"I Can See Clearly Now." Johnny Nash may have hit number one on the charts with this classic tune in 1972, and forty-one years later the markets would sure love a clear sign regarding when the Fed may taper its Bond purchase program known as Quantitative Easing. Remember that the Fed has been purchasing $85 billion in Bonds and Treasuries each month to stimulate the economy and housing market. This includes Mortgage Bonds, to which home loan rates are tied. Last week, the minutes from the Fed's October meeting of the Federal Open Market Committee revealed that members did discuss tapering these purchases–but there was no clear sign when tapering would begin. This led to a volatile Wednesday, causing both Stocks and Bonds to worsen immediately after the minutes were released.
In housing news to note, Existing Home Sales for October fell by 3.2 percent due to a rise in home loan rates and housing prices. This was the second month of declines, as there were 5.12 million units sold annualized, below the 5.20 million expected. In addition, the National Association of Home Builders reported that its Housing Market Index fell to the lowest level since June, but the figure does remain in positive territory. Meanwhile, Retail Sales rose more than expected in October, as the decline in gas prices gave consumers extra money to spend, while both consumer and wholesale inflation remain tame.
What does this mean for home loan rates? The housing sector has been on an improving streak, but as the reports above show, these improvements could be hindered if home loan rates continue to rise. One thing is clear: The Fed has said that economic reports will be a key factor regarding when it begins to taper its Bond purchases. But whether this will happen before or after the new year remains to be seen.
The bottom line is that home loan rates remain attractive compared to historical levels, and now remains a great time to consider a home purchase or refinance. Let me know if I can answer any questions at all for you or your clients.
Forecast for the Week
The upcoming week's economic data is crammed into three trading days, given the Thanksgiving Holiday.
Housing data is plentiful this week and kicks off on Monday with Pending Home Sales. Tuesday brings the S&P/Case-Shiller Home Price Index, as well as September and October data for Housing Starts and Building Permits. September's Housing Starts and Building Permits were never reported due to the government shutdown.
Tuesday also brings a read on Consumer Confidence, with the Consumer Sentiment Index following on Wednesday.
Also on Wednesday, look for Weekly Initial Jobless Claims, Durable Goods Orders, and news from the manufacturing sector with Chicago PMI.
All capital markets will be closed on Thursday in observance of Thanksgiving. The Bond markets will be open on Friday and will close at 2:00 p.m. ET, while Stocks are also open and will close at 1:00 p.m. ET.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of Bond that home loan rates are based on.
When you see these Bond prices moving higher, it means home loan rates are improving – and when they are moving lower, home loan rates are getting worse.
To go one step further – a red "candle" means that MBS worsened during the day, while a green "candle" means MBS improved during the day. Depending on how dramatic the changes were on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.
As you can see in the chart below, it was a volatile week for Bonds as the Fed minutes renewed talk of tapering the Fed's Bond purchase program. I'll be watching the markets closely in the coming weeks as more discussion on this topic is sure to continue.
Chart: Fannie Mae 4.0% Mortgage Bond (Friday Nov 22, 2013)