The stock market posted gains for the week largely due to a solid rally on Tuesday that may have been triggered by a report from Politico stating Republican lawmakers were working behind the scenes on tax reform legislation. According to Politico, a consensus is emerging among top administration and congressional officials on ways to pay for individual and corporate tax cuts and reduced tax rates, including capping the mortgage interest deduction and eliminating the deduction for state and local tax payments. Also, businesses would no longer be able to deduct interest payments. Treasury prices increased during the week. The yield on the 10-year Treasury Note fell by 2.80 basis points to end at 2.1694%.

 

The week’s economic and housing data continued to be mixed. Durable Goods Orders declined by 6.8% in July, in sharp contrast to a gain of 6.4% during June. The decline was largely driven by a substantial reduction in aircraft orders. One encouraging piece of data came from the latest reading on core capital goods, a key measure of business investment, showing an increase of 0.4%. Weekly Initial Jobless Claims increased slightly from 232,000 to 234,000, but remained well under market expectations of 237,000 claims.

 

In housing, the Federal Housing Finance Agency (FHFA) House Price Index (HPI) released last Tuesday showed home prices increased by 1.6% during the second quarter of 2017 compared to the first quarter. For June 2017, the FHFA’s seasonally adjusted monthly index rose 0.1% from May. On an annual basis from the second quarter of 2016 to the second quarter of 2017, home prices have risen 6.6%. FHFA Senior Economist William Doerner remarked “U.S. house prices rose in most states during the second quarter. New home sales are climbing but, relative to the overall population, they still remain low from a historical perspective. The tight inventory is a major explanation for why house prices have been increasing every quarter over the last six years.”

 

New Home Sales for July disappointed by missing the consensus forecast of 615,000 with a seasonally adjusted annual reading of 571,000 that was 9.4% lower than an upwardly revised June rate of 630,000 (from an originally reported 610,000). July’s reading was also 8.9% lower from the same period a year ago. However, when taking into account the upward revisions that have taken place over the past three months that have collectively added 46,000 new home sales, the July sales pace was not really as bad as it first appeared.

 

The primary problem for New Home Sales appears to be a limited inventory of lower priced new homes for sale. Also, higher average selling prices continue to act as a constraining factor. The median sales price increased 6.3% year-over-year to $313,700 while the average sales price increased 4.6% to $371,200. Based on the rate of July sales, the inventory of new homes for sale is currently at a 5.8-months’ supply versus 5.2 months for June.

Furthermore, the National Association of Realtors (NAR) reported last Thursday that Existing Home Sales edged 1.3% lower in July to a seasonally adjusted annual rate of 5.44 million versus a consensus forecast of 5.56 million. Although the July’s sales rate was 2.1% above the year ago period, it was the lowest sales pace so far in 2017. NAR Chief Economist Lawrence Yun commented “Homes are selling fast” while Zillow Senior Economist Aaron Terrazas stated “The American housing market is stuck in its own kind of stagflation: Existing home sales have been flat since last fall, while home values are up more than 4% over the same period. For more than two years now, inventory has been has been contracting, pushing the housing market into an inventory crisis.”

 

Strong housing demand in July meant listings went into contract in under 30 days. It also pushed prices higher. The median existing home sales price in July was $258,300, a 6.2% increase compared to a year ago and the 65th straight month of year-over-year gains. Inventory (1.92 million) was 9% lower than a year ago, and has fallen year-over-year for 26 consecutive months. Unsold inventory is now at a 4.2-month supply at the current sales rate, versus 4.8 months a year ago and the 6.0-month supply typically associated with a more balanced real estate market.

 

One positive aspect was an increase in first-time home buyers who comprised 33% of buying volume compared to 32% in June. However, that’s still substantially lower than the 40% market share historically taken by first-time home buyers.

As for mortgages, mortgage application volume decreased during the week ending August 18. The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 0.5%. The seasonally adjusted Purchase Index declined 2.0% from the prior week while the Refinance Index increased 0.3%.

 

Overall, the refinance portion of mortgage activity increased to 48.7% of total applications from 47.8% in the prior week. The adjustable-rate mortgage share of activity decreased to 6.4% of total applications from 6.6%. According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance was unchanged at 4.12% with points increasing to 0.39 from 0.38.

 

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to close at $103.406. The 10-year Treasury yield decreased 2.80 basis points to end at 2.1694%. The major stock indexes ended the week higher.

