Mortgages were hit with strong selling last week with investors shedding duration as the market backed up on stronger-than-expected economic data and uncertainty regarding Friday's employment report. On Wednesday alone, there was $4 billion dumped on the market, half from originators and servicers and half from other fast money. While demand was limited, there was some month-end buying noted and other real money was coming in at the cheaper levels.
There is not a lot of reason to like mortgages right now. While volatility tends to dip after the payrolls report, the curve continues to flatten and there are additional Federal Reserve interest rate hikes on the horizon. Other negatives include increasing supply with limited demand sources.
In midweek comments, JPMorgan Securities analysts were sticking with their modest negative outlook on the basis. They have a preference for 15s on expectations that rising loan balances as a result of the substantial jump in the conforming loan limit will have a more adverse impact on new 30-year originations, further widening the supply gap between the two sectors. In a preview of 2006, JPMorgan anticipates the market in the next six months will be weighed down by supply of over $120 billion. In addition, there is the risk that higher rates will contribute to bank de-levering that could add another $100 billion to $200 billion. In this scenario, the current pace of overseas buying isn't adequate to stabilize spreads, analyst say, and would require the GSEs to help absorb the de-levering.
Bear Stearns returned to neutral to negative on the sector last week. With the OAS on the par coupon to agency debt negative, GSEs are likely to be sidelined.
Refi Index declines 6% to 1484
Mortgage application activity moved lower for the holiday-shortened week ending Nov. 25. The Mortgage Bankers Association reported that the Refinance Index declined 6% to 1484 while the Purchase Index rose 1% to 476. Analysts had expected the Refinance Index to hold steady at 1584 to 1600 area in response to the recent decline in mortgage rates.
As a percentage of total application activity, refinancing slipped to 39.1% from 39.9%. ARM share was essentially unchanged at 33.0% versus 33.2%.
Mortgage rates held within a narrow range last week despite the sell-off that moved the 10-year Treasury yield 19 basis points higher mid-day Thursday from the previous Friday's close. According to Freddie Mac's survey, the 30-year fixed mortgage rate declined two basis points to 6.26%, while the 15-year rate was unchanged at 5.81%. On the adjustable side, 5/1 hybrid ARMs reported in at 5.76%, up just one basis point from last week, and one-year ARM rates increased two basis points to 5.16%.
"Mortgage rates are in a holding pattern at the moment as financial markets try to discern where inflation and growth in the economy are headed," Freddie Mac Chief Economist Frank Nothaft said. "Until the market decides these issues, mortgage rates should stay within a relatively narrow band." Nothaft added that current low mortgage rates, coupled with the higher 2006 conforming loan limits of $417,000 should help to keep the mortgage industry bustling heading into the new year.
With mortgage rates holding stable and the holidays past, there is some expectation that refinancing activity will rise back towards 1600, Lehman Brothers analysts say. JPMorgan analysts expect the index to trend lower towards 1400.
OFHEO Reports HPI annual increase at still strong 12.02%
The Office of Federal Housing Enterprise Oversight last week reported another strong quarter of home price appreciation. Over the period from 3Q04 through 3Q05, home prices rose 12.02%. This was down, however, from the previous four-quarter period that recorded a 14.01% jump. For the quarter, appreciation was 2.86%, down from 3.55% in the second quarter.
OFHEO Chief Economist Patrick Lawler noted, "Much of the recent run-up in mortgage rates occurred after the third quarter ended. To the extent that those increases may have affected prices, those effects will be evident in future quarters."
By state, Arizona recorded the strongest year-over-year as well as quarterly growth at 30.3% and 7.30% respectively. Florida was second at 25.18% and 6.09%, with Hawaii rounding out the top three at 21.33% for the 3Q04 through 3Q05 period, and 5.68% for the quarter.
Nevada, which recorded the strongest one-year gain in the previous report, dropped to eighth with one-year growth at 17.59%. OFHEO also noted that for the first time since 4Q03, no Nevada cities were ranked in the top 20 MSAs for highest appreciation.
States showing the slowest growth were Indiana, Nebraska, Ohio and Michigan - all under 5.0% for the annual period. In the previous report, Texas ranked last with home price appreciation of 4.68%.
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