Monday, March 30, 2015

Chesapeake, VA Market Update...Another View

Great Recap on recent impacts on mortgage rates and the view from one of my recommended mortgage officers on the present state of the market.

Weekly Review

A decline in manufacturing activity in China coupled with a disappointing Durable Goods Orders release for February was instrumental in a declining stock market this past week.  The Commerce Department reported February's Durable Goods Orders fell 1.4%, missing expectations of a modest pick-up of 0.4%.  The Durable Goods Orders excluding transportation (aircraft), a closely watched proxy for business spending plans, fell 0.4% last month and was below the consensus estimate of 0.3%.  This was the sixth straight month of declines in Durable Goods Orders and is likely due to the combined effects of a strong dollar and weaker global demand.  January’s number was also revised lower from 2.8% to 2.0%.  This report was the latest indicator that U.S. economic growth stalled earlier this year.

In the bond market, weak demand at a couple of Treasury note auctions during the week resulted in higher yields.  Intermediate and long-term U.S. Treasury debt prices fell, pushing yields higher to end a two-week rally.  The Treasury Department brought additional supply to the bond market on Wednesday with a $35 billion five-year note auction that had a high yield of 1.387%.  The bid-to-cover ratio was 2.35 indicating weaker demand, and was the lowest bid-to-cover ratio for a five-year auction in the past four years.  Indirect bidders, which include foreign central banks, took 55.7% of the supply while direct bidders took 4.7%.  The average over the prior 12 auctions had a high yield of 1.63% and a bid-to-cover ratio of 2.66.
On Thursday, the Treasury auctioned off $29 billion in seven-year debt, but the auction drew the least demand since May 2009.  The mediocre bid-to-cover ratio was 2.32 versus an average of 2.40 over the past four auctions of similar maturity securities.  Indirect bidders took 50.5% of the supply while direct bidders took 12.3%.  The prior 12 auction average saw a bid-to-cover ratio of 2.52.  CNBC’s Rick Santelli graded the auction a “D+” and selling in the bond market accelerated to the downside following the auction.

From the week’s housing news, it appears the real estate market is on the mend.  Existing Home Sales improved by 1.2% during February to 4.88 million from an unrevised 4.82 million in January.  The consensus forecast had called for Existing Home Sales to increase to 4.90 million.  The lower than expected sales number may have been negatively impacted by severe winter weather conditions, but supply problems probably have a greater impact as inventories remain at a 4.6 month supply at the current sales rate.  A more normal inventory level is maintained at a 6.0 month supply.

The lower inventory level is pushing prices higher with the median existing home price increasing 7.5% year-over-year in February to $202,600.  February marked the 36th consecutive month of year-over-year home price increases.  Higher home prices make it more difficult for first-time home buyers to enter the market and this is evident from the 29% of February purchases made by first-time buyers.  Although this was a percent higher than January’s 28%, it is well below the 40% level that is seen under normal housing market conditions.

February New Home Sales increased to 539,000 units, annualized, surpassing analyst expectations of 465,000.  February’s sales number also exceeded January’s upwardly revised 500,000 units from the 481,000 units first reported.

Also, the Federal Housing Finance Agency reported their House Price Index increased by 0.3% in January from the previous month.  From January 2014 to January 2015, house prices were up 5.1%.  Jonathan Smoke, chief economist at, stated “…the FHFA numbers appear to be showing a moderation in price increases which we aren’t seeing in listing prices or median existing home prices.  On the contrary, other metrics are showing acceleration in year-over-year prices that started in December and coincided when inventories started getting super tight.  The FHFA number may be weaker because it is based only on government backed purchase mortgages and therefore doesn’t reflect jumbo mortgages on higher priced homes.”

For the week, the FNMA 3.0% coupon bond lost 18.8 basis points to end at $101.94 while the 10-year Treasury yield gained 2.8 basis points to reach 1.96%.  Stocks ended the week with the NASDAQ Composite losing 135.20 points, the Dow Jones Industrial Average dropping 414.99 points, and the S&P 500 decreasing 47.08 points.

To date for 2015, and exclusive of any dividends, the NASDAQ Composite has gained 3.17%, Dow Jones Industrial Average has lost 0.62%, and the S&P 500 has gained 0.10%.  The national average 30-year mortgage rate rose to 3.79% from 3.74% while the 15-year mortgage rate increased to 3.08% from 3. 30%.  The 5/1 ARM mortgage rose to 3.16% from 3.10%.  FHA 30-year rates rose to 3.50% from 3.30% and Jumbo 30-year rates rose to 3.67% from 3.64%.

Mortgage Rate Forecast with Chart

The FNMA 3.0% coupon bond ($101.94, -18.8 bp) opened the week 9 basis points higher on Monday at $102.22 and ended up trading within a range between a weekly high of $102.63 and a low of $101.61 before settling at $101.94 on Friday.  The bond traded significantly lower on Wednesday and Thursday resulting in a new sell signal from a negative stochastic crossover.  The move dropped the bond below its intermediate lower trend line and back below the key 50-day moving average support level located at $101.99, which now becomes technical resistance.  Nearest support is now located at the 25-day moving average at $101.56.  Unfortunately, the bond remains close to “overbought” levels even with the losses on Wednesday and Thursday, and appears destined to test the next levels of support at $101.56, $101.40.  The bond did manage to bounce back a little on Friday to create a two-day Harami Japanese Candlestick candle pattern that can be a potential reversal signal, but this will require confirmation from a positive candlestick on Monday.

With the March employment report looming in the background on Friday, technical signals will likely take a backseat to economic news.  If the week’s economic news proves to be bond market friendly we should see an improvement in bond prices and lower yields.  Conversely, if the economic news is more favorable for stocks, we could see bond prices fall further to test support levels and see yields and mortgage rates rise slightly.

Chart:  FNMA 30-Year 3.0% Coupon Bond

Jim Belote NMLS # 254207   MLO #:  22270VA
Branch Manager/Senior Loan Officer
Old Point Mortgage, LLC
Branch Manager/Senior Loan Officer
1613 Laskin Road, Suite 300
Virginia Beach, VA 23451

Office:  757-690-8047 or 757-395-LOAN(5626)
Cell:  757-287-3873
eFax:     757-605-4982

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