Archive → September, 2010
The Week That Was ……
The chance for additional Treasury purchases by the Fed helped mortgage rates improve early this week. Stronger than expected economic growth data trimmed the gains later in the week. The net result was that mortgage rates ended the week a little lower.
As expected, the Fed made no change in the fed funds rate at Tuesday’s meeting. Its statement was very similar to the last one, but investors focused on one important difference. Fed officials stated that they are “prepared to provide additional accommodation if needed to support the economic recovery.” Investors interpreted this to mean that additional bond purchases by the Fed could take place in coming months. While the Fed is expected to purchase Treasury securities rather than mortgage-backed securities (MBS), increased demand for Treasuries would be favorable mortgage rates. As usual, investors immediately priced in this information, and mortgage rates improved. Of course, if this action by the Fed never becomes necessary, then mortgage rates could give back this week’s gains.
The housing data released during the week generally matched expectations. While there are differences in regional performance, overall the housing market is holding steady above the lows reached during the recent financial crisis or improving modestly. August Existing Home Sales rose 8% from July. Inventories of unsold existing homes declined 1% to an 11.6-month supply. August New Home Sales were unchanged from July. August Housing Starts rose 11%, and Building Permits, a leading indicator, rose 2%. The September NAHB home builder confidence index was unchanged from August.
Next week, Consumer Confidence will be released on Tuesday. The final revision to second quarter GDP will come out on Thursday, along with the Chicago PMI national manufacturing index. GDP is the broadest measure of economic activity. Friday will be the big day with Personal Income, PCE inflation, Construction Spending, ISM manufacturing, and Consumer Sentiment. There will be Treasury auctions on Monday, Tuesday, and Wednesday.
A Small History Lesson
How Did The Interest Deduction Come About?
The First Income Tax: In 1984 Congress passed the first income tax, which was challenged and later struck down by the Supreme Court. So the government got into gear and in 1913 the Sixteenth Amendment was ratified granting Congress the power “to lay and collect taxes on incomes, from whatever source derived”.
The Second Income Tax: Congress quickly imposed and income tax starting at 1% and rising to 7% on incomes over $500,000. This resulted with less than 1% of the US population paying any income taxes. This was the beginning of the graduated income tax.
Enter The Tax Deduction: The tax was offset with a deduction of any interest paid. Rental income was offset by the interest paid to finance the rental property and interest bacame a tax deduction.
Prior to WWI, home owners typically owned their homes outright. With the exception of financed or leased farm land, homes were purchased with cash. So at first, mortgage interest deduction did not benefit homeownership.
Soon, local Thift & Loans (Savings and Loans) were created to provide access to home financing. Subsequently, programs through FHA, VA, and latter Fannie Mae and Freddie Mac facilitated broader homeownership. Finally, the creation of the conventional loan and the mortgage backed security market brought financing to the masses. Along with homeownership came the morthahe interest deduction.
The Bottom Line: The home mortgage interest deduction is a carryover from the original income tax and business intterest rate deduction of a century ago. It was not intended to encourage home ownership or considered a public policy. Today, Washington is eyeing the hoome mortgage interest deduction (the removel of the exemption) as a possible source of revenue. As always, the government giveth and the govenment taketh away!
What’s Up For This Week??
A shift in Wall Street sentiment caused mortgage markets to worsen last week. There wasn’t much in the way of new data, but the numbers that did hit the street helped quell fears of a double-dip recession.
Conforming mortgage rates rose between Monday-Friday for the first time since June, and mortgage-backed securities have now lost ground on six of the last 7 trading days.
During this period, conforming mortgage rates in Florida have risen by as much as 0.375 percent.
Mortgage rates for FHA-insured home loans are higher, too.
Remember, concern for the future of the U.S. economy was a major catalyst for low rates this summer. The drop in rates, which began in April on weaker-than-expected data, accelerated through July and August on record-low home sales and a stalled jobs market.
Lately, though, these concerns are turning to hope.
- The July Pending Home Sales Index showed that housing has life
- Initial jobless claims came in much lower than expected
- Retail Sales is expected to post a gain for August
The growing optimism is putting the Refi Boom at risk. To be sure, it’s been a rough two weeks to shop for a mortgage.
This week may figure no better. In addition to the Retail Sales data, there’s key inflation data due both Thursday and Friday, plus, two consumer confidence reports are set for release. If the overall numbers point to an “improving economy”, mortgage rates will likely rise again this week.
Momentum is moving in that direction, certainly.
If your looking for the right time to lock a rate, now may be the time. Mortgage rates are off their best levels of all-time, but still quite low. There’s lot of savings out there for homeowners who qualify.
The economic calendar for the week is as follows:
This Week’s Economic Calendar:
Today;
2:00 pm Aug Treasury budget deficit (-$95.0B)
Tuesday;
8:30 am August retail sales (+0.3%, ex auto sales +0.3%)
10:00 am July business inventories (+0.7%)
Wednesday;
7:00 am MBA mortgage applications for last week
8:30 am NY Fed Empire State manufacturing index (+6.4 frm +7.1)
9:15 am Aug industrial production (+0.3%)
Aug Capacity Utilization (75.0 frm 74.8%)
Thursday;
8:30 am Weekly jobless claims (+9K to 460K; con’t claims 4.45 mil from 4.478 mil)
August Producer Price Index (+0.3%, ex food and energy +0.1%)
Q2 Current Account deficit (-$125B)
10:00 am Sept Philly Fed business index (+2.0 frm -7.7 in Aug)
Friday;
8:30 am August Consumer Price Index (+0.2%, ex food and energy +0.1%)
9:55 am U. of Michigan/Reuters consumer sentiment index (70.0 frm 68.9 at the end of Aug)
Have Rates Bottomed Out?
Stronger than expected economic data pushed mortgage rates a little higher again this week. Following a string of weekly drops since the middle of June, mortgage rates have now risen for two straight weeks.
Over the summer, mortgage rates have fallen substantially. Weaker than expected economic reports and the debt crisis in smaller European countries caused investors to reduce their forecasts for economic growth and produced a flight to the relative safety of government guaranteed bonds, resulting in the lowest mortgage rates in decades. Now, however, some investors are asking whether they can fall further. Weaker than average economic growth, low inflation, and an “unusually uncertain” economic outlook still make the current environment supportive of low mortgage rates, but some investors feel that these factors have been fully “priced in.” These investors feel that economic growth must falter significantly for mortgage rates to drop much from here.
Also contributing to the fall in rates was the possibility that the government would take action which would push mortgage rates lower. The political climate has turned less favorable for this, though. Growing opposition to fiscal spending of any type has reduced the chances for additional government support for the housing market and mortgage rates.
The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Thursday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales, an important indicator of economic growth, will be released on Tuesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, is scheduled for Wednesday. Empire State, Import Prices, Consumer Sentiment and Philly Fed will round out the week.