Wednesday, November 18, 2009

Trading in the mortgage market got off to a wobbly start this morning - buffeted by a mixed-bag of macro-economic news. A stronger-than-expected gain of 0.3% in the headline consumer price index was initially a bit unsettling for investors since it hinted at an uptick in inflation pressure on Main Street - a condition that put early upward pressure on mortgage interest rates.


Once market participants took the time to drill deeper into the data it became readily apparent that inflation pressures at the core level (a value stripped of the more volatile food and energy components) of the index remained extremely benign and the early upward pressure on mortgage interest rates quickly abated. It was essentially a "no-brainer" for investors since the data indicated that a spike in prices on used cars and trucks together with new vehicles accounted for more than 90% of the rise in core prices.



In a separate report the Commerce Department announced construction of new homes fell 10.6% on a seasonally adjusted basis in October, the lowest level since April and the biggest percentage drop since January. Roughly half of the outsized drop in the housing start figure was related to the very volatile multifamily segment of this data series. Total building permits fell 4.0% in October. As is the case with housing starts, the multifamily segment put a large negative dent in the total permits figure, with an 18% month-over-month decline.


The "so what" factor here is that the single-family segment of the housing industry is by far healthier than the raw data would lead you to believe. The slump in October residential construction was probably the result of the impending conclusion of the first-time homebuyer tax credit program. Buyers likely retreated from the new home market as it became increasingly risky that a home sale would be completed before the tax credit expired on November 30th. On this front, the extension and expansion of the tax credit for single-family purchase over the next three quarters will help substantially. Sustained growth in housing starts and building permits will not likely fully develop until national employment prospects brighten considerably.



Last week the borrowing costs on 30-year fixed rate mortgages, excluding fees, averaged 4.83%, down 0.07% from the previous week and the lowest since mid-May. Mortgage interest rates are hovering within shouting distance of the all-time record low of 4.61% set during the week ended March 27th -- yet according to data provided by the Mortgage Bankers of America -- the demand for home purchases dropped to a 12-year low last week.



The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, decreased 2.5% for the week ended November 13th. Purchase application requests were down 4.7% while refinance application activity dropped by 1.4%. Certainly the Obama administration's extension of the $8,000 first-time home buyer credit and the addition of the $6,500 credit for home owners buying a new residence will help forward looking loan demand. There is no doubt that lower rates, increased affordability indexes, lower property values and extended tax credits all help bring the dream of American homeownership closer to reality - but the key ingredient to a full recovery in the housing sector is still missing.


Without a solid and sustain improvement in the labor sector it really doesn't matter how low interest rates go or how much tax credit is offered - the pace of residential real estate sales will continue to wallow near historical lows. Hope for a better tomorrow and financial security drive home demand - tax credits and the current level of mortgage interest rates are only secondary considerations. The major of economists firmly believe a better tomorrow is coming - but the general agreement is that it probably won't begin to convincingly manifest itself until the mid part of next year. Those that find a way, any way, to make it from here to there, will no doubt be handsomely reward for their effort.