No New ECB Stimulus

After spending the last couple of weeks at or near the lowest levels of the year, mortgage rates rose this week. The cause came from investor disappointment with Thursday’s European Central Bank (ECB) meeting. The U.S. economic data contained few significant surprises and had little effect.
At its last meeting in March, the ECB announced significant new stimulus measures to spur economic activity and inflation in the eurozone. In speeches following the March meeting, ECB President Mario Draghi emphasized the ECB’s readiness to do more if needed. Investors liked what they heard and pushed interest rates around the world lower in anticipation of more stimulus. This week, however, the ECB chose to add no new measures, and some of the improvement in rates was reversed. 
The recent housing data was mixed. The existing home sales data for March revealed a solid increase of 5% from February, and they were higher than a year ago. Also notable,inventories of existing homes for sale increased 6%. Tight inventories have been a big factor holding back home sales activity in many regions. National median sale prices were 6% higher than a y
ear ago. 
In contrast to home sales, housing starts declined 9% from February, but they still were 14% higher than a year ago. The drop was evenly split between single-family and multi-family units. Building permits, a leading indicator of future activity, fell 8% in March but also remained above year ago levels.
The figures for housing starts and building permits are very volatile from month to month, which makes it necessary to look at a longer time period to determine the underlying trend. Housing starts in 2016 are well above the levels seen a year ago.
Looking ahead, the next Fed meeting will take place on Wednesday. No change in rates is expected, but the statement could have an impact on mortgage rates. This will be followed by a Bank of Japan meeting which could influence U.S. markets on Thursday. Before the meetings, durable orders will come out on Tuesday. The first reading for first quarter gross domestic product (GDP), the broadest measure of economic activity, will be released on Thursday. The core PCE price index, the Fed’s preferred measure of inflation, will come out on Friday.

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Inflation Declines

While the U.S. economic data released over the past week generally was a bit weaker than expected, it was offset to some degree by stronger than expected data in China. The net effect was small, and mortgage rates ended the week just a little higher, up from the lowest levels of the year. 
While explaining why the Fed plans to move gradually to tighten monetary policy, Fed Chair Yellen said that she was concerned that the recent increase in core inflation may be due totemporary factors. The consumer price index (CPI) report for March released on Thursday might be a sign that her concerns are justified. 
Core CPI inflation, which excludes the volatile food and energy components, was 2.2% higher than a year ago, down from a 2.3% annual rate in February, and below the consensus forecast. This follows four straight months of increasing levels of core inflation and may be the start of a trend lower. It would be good for mortgage rates if inflation continues to decline.
Retail sales in March were a good deal weaker than expected. The results were decent, but investors were looking for better. Excluding the volatile auto component, retail sales increased 0.2% from February, which was the largest increase in four months, but it was half the expected level. Consumer spending is an important component of gross domestic product (GDP), and it was somewhat surprising that the report caused so little reaction. 
Looking ahead, the biggest event next week may be Thursday’s European Central Bank (ECB) meeting. Bond purchases by the ECB have helped keep global bond yields low, so comments about future policy could have an impact on U.S. mortgage rates. Before that, the NAHB housing index will be released on Monday. Housing starts will come out on Tuesday. Existing home sales will be released on Wednesday.

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Central Banks See Continued Support

