Mortgage News Update

Lots of Geo-Political news has been driving the mortgage markets and mortgage rates lately. Here is just a small sampling of events from our friends at NYCB that will influence mortgage rates this week:

Ukraine, the U.S. and Europe accuse Russia of dispatching soldiers and backing militias in an effort to open a new front in a conflict the United Nations estimates has thus far claimed at least 2,600 lives. Russia, which is facing further sanctions as early as this week over the unrest, has repeatedly denied involvement. The Kremlin calls this war a purely “domestic matter” and insists that any Russians that happen to be found are simply “volunteers” or soldiers on holiday. The only part that could potentially be unexplained could be the question of who goes on vacation in a tank.

Mortgage rates have been steady and not ready to move up or down. It feels like resisting any directional shift, and are balancing quite well. What are these forces trying to pull it in either direction? On one side there is a thrust towards higher rates generated by a seemingly growing economy while on the other side there is a strong pull down for lower rates from a troubled and slow-growth world. All these counterbalancing influences are long term and thus rates may continue their seesaw battle over a longer horizon.

One of the factors keeping rates on the lower side can be traced to Eurozone. There is a growing expectation that weak growth and very low inflation in the Eurozone may prompt the European Central Bank into action before long, and they would be expected to follow the Fed’s path of a bond-buying program in hopes of supporting growth and lifting prices. This belief is already pushing down rates in the Eurozone, and an actual program would probably enhance this move. Low yields over there make U.S. Treasuries look attractive, and so demand for the our debt raises the prices of bonds, which in turns lowers yields, helping mortgage rates to fall.

The second factor behind the lower rates could be linked to troubles in the Middle East, Russia and Ukraine’s tussle, and other hot spots pushing investors to relocate into Treasuries, and with this additional demand also serving to press rates lower. Other influences, such as a lack of inflation and a still soft job market, collectively are the reason why interest rates continue to fall even as the Fed continues to trim its purchases of Treasuries and MBS. There is more than sufficient demand to meet available supply, and with a sliding budget deficit and a weak mortgage originations market, there is rather less supply available. Treasury offerings are on a pace for about $600 billion this year, down from about $1.1 trillion just two years ago; Mortgage-Backed Securities from Fannie, Freddie and Ginnie Mae might not even make it to a trillion dollars this year, and even if they do, it would be more than a third less than 2013.

Policy makers and Wall Street analysts often focus on the demand side of the economy, like household spending. When the economy sank in 2008, policy makers and the Federal Reserve focused on stimulating demand to lift consumption. The Fed did this by lowering interest rates to promote borrowing, investing and spending. Increasingly, economists are focusing on the supply side. A productivity slowdown, meager investment by companies and a falling rate of participation in the labor force by individuals have slowed the supply side of the economy in recent years. Prompted by this shift, a noted economist said in his baseline forecast, the economy will grow at a 1.6% rate in the decade ahead.

Among the economic bright spots this year have been the reliable gains in new hiring and diminished levels of people seeking unemployment assistance. The markets will analyze hiring when the August employment report comes due this upcoming Friday; expecting around 200,000 new hires during the month. More people continuing to work or finding new jobs is key to increasing consumer spending, which in turn powers economic growth. Ahead of the important Labor Day weekend, sales early indications pointed to stronger auto sales in August, providing a boost to the outlook for headline Retail Sales.

Gross Domestic Product rose at a 4.2 percent clip in the second quarter, an upward revision from the advance estimate released at the end of last month. GDP was better than expected with, notably, improvement in investment and business spending and so a positive going forward. Although, it appears that third-quarter growth is running at a lower level than the second.

Besides the release of the employment report, there are several key data releases this week, including ISM Manufacturing on Tuesday, and Jobless Claims on Thursday. all can influence mortgage rates.

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