 

The Dow Jones Industrial Average added 139.16 points to close at 21,813.67. The NASDAQ Composite Index rose 49.11 points to close at 6,265.64 and the S&P 500 Index gained 17.50 points to close at 2,443.05. Year to date on a total return basis, the Dow Jones Industrial Average has gained 10.38%, the NASDAQ Composite Index has advanced 16.39%, and the S&P 500 Index has added 9.12%.

 

This past week, the national average 30-year mortgage rate increased to 3.95% from 3.94%; the 15-year mortgage rate increased to 3.23% from 3.22%; the 5/1 ARM mortgage rate moved higher to 3.20% from 3.17% and the FHA 30-year rate remained unchanged at 3.60%. Jumbo 30-year rates increased to 4.23% from 4.22%.
Economic Calendar – for the Week of August 28, 2017

 

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

The FNMA 30-year 3.5% coupon bond ($103.406, +12.50 bp) traded within a 26.5 basis point range between a weekly intraday low of $103.188 on Tuesday and a weekly intraday high of $103.453 on Friday before closing the week at $103.406 on Friday.

Last week’s newsletter forecast range-bound trading with a sideways movement in mortgage bonds resulting in relatively stable mortgage rates for the week, and that was what we ended up with. Rates differed on average by just a few basis points from the prior week. At the risk of sounding like a broken record, not much has changed technically since last week. The bond continues to be extremely “overbought” and susceptible to a turn lower, but could continue to be range-bound and trade between the identified support and resistance levels shown in the chart.
Additional sideways movement in the bond should result in stable mortgage rates in the coming week.

 

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‘Baby boomers’ staying put as housing shortage looms from CNBC.

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Volatility returned to the stock market this past week as geopolitical events exerted noticeable influence on traders.  Concerns about a potential military conflict with North Korea subsided to spark a rally in stocks last Monday that led the S&P 500 Index to record its largest one-day gain in almost four months.  However, these gains were entirely erased on Thursday with the S&P 500 Index’s largest decline in three months following protestor violence in Charlottesville, VA in addition to new terrorist attacks in Spain.  Investors are becoming increasingly worried that President Trump’s ability to move forward on economic and tax policy is being derailed by the constant criticisms voiced by opposing politicians and most of the so-called mainstream media.

 

The week’s economic data were mixed.  Retail Sales were reported stronger than expected and despite numerous negative headlines for retailers over the past several months, July’s Retail Sales were up 0.6% versus a +0.3% forecast.  Further, revisions in the data showed a +0.3% increase in June rather than the originally reported -0.2% decline.  For the trailing 12-month period, Retail Sales were 4.2% higher and near the five-year average.

 

In housing, July’s new Housing Starts and Building Permits were both more than 4% lower than June’s numbers with Starts declining by 4.8% to a seasonally adjusted annual rate of 1.155 million versus 1.217 million expected.  Permits fell by 4.1% to a seasonally adjusted annual rate of 1.223 million compared to expectations for 1.247 million.  Although Housing Starts were 5.6% lower than July of last year, the total for the first seven months of 2017 are about 2.5% ahead of 2016’s pace.  Also, July’s home builder sentiment was four points higher, recovering from an eight-month low in June.

 

As for mortgages, mortgage application volume increased minimally during the week ending August 11.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose 0.1%.  The seasonally adjusted Purchase Index declined 2.0% from the prior week while the Refinance Index increased 2%.

 

Overall, the refinance portion of mortgage activity increased to 47.8% of total applications from 46.7% in the prior week.  The adjustable-rate mortgage share of activity decreased to 6.6% of total applications from 6.8%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance declined to 4.12% from 4.14% with points unchanged at 0.38.

 

Following this past week’s political turmoil and economic news, the Fed Funds futures market now points to either the May or June 2018 FOMC meetings as the most likely time for the next rate-hike announcement with an implied probability of 50.4% for May and 59.9% for June.  Last week, the market expected the next rate hike to occur in June 2018 with an implied probability of 57.5%.

 

For the week, the FNMA 3.5% coupon bond lost 1.6 basis points to close at $103.281.  The 10-year Treasury yield increased 0.69 basis points to end at 2.1974%.  The major stock indexes ended the week lower.

