The Perfect Storm for Lower Mortgage Rates
Last week’s economic reports left many surprised at the lackluster growth of the U.S. economy. The result was mortgage rate improvements across the board. One of the biggest improvements was on Wed when ADP reported employment growth of only 38k jobs, vs expectations of 175k new jobs. This was reinforced by NonFarm Payroll data on Friday, indicating the economy only added 54k jobs, while unemployment in May rose back above the 9% marker to 9.1%. U.S. Treasuries, despite the risk of being downgraded by Moody’s, fell below a 3% yield, which is a barrier that hadn’t been broken since last fall.
All told, there are several factors combining to create a very attractive mortgage rate environment for borrowers:
1. Instability remains in Europe and abroad, which drives investment in Treasuries & mortgage-backed securities
2. Meager economic growth maintains lower rates with low risk of inflation
3. Supply of mortgage volume is relatively light compared to demand, which means that excess demand drives rates down further. At least some mortgage companies, like Guaranteed Rate, also have the operational capacity to handle the application volume. In this case, better rates doesn’t necessarily mean that it has to take forever to close a loan.
4. Housing prices remain low, despite lower rates, as the market still works to churn through excess inventory (distressed sales, foreclosures, etc)
5. Government Sponsored Enterprises (ie Fannie Mae & Freddie Mac) have not yet been de-emphasized. Investors are clamoring for these securities that have an implicit government guaranty and should perform well over time.
6. We are seeing more involvement from Wall Street which helps add competition (and lower rates) overall, especially in the Jumbo space.
There are no major economic releases to start the week, which means focus will likely turn more toward debt issues on both international and domestic fronts. Especially with Greece and Portugal, as debt concerns ease abroad, you could see money start to flow out of Treasuries which would put some upward pressure on rates. Domestically, the battle between spending cuts and raising the U.S. debt ceiling is likely to escalate as we head toward the announced “drop dead” date of Aug 2nd. Rating agencies (like Moody’s mentioned above) may look to downgrade U.S. debt if positive direction isn’t taken in the near future.
Federal Reserve Chairman Bernanke and several other Fed presidents will be speaking tomorrow, and many will focus on any signs given on the economic outlook and upcoming Fed policy implications. Initial unemployment claims will be released Thursday, which will put some light on jobs coming away from last week’s meager reports.