Mortgage-backed volume in the last two weeks of December averaged less than 70% of the 30-day average. Heading into the Christmas holidays, mortgages widened substantially on nearly $4 billion in originator selling - consisting of about 75% 4.5s and 25% 4s.
From Christmas Eve through midday Monday last week, mortgages tightened as a result of buying from real and fast money investors, who took advantage of the widening. The buying was also caused by a stable Treasury market and light supply.
Starting late Monday afternoon and into Tuesday, mortgages turned weaker as selling picked up from money managers, banks and originators initially, as Treasurys strengthened on a flight to quality, and later as Treasurys sold off.
Month-to-date through Dec. 29, Barclays Capital's MBS Index was down 12 basis points versus Treasurys. The sector compared favorably with ABS performance, which lagged Treasurys by 51 basis points, while CMBS and corporates experienced substantial gains for the month: plus 1,221 basis points for CMBS and plus 215 basis points for corporates.
For the year, the MBS Index outperformed its competing sectors by a substantial margin. According to Barclays, excess return on the MBS Index was negative 282 basis points through Dec. 29, while ABS was negative 2,106 basis points, CMBS negative 3,492 basis points, and corporates negative 1,855 basis points.
News Updates on Housing
The housing market continued on its downward trend, according to various data.
For instance, the S&P/Case-Shiller Home Price Index for October reported a record annual decline of 19.1% and 18.0%, respectively, for the 10-city and 20-city composites.
"The bear market continues; home prices are back to their March 2004 levels," said David Blitzer, chairman of the index committee at Standard & Poor's. He added that from their mid-2006 peaks, the 10-city composite is down 25% and the 20-city composite is down 23.4%
Furthermore, October saw three new markets enter the "double-digit club." These are Atlanta, Seattle and Portland, which are now reporting annual rates of decline of 10.5%, 10.2% and 10.1%, respectively. Phoenix remains the weakest market with an annual decline of 32.7%, according to the latest data, followed by Las Vegas at negative 31.7%, San Francisco at negative 31%, and Miami at negative 29.0%. Charlotte and Dallas had the lowest year-over-year declines at 4.4% and 3.0%. For the month of October, the 10-city composite fell 2.1% and the 20-city composite 2.2%, compared with negative 1.9% and negative 1.8% in September.
Meanwhile, existing home sales for November provided no relief. Sales fell a larger-than-expected 8.6% to 4.49 million units - the lowest level in 11 years. Previously, Street analysts were expecting a 1.6% decline. In addition, the October existing home sales figure was revised downward to 4.91 million from 4.98 million. Sales declined in all areas of the country. The National Association of Realtors (NAR) also reported that the median home sales price fell a record 13.2% to $181,300 from November 2007, which is the largest price decline since the NAR began tracking prices in 1968. The months' supply stands at 11.2 months, matching the April high, and is the highest level since the mid-1980s.
New home sales for November also fell more than projected to 407,000, which is the lowest figure since 1991. In addition, October was revised sharply lower to 419,000 from an originally reported 433,000. New home sales over the year have now fallen a total 35.3%, the largest annual decline since April 1980. Median home prices are down 11.5% from a year ago to $220,400. Months' supply is 11.5 months, improved from 11.8 months in October. New home sales declined in the Midwest and South, while the West and Northeast were higher.
The Federal Housing Finance Authority reported its Purchase-Only Home Price Index fell a seasonally-adjusted 1.1% from September to October, compared to a 1.2% decline in the previous month. Year-over-year, home prices are down 7.5%.
Mortgage/Prepayment Outlook
MBS are starting the year with a more favorable tone compared with this time last year. A major source of this improvement is the Federal Reserve's plan to buy $500 billion in MBS over the next several quarters. In addition, there is the Treasury's expected ongoing buying of $20 billion or so per month. Combined, these purchases represent nearly all of the net supply projected currently for 2009.
With an increase in the day count (three more days) and a surge in refinancing activity in November (increasing 44% based on November's Refinance Index average), speeds are expected to jump in the December report, which will be released in January. Current estimates suggest that speeds will be increasing around 40%, with paydowns totaling in the mid-$40 billions. December prepayment reports will be released beginning Wednesday evening into Thursday morning.
The largest gains are predicted for 2007 and 2006 vintages, as well as 6% coupons. December's increases, however, look prime to be eclipsed by January's current forecast - a surge of over 100% in conventional speeds and over 60% for GNMAs, with mortgage rates near record lows. Further gains, albeit more modest, are expected for February.
While refinancing activity has popped, analysts at Keefe, Bruyette & Woods don't believe this has translated into new mortgages. They attributed this dynamic to the sharp decline in home prices.
Meanwhile, analysts said purchase activity has been partly hindered by existing homeowners' inability to move up, since they have a limited gain upon sale of their home, or are unwilling to realize a loss.
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