 

The Dow Jones Industrial Average fell 183.81 points to close at 21,674.51.  The NASDAQ Composite Index dropped 40.03 points to close at 6,216.53 and the S&P 500 Index lost 15.77 points to close at 2,425.55.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 9.67%, the NASDAQ Composite Index has advanced 15.48%, and the S&P 500 Index has risen 8.34%.

 

This past week, the national average 30-year mortgage rate fell to 3.94% from 3.96%; the 15-year mortgage rate decreased to 3.22% from 3.24%; the 5/1 ARM mortgage rate was unchanged at 3.17% and the FHA 30-year rate was also unchanged at 3.60%.  Jumbo 30-year rates decreased to 4.22% from 4.24%.

 

Economic Calendar – for the Week of August 21, 2017

 

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Aug 22 09:00 FHFA Housing Price Index June NA 0.4%
Aug 23 07:00 MBA Mortgage Purchase Index 08/19 NA 0.1%
Aug 23 10:00 New Home Sales July 615,000 610,000
Aug 23 10:30 Crude Oil Inventories 08/19 NA -8.9M
Aug 24 08:30 Continuing Jobless Claims 08/19 237,000 232,000
Aug 24 08:30 Initial Jobless Claims 08/19 NA 1,953K
Aug 24 10:00 Existing Home Sales July 5.56M 5.52M
Aug 25 08:30 Durable Goods Orders July -6.0% 6.5%
Aug 25 08:30 Durable Goods Orders excluding transportation July 0.5% 0.2%

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

 

The FNMA 30-year 3.5% coupon bond ($103.28, -1.60 bp) traded within a 42 basis point range between a weekly intraday low of $103.00 on Tuesday and Wednesday and a weekly intraday high of $103.42 on Friday before closing the week slightly lower at $103.28 on Friday.

 

Following a week of increased volatility in the financial markets the bond ended the week very nearly where it began with a loss of less than two basis points.  Technically, not much has changed since the last newsletter.  The next level of overhead resistance remains at $103.53.  It will take a further stock market correction for the bond to reach this target as the bond continues to be extremely “overbought” and susceptible to a turn lower.  With an expansion in the range between support and resistance as identified in the chart below, the bond could continue to be range-bound in the coming week.  Mortgage rates should hold at relatively stable levels in the coming.

 

 

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Although the stock market once again ended the week in a “mixed” fashion, the Dow Jones Industrial Average continued its march higher by setting consecutive new all-time highs during the week.  In fact, the Dow has set new all-time highs during each of the last eight trading days while crossing another 1,000 point milestone at 22,000 to close the week at 22,092.81.  Bond prices also gained some ground to send Treasury yields marginally lower.

 

The financial markets continue to be buoyed by mostly favorable economic data.  This past week

Personal Income was reported unchanged at 0.0% for July versus a consensus forecast of a 0.3% increase, while Personal (consumer) Spending ticked higher by 0.1% in June after an upwardly revised 0.2% gain in May.  On the inflation front, the Core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, increased by 0.1% in June to match expectations while the 12-month reading recorded a 1.5% increase.

 

Although the July ADP Employment data was weaker than expected with a reading of 178,000 new jobs created compared to 187,000 predicted by economists, the Employment Situation Summary (Jobs Report) for July was better than economic forecasts.  The Labor Department reported Non-farm Payrolls at 209,000, which was higher than the 181,000 expected.  The Unemployment Rate fell back to 4.3% from June’s reading of 4.4% to matching the reading for May, its lowest rate in 16 years.  Average Hourly Earnings rose 0.3% or by 9 cents to $26.36 to match the consensus forecast and is now up by 2.5% on the year.  Overall, both stock and bond participants liked what they saw in the jobs data with the strong job creation while wage inflation remained restrained.  The jobs data resulted in a slight increase in rate hike expectations for the Fed’s December FOMC meeting with the fed funds futures market now showing a 48.0% likelihood of a rate hike in December.  This is up from last Thursday’s closing reading of 46.8%.

 

In housing, the National Association of Realtors (NAR) reported their Pending Home Sales Index (PHSI) snapped a three month losing streak by posting a 1.5% gain in June to reach a reading of 110.2, up from May’s level of 108.6.  Lawrence Yun, chief NAR economist, remarked “The first half of 2017 ended with a nearly identical number of contract signings as one year ago, even as the economy added 2.2 million net new jobs.  “Market conditions in many areas continue to be fast-paced, with few properties to choose from, which are forcing buyers to act almost immediately on an available home that fits their criteria.  Low supply is an ongoing issue holding back activity. Housing inventory declined last month and is a staggering 7.1% lower than a year ago.  It appears the ongoing run-up in price growth in many areas and less homes for sale at bargain prices are forcing some investors to step away from the market.  Fewer investors paying in cash is good news as it could mean a little less competition for the homes first-time buyers can afford.”

