FRM Update

February 4, 2019

Yield spreads on current production MBS to Treasuries were mixed but relatively stable for the week. The tightening of 4 to 7 ticks since year-end can be attributed to a decline in implied volatility, seasonal lows in supply, and positive sentiment following the dovish FOMC meeting.  While the expected pace of rate hikes has slowed, investors also focused on the expected trajectory of the Fed’s balance sheet, which has shifted as well.

The following represents a summary of the activity last week:


15-Year MBS


20-Year MBS


30-Year MBS



Mortgage Rates and Refinance Activity


Pending Home Sales Fell Unexpectedly Despite Mortgage Rates Pulling Back: Pending home sales fell unexpectedly in December, marking a third month of slowing contracts on existing home sales. Total sales fell 2.2% in December, compared with estimates for a modest 0.5% increase. Fewer contracts were signed in three of the four regions with the biggest disappointment marked by a 5.0% plunge in the South, the largest decline for the region since April 2011. There was a 1.7% uptick in contracts on homes in the West. The recent Home Builder surveys from the NAHB showed prospective buyer traffic slowed notably late in 2018 as mortgage rates climbed to a November peak. While that report is more directly tied to sales of new homes, the trend could logically be applied to the existing home sector as well. While rates fell throughout December and reached nine-month lows in recent weeks (Freddie Mac Survey rate was down from 4.94% in November to 4.45% last week), any positive effect may yet be a month or more away as potential buyers re-start their searches. For now, however, pending home sales at a near-five-year low (April 2014) point to continued weakness in existing home sales to start 2019.


New Home Sales Surged the Most Since 1992: On Wednesday, the Commerce Department published an updated release calendar for several data series it’s responsible for publishing, but which were delayed by the month-long government shutdown. The first of those reports was released yesterday (Thursday) after markets opened and showed the largest single-month gain for new home sales since January 1992. The 16.9% MoM surge pushed the annualized pace up to 657k units, the best pace in eight months. In addition to November’s positive results, each of the previous three months was revised higher for a cumulative upward revision of 44k units. At the regional level, sales in the South, which generally account for more than half of total activity, popped an impressive 20.6%. Activity in the Northeast and Midwest also reflected hearty percentage gains while sales in the West slipped to a five-month low. While November represented the peak for several separate measures of mortgage rates, buyers saw affordability improve on the pricing front. The median price tumbled to a 21-month low of $302.4k, representing an 11.9% drop from a year earlier, the biggest annual change since February 2009. While new home sales tend to be volatile, the monthly jump represented a recovery from October’s steep 8.3% decline, the fact that sales jumped as prices fell could portend a potentially more positive outlook for near-term activity, especially if the recent decline in mortgage rates holds in the months ahead.

Michael S. Erhardt, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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