if any reaction in the mortgage market.