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Mortgage Market News for the week ending October 19, 2007

Events This Week:
Inflation Steady
Housing Weaker
Manufacturing Mixed
Stocks Down

Events Next Week:

Wed 10/24 Existing Home Sales
Thurs 10/25 Durable Orders / New Home Sales / 5-yr Auction
Fri 10/26 Consumer Sentiment

Mortgage Rates Improve

A combination of tame inflation data, weaker than expected economic growth, and increased geopolitical tension pushed mortgage rates lower last week. On the inflation front, the September Core Consumer Price Index (CPI) matched the consensus forecast, rising at a 2.1% annual rate, down from higher levels earlier in 2007. While the majority of the data on economic growth was not particularly strong, the housing data was the source of the most glaring weakness. September Housing Starts fell far short of the consensus forecast, to the lowest level since 1993. In addition, the Fed's Beige Book was released on Tuesday, and it contained anecdotal evidence that the impact of the housing slowdown was spreading to other areas of the economy. Slower economic growth decreases the risk of future inflation, which is good news for mortgage rates.

Mortgage markets also benefited from a flight to safety as a result of increased geopolitical tensions around the world. Turkey took steps which laid the groundwork for a military incursion into Iraq. Bombings in Pakistan and a lack of cooperation from Iran added to the unease. Oil supplies may be threatened by these moves, and oil prices climbed to record levels above $90 per barrel, up from $70 p/b in the middle of August. Investors reacted by shifting to less risky assets, such as mortgage bonds.
In typical fashion, many of the same factors which helped the mortgage market took a toll on the stock market. Slower economic growth and increased worries about international stability were unfavorable for the stock market. As investment funds flowed to the relative safety of fixed income markets, they were withdrawn from stock markets, and stock prices suffered.

Also Notable:
OFHEO announced that the conforming loan limit for 2008 will not be reduced below the 2007 level of $417,000
The NAHB confidence index showed that home builders had the worst outlook on record in October
Fed Chief Bernanke stated that the housing downturn is likely to remain a "significant drag" on economic growth through early 2008
The Treasury report on foreign purchases of US securities showed a larger than expected decline in the quantity of US Treasuries held by foreigners in August

Average 30 yr fixed rate:
Last week:+0.02%
This week:-0.12%

Stocks (weekly):
Dow:13,701-386
NASDAQ:2,765-38

Week Ahead

Next week's biggest economic news will be the housing market data. Existing Home Sales will be released on Wednesday and New Home Sales on Thursday. Investors are concerned that the weakness in the housing sector will spread to the rest of the economy. Thursday's Durable Orders report will also provide an important read on the level of economic activity. Beyond the economic data, a G7 meeting will convene this weekend, and a 5-year Treasury auction will take place on Thursday. In addition, shifting expectations for the FOMC meeting on October 31 may have an impact on mortgage markets next week.

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