Market Gets Sneak Peak into Jobs…Rates Steady

We had another slow day of activity in the bond markets. Mortgage backed securities opened lower yesterday resulting in worsened rate sheets when compared to the prior day. During afternoon trading, mortgage rates did manage to marginally improve leading a few lenders to offer reprices for the better.

We have a busy day of data…

First up was the Mortgage Bankers Association’s Weekly Mortgage Applications Index. The MBA survey covers over 50 percent of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. A rising trend of mortgage applications indicates an increase in home buying interest, a positive for the housing industry and economy as a whole. Furthermore, in a low mortgage rate environment, such a trend implies consumers are seeking out lower monthly payments which can result in increased disposable income and therefore more money to spend on discretionary items or to pay down other debt.

Recent reports from the MBA have shown applications to be at disappointing levels despite record low mortgage rates and government stimulus . Today’s release showed demand picking up with the purchase index moving higher by 6.8%, while the refinance activity declined by 1.3%. Apparently, consumers are getting out there to buy as the expiration of the tax credit is right around the corner. Most economists expect the refinance activity to decline as many home owners have already taken advantage of the near record low mortgage rates.

As a reminder to all potential home buyers…the home buyer tax credit that gives first time home buyers up to an $8000 tax credit and repeat buyers up to $6500 is set to expire the end of April. You must be under contract by April 30th and close by June 30th to qualify. Any contracts or closings after those dates, whether your fault or the lenders fault, do not qualify. With the expiration fast approaching, I expect to see increased demand at lenders which will slow down loan approvals. If you plan to take advantage of this program, get out there and find your new home as soon as possible.

Next out was the ADP Employment Report. This data gives us a sneak peek into the health of the labor market ahead of the official government data, which is due out this Friday. Historically, the ADP report has varied greatly from the official report but its accuracy has been improving lately. The biggest difference between the two jobs report is the ADP numbers do not take into account government hiring, only the private sector. Since our economy is driven by consumer spending, higher unemployment would indicate less consumer demand and spending, a negative for corporate profits. Investors tend to sell stocks when unemployment is high in favor of the safety of the fixed income sector.

Today’s release gave us disappointing numbers. Economists had expected ADP to show 40,000 jobs gained last month, but the release indicated a loss of 23,000. The prior month’s report was also revised worse from the first reported loss of 20,000 jobs to a loss of 24,000. Immediately following the release of this report, both benchmark treasuries and MBS improved in price which should allow for better rate sheets this morning. With the preview over, all eyes will be focused on the official report due out Friday morning. Economists are expecting it to show a gain of 190,000 jobs and the unemployment rate holding steady at 9.7%.

The final two reports on the day gives us a look into the strength of the manufacturing sector of our economy. First out was the Chicago PMI. This data measures the strength of business conditions in the Chicago region. The Institute of Supply Management surveys both manufacturing and non-manufacturing firms, readings above 50 indicate an expanding conditions while readings below 50 indicate contraction. Recent surveys have shown conditions improving with last month’s report registering a 62.6, the highest reading in over 3 years and the fifth consecutive monthly gain. Economists expected today’s report to step back slightly to 61.0. The release indicated business conditions in the Chicago region took a larger step backward than expected coming in at 58.8.

The final report on the day was Factory Orders. This data represents the dollar amount of new orders for both durable and non-durable goods. Durable goods are products that have a life expectancy of at least three years such as autos, computers, machinery. Non-durable goods are products that can only be used one time or a product with less than a three year life expectancy. If orders are increasing, it indicates manufactures will be busier in the months ahead as they ramp up production to meet the demand. Busier factories can lead to additional hiring which is good for the overall economy and the equities market. To remind readers, as a general rule positive economic data benefits the stock market while negative economic data benefits the bond market and low mortgage rates. This report has a two month lag, so today’s data is for the month of February. Last month’s report posted a very strong increase of 1.7% and economists surveyed prior to this report expect another increase of 0.4%.

The release indicated Factory Orders in December rose more than expected by 0.6% indicating that manufacturing continues to drive our economic recovery, though it is a jobless one so far.

Reports from fellow mortgage professionals do indicate lender rate sheets to be improved this morning. The par 30 year conventional rate mortgage remains in the 4.875% to 5.125% range for well qualified consumers. To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. If you are seeking a 15 year term, you should expect par in the 4.25% to 4.50% range with similar costs but a lower FICO score requirement.

I continue to favor locking over floating. There are too many unknowns in the near term. We have the end of the MBS purchase program by the Fed today, more treasury supply coming tomorrow and non farm payrolls on Friday. Even if all these events go in our favor, at best mortgage rates dip .125%. If these events go against us, mortgage rates could rise very quickly. Way too much to risk with very little to gain. The only loans I would consider floating would be ones that are a day away from locking on a shorter time frame which does give better pricing but I am a little reluctant to even float those.