The bond market’s month-long plunge has pushed long-term interest rates on mortgages and Treasurys to their highest levels in more than a year, sparking a debate: Is this a bursting bubble, the aftereffect of clumsy Federal Reserve communication or a welcome sign the economy is, at last, on the mend. The Dow last traded at 15,232. The S&P 500 is trading at 1,652. Gold is trading higher at $1,393 an ounce, while oil futures at $92.87 a barrel. Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.80/Gal.
Yields on 10-year Treasury notes, which move inversely to prices, last traded at 2.18%. 30-year Treasury Bond yields last traded at 3.33%. Rates on 30-year fixed-rate mortgages rose a hair above 4% this week. Six months ago, they were below 3.5%. Since May 8th Fannie Mae MBS (Mortgage Backed Security) with 3% coupons has fallen nearly 4 points to their lowest levels in a year. MBS yields are interest rates at which banks sell their loans into Fannie Mae and Freddie Mac bond programs. Rising yields mean higher consumer-mortgage rates.
The FNMA 30-year fixed 3.0% coupon, containing 3.25-3.625% mortgages, pretty much the benchmark or how rate sheets are priced these days is currently trading at 100.34, which is 1.25 pts worse than where we were just last week ago. Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate. The higher the number (price), the better the rate.
In economic news this week; The reader’s digest version is the housing market continues to improve and overshadow the slight improvements in the rest of the economy as well as consumer confidence at least for the moment is on the rise. All eyes are on the Fed these days as many traders see the recent fall in bond prices, which move inversely to yields, as confirmation of a bond-market bubble fueled by the Fed and bound to end badly, retarding an economy whose growth is already painfully slow.
Home prices rose in March, marking the fastest annual growth rate in nearly seven years. The S&P/Case-Shiller 20-city composite rose 1.4% in March, the largest monthly growth since July. The growth from the same period of last year was 10.9%, which marks the highest year-on-year growth rate since April 2006. All 20 cities tracked by the gauge saw year-over-year improvements for a third consecutive month. Low inventory and interest rates, as well as pent-up demand, are supporting home prices. There are also fewer distressed sales.
Pending sales of homes ticked up 0.3% in April, with gains in the Northeast and Midwest, but decreases in the South and the West. Despite April’s slight gain, the pending-sales gauge increased 10.3% from April 2012, hitting the highest level in three years. While the housing market has seen large gains over the past year, low inventories, and high unemployment and credit standards are constraining growth.
Rising home prices encourage market activity as more owners are willing and able to place their homes on the market. As home prices have increased, the number of owners who owed more on a home than the property was worth fell to about 13 million in the first quarter from 15.7 million during the same period last year. On a percentage basis, 25.4% of all homeowners with a mortgage had negative equity in the first quarter, down from 31.4% during the same period last year. Owners with negative equity, (those with less than 20% equity) may be unable to afford a down payment for a new home, thereby preventing them from moving. Rapidly rising prices and bidding wars are preventing first-time buyers from participating. With fewer first-time buyers, it’s tougher for other owners to sell and move up from starter homes. It’s a vicious circle.
The Economy grew a touch slower in the first three months of 2013 than previously believed, mainly because of a slower buildup in inventories and a somewhat steeper drop in government spending. Gross Domestic Product (GDP) expanded at an annual rate of 2.4% in the first quarter, down from an initial estimate of 2.5%. GDP is the broadest measure of an economy’s health, reflecting the value of all the goods and services a nation produces. The gain in first-quarter growth follows a tepid increase of 0.4% in the fourth quarter last year. A big driver of GDP is consumer spending. The more products that are purchased the more products are produced thus increasing GDP. Consumer confidence allows us to predict future GDP growth.
Earlier in the week we saw the Conference Board’s Consumer-Confidence Index climbed to a five-year high of 76.2 in May from 69.0 in April. Apparently we have the most confidence in five years about the nation’s economic prospects. Higher stock prices, rising home values and falling gasoline costs have made apparently made us more upbeat. A lack of drama in Washington has also allowed consumers to regain confidence after several political disputes had threatened to harm the economy. Still, consumer confidence remains well below the level expected in a normal economic recovery. Before the Great Recession, consumer confidence hovered in the 100-point range.
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