Mortgage rates improved again this week and are now near their best levels of the year. Again the improvement resulted from statements by central bankers. The economic data had little effect.
Statements by the heads of the International Monetary Fund (IMF), the European Central Bank (ECB), and the U.S. Fed shared the same sentiment, the global economy needs support. IMF Managing Director Lagarde described economic growth in Europe as “too slow, too fragile”. ECB President Draghi said the ECB will do what ever it takes to stimulate growth and raise inflation. Inflation in the eurozone is now -0.1%. The target is 2.0%. The minutes from the U.S. Fed meeting on March 16th supported recent comments that the Fed will take a gradual approach to raising the federal funds rate. These dovish comments were well received by the bond markets, including U.S. mortgage-backed securities.
The economic data released this week shows that the U.S. economy is on far better footing than the overall global economy. The JOLTS report, which measures job openings and labor turnover rates, showed that job openings rose and voluntary quits increased. Both are signs of an improving labor market.
The ISM Services index measures expansion or contraction in the services sector of the economy. Readings above 50 indicate expansion. The index for March, at 54.5, shows that the service sector expanded again and did so at a better pace than the previous two months.
Looking ahead, the Retail Sales report will be released on Wednesday. Consumer spending accounts for about 70% of economic output in the U.S., and the retail sales data is a key indicator. The consumer price index (CPI) will come out on Thursday. CPI is a widely followed monthly inflation report that looks at the price change for goods and services which are sold to consumers. Industrial production, another important indicator of economic activity, will be released on Friday.
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Who knew? The Federal
Reserve raised its funds rate barely two months ago, and all that worry about
higher interest rates for mortgage borrowers ended up being positively
unwarranted. The average rate on the popular 30-year fixed mortgage began a
free fall, reacting to financial markets overseas rather than monetary policy
here at home.
“Mortgage rates
are going down again, and it’s good for borrowers, but is it really good for
the housing market and the broader economy? The answer is no,” said Guy
Cecala, CEO and publisher of Inside Mortgage Finance.
Mortgage rates are
falling because investors are flooding the U.S. bond market. Mortgage rates
follow the yield on bonds that loosely follow the 10-year Treasury. Investors
are buying bonds as a safety play in a highly volatile and largely negative
stock market. Signs of weakness in the U.S. economy, in addition to trouble in
overseas markets, pushed the yield on the 10-year Treasury to its lowest level
since 2012, and mortgage rates followed south.

“If stocks are
selling, and if people are generally pretty panicked about the state of the
global economy, bond markets are a natural safe haven,” said Matthew
Graham, chief operating officer of
 Mortgage News Daily. “Popular opinion about rates moving
higher only helped. Too many people were on one side of that trade, and it
almost always makes sense to root for the underdog in those scenarios.”
Lower mortgage rates
certainly offer homebuyers lower monthly payments and at the same time help
them to qualify for larger loans, so they can buy more expensive homes. The
latter is particularly pertinent this spring, as home prices are rising due to
record low supply of homes for sale. On the flip side, a weaker economy, stock
market losses and general unease about the fate of employment and wage growth
all hurt housing.
“Frankly, a
healthier economy would be mortgage rates in the 5 percent range, but that’s
also assuming you could get 2 percent in your checking account,” Cecala
Now not only are
mortgage rates nearing their record lows set in 2012, there is new talk of the
Federal Reserve moving to a negative interest rate policy. Fed Chair
 Janet Yellen said Thursday it was not out of the realm of
This would not,
however, translate to negative mortgage rates. That is impossible. Lenders only
lend if they can make money.
“As far as the
connection to mortgage rates, it’s no different than it was,” said Graham.
“The Fed rate is only loosely connected over longer time horizons. Whether
the Fed hikes or cuts below zero, the global economic panic will be good for
It could, however,
push rates into the 2 percent range, which would have a significant impact on
borrowers. It would help those on the low end but could hurt jumbo loan
borrowers. Banks, which generally hold these larger loans on their own books,
would not want to lend in that environment,
“We would go back
to a situation where conforming government mortgages are considerably cheaper
than private jumbo,” said Cecala. “All you’re doing is asking them
[banks] to shrink their margin and get nothing in return because there is no
way to lower their cost of funds from 0 to 0.”
Cecala does not expect
the Fed to move rates lower. He cites the fact that the nation went through one
of the worst recessions in history, and the Fed never moved below zero. The
bigger issue is that most lenders have stopped hedging for rate drops, so,
Cecala added, “It may to cause a lot of losses and shake up things.”
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