THE YEAR AHEAD

This year begins in a similar fashion to last year. Last year at this time 30 year fixed rate mortgage interest rates were historically low. Most pundits predicted steady interest rate increases with little or no opportunities for additional refinancing. Mortgage interest rates did spike higher as oil prices and inflationary fears hit all-time highs this past summer. Then the global economic turmoil hit full force and economies across the world stumbled. The housing market continued to weaken and the Fed and US Treasury had to step in to buy mortgage-backed securities in an effort to push mortgage interest rates lower. Now, 30 year fixed rate mortgages remain low and once again future predictions are all over the board.

What will occur in the future, economic recovery or additional weakness will continue to be debated. There is no certainty in predictions. But most of the recent signs show the economy continues to struggle at least in the short-term. Data can be used to support both sides of the debate. What we can be certain of is the fact that until the economy gains some stability, mortgage interest rates are likely to be volatile. Historically, mortgage interest rates seem to improve slowly. In contrast, when rates increase, it is often fast and furious. One negative day often erases a month’s worth of improvements.

It is possible for mortgage interest rates to push lower considering the Fed continues to purchase mortgage bonds. However, we are in unprecedented times. While the Fed is trying to push rates lower there are no guarantees. The Fed isn’t the only player in the mortgage bond market and there are many others buying and selling the securities. Remember that the Fed does not directly dictate that mortgage interest rates will be at a certain percentage. Rates are determined by the supply and demand for mortgage-backed securities. As of late, every time the Fed comes in to purchase mortgage bonds, rates have headed lower, only to jump back up as others sell into the Fed buying.

Only time will tell if the Fed can accomplish the goal. With mortgage interest rates relatively low, capitalizing on current levels protects against future volatility.

Mortgage Market Comment

MARKET COMMENT

Mortgage bond prices rose last week, which helped mortgage interest rates improve, but only slightly. We saw a huge rally following the Fed rate cut Tuesday. Unfortunately the gains were short-lived and most were erased the following day. Trading remained volatile throughout the remainder of the week. The White House stepped in to help the troubled auto industry Friday, which sent stocks higher that morning at the expense of mortgage and Treasury bonds. For the week, interest rates on government and conventional loans fell by about 1/8 to 1/4 of a discount point.

The Treasury auctions will set the tone for trading this week. Foreign demand for dollar denominated assets will be the focus. The bond market will close early Wednesday ahead of the Christmas holiday Thursday. Trading will resume Friday. This shortened trading week may lead to mortgage interest rate volatility.

LOOKING AHEAD

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
2-year Treasury Note Auction	Monday, Dec. 22, 1:30 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Q3 GDP final revision	Tuesday, Dec. 23, 8:30 am, et	Down 0.5%	Important. The aggregate measure of US economic production. A larger decrease may lead to lower rates.
Existing Home Sales	Tuesday, Dec. 23, 10:00 am, et	Down 1.0%	Low importance. An indication of mortgage credit demand. A significant decrease may lead to lower rates.
U of Michigan Consumer Sentiment	Tuesday, Dec. 23, 10:00 am, et	None	Important. An indication of consumers’ willingness to spend. Weakness may lead to lower mortgage rates.
New Home Sales	Tuesday, Dec. 23, 10:00 am, et	Down 3.0%	Important. An indication of economic strength and credit demand. A decrease may lead to lower rates.
5-year Treasury Note Auction	Tuesday, Dec. 23, 1:30 pm, et	None	Important. Notes will be auctioned. Strong demand may lead to lower mortgage rates.
Durable Goods Orders	Wednesday, Dec. 24, 8:30 am, et	Down 3.1%	Important. An indication of the demand for “big ticket” items. Weakness may lead to lower rates.
Personal Income and Outlays	Wednesday, Dec. 24, 8:30 am, et	Inc. unchanged, Outlays down 0.8%	Important. A measure of consumers’ ability to spend. Weakness may lead to lower mortgage rates.

REVISED GDP

The Gross Domestic Product (GDP) is one the most important reports during any given quarter. GDP is a measure of US economic output and spending. The report is significant in that it provides investors, analysts, traders, and economists with a comprehensive report of the direction of the economy. In addition, it also influences the decisions of Federal Reserve policy makers, Congressional budget employees, and corporate financial planners.

GDP is the sum total of goods and services produced by the United States. The four major components of the GDP release are consumption, investment, government purchases, and net exports. The initial report is often based on incomplete data. Therefore, additional revisions are released over the following two months. There are often substantial differences between the initial release and the revisions. The mortgage-backed security market generally responds favorably to weaker GDP growth.

The revised third quarter gross domestic product data this week has the potential to move mortgage bond prices, especially amid the thin trading that is likely.

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