 

Mortgage application volume decreased during the week ending July 28.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 2.8%.  The seasonally adjusted Purchase Index fell 2.0% from the prior week while the Refinance Index decreased 4%.

 

Overall, the refinance portion of mortgage activity decreased to 45.5% of total applications from 46.0% in the prior week.  The adjustable-rate mortgage share of activity decreased to 6.6% of total applications from 6.8%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance were unchanged at 4.17% with points decreasing to 0.36 from 0.40.

 

For the week, the FNMA 3.5% coupon bond gained 25.0 basis points to close at $103.17.  The 10-year Treasury yield decreased 2.69 basis points to end at 2.2637%.  Stocks ended the week mixed with the NASDAQ Composite Index edging lower while the S&P 500 Index and Dow Jones Industrial Average moved higher.

 

The Dow Jones Industrial Average gained 262.50 points to close at 22,092.81.  The NASDAQ Composite Index fell 23.12 points to close at 6,351.56 and the S&P 500 Index added 4.73 points to close at 2,476.83.  Year to date on a total return basis, the Dow Jones Industrial Average has gained 11.96%, the NASDAQ Composite Index has advanced 19.13%, and the S&P 500 Index has risen 11.67%.

 

This past week, the national average 30-year mortgage rate fell to 3.99% from 4.04%; the 15-year mortgage rate decreased to 3.29% from 3.33%; the 5/1 ARM mortgage rate increased to 3.18% from 3.17%; and the FHA 30-year rate fell to 3.65% from 3.75%.  Jumbo 30-year rates decreased to 4.28% from 4.33%.

 

Economic Calendar – for the Week of August 8, 2017

 

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
Aug 07 15:00 Consumer Credit Jun $16.2B $18.4B
Aug 08 10:00 JOLTS – Job Openings Jun NA 5.666M
Aug 09 07:00 MBA Mortgage Applications Index 08/05 NA -2.8%
Aug 09 08:30 Preliminary 2nd Qtr. Productivity Qtr. 2 0.5% 0.0%
Aug 09 08:30 Preliminary 2nd Qtr. Unit Labor Costs Qtr. 2 1.5% 2.2%
Aug 09 10:00 Wholesale Inventories Jun 0.6% 0.4%
Aug 09 10:30 Crude Oil Inventories 08/05 NA -1.5M
Aug 10 08:30 Producer Price Index (PPI) Jul 0.2% 0.1%
Aug 10 08:30 Core PPI Jul 0.2% 0.1%
Aug 10 08:30 Initial Jobless Claims 08/05 240,000 240,000
Aug 10 08:30 Continuing Jobless Claims 07/29 NA 1,968K
Aug 11 08:30 Consumer Price Index (CPI) Jul 0.2% 0.0%
Aug 11 08:30 Core CPI Jul 0.2% 0.1%

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

 

The FNMA 30-year 3.5% coupon bond ($103.17, +25.0 bp) traded within a 51.5 basis point range between a weekly intraday low of $102.81 on Tuesday and a weekly intraday high of $103.328 on Thursday before closing the week higher at $103.17 on Friday.

 

Bond prices ended notably higher on Tuesday and Thursday before giving back some of the gains on Friday in reaction to the Jobs Report.  Still, the bond was able to break above a couple of resistance levels before falling back below resistance at the $103.20 level on Friday.  Friday’s reactionary trading resulted in a Hanging Man candlestick.  The Hanging Man is a bearish signal appearing in an uptrend and is a warning of a potential trend reversal lower.  However, the long lower shadow or wick of the Hanging Man is also a potentially a bullish signal, indicating that demand for the bond forced the price into the upper third of the price range for the day.  Therefore, confirmation of a trend reversal should be watched for.  Confirmation would be Monday’s candlestick closing below the real body of Friday’s Hanging Man candlestick.

 

Also, the bond is showing a sell signal from a negative stochastic crossover while extremely “overbought.”  This suggests the next move is lower toward support, and we could see a slight deterioration in mortgage rates this coming week.

 

 

 

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Monthly Housing Data

Aug 2, 2017

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