Mortgage Time

[Adam in CO]

Mortgage Market News for the week ending February 9, 2007

Events This Week:

Productivity Jumped
Inflation Steady
Employment Healthy

Events Next Week:
Tues 2/13
Trade Balance
Wed 2/14
Retail Sales
Thurs 2/15
Industrial Prod
Fri 2/16
PPI Housing Starts

Foreign Investors Snap Up US Securities

During a week with little economic data, mortgage investors focused their attention on the US Treasury’s quarterly auctions. Strong demand for Treasury securities benefited fixed income investments of all types, including mortgage bonds, leading to lower mortgage rates for the week. Of particular interest was the high level of demand from foreign investors, which includes both private institutions and central banks. Foreign investors typically buy about one-third of the total supply of new Treasury securities. During each auction, investors watch for evidence that foreigners have chosen to buy a smaller quantity of US securities. Reduced foreign investment likely would lead to higher mortgage rates.

The only major economic report last week showed that Fourth Quarter 2006 Productivity rose 3.0%, faster than the 2.0% consensus forecast. Increases in productivity reflect the more efficient use of resources, allowing more output per employee, and are a vital component for long-term improvement in the standard of living. Productivity gains are also good news for mortgage markets. Goods produced using fewer resources cost less, relieving other inflationary pressures.

In the housing sector, three leading economists released updated forecasts for 2007 at an industry conference. While the expected timing of housing market improvement varied a little between them, they shared a similar general message. The National Association of Home Builders chief economist was hopeful that the housing market activity will pick up steam in the spring, while the chief economist for Freddie Mac saw a little more downside before conditions improve during the second half of the year. In any case, all three agreed that the worst of the correction was already past. Fannie Mae’s chief economist expected a decline in sales of about 7% in 2007, which would still produce a very strong year by historical standards. He attributes short-term investors looking to make a quick profit with artificially propping up the housing market to record levels over recent years, and he believes that their gradual departure will slow the market to some degree.

• Also Notable:
• The Mortgage Bankers Assoc. estimated that $1.1 to $1.5 trillion in adjustable-rate mortgages are scheduled to reset at higher rates in 2007
• Fannie Mae’s chief economist predicted a decline in housing market activity of about 7% in 2007
• Massachusetts lawmakers have filed a bill which offers a “breathing period” of 30 days to borrowers at risk of losing their homes
• Office rents rose 9% in 2006, the highest pace since 2000

Average 30 yr fixed rate: Last week:+0.17%This week:-0.11%Stocks (weekly): Dow:12,578-68NASDAQ:2,461-11

Week Ahead
The second half of next week will be packed with economic data, beginning with the Retail Sales report on Wednesday. Consumers account for about 70% of economic activity, and this report is a major indicator of spending by consumers. The next major report will be Thursday’s release of Industrial Production, a broad measure of business related economic activity. Housing Starts and the Producer Price Index (PPI) inflation data will come out on Friday. PPI focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. Almost without exception, price increases lead to higher interest rates. Rounding out the week will be the Trade Balance, Consumer Sentiment, and two regional manufacturing indexes. Investors will receive important data about nearly every sector of the economy from the economic announcements made next week.