FRM Update

July 23, 2018



MBS outperformed Treasuries in a meaningful way this past week, reflecting range-bound interest rates and a steady decline in implied volatility.  15-year MBS spreads to Treasuries tightened 3 to 4 ticks, while 30-year MBS spreads moved tighter by 2 to 3 ticks.  In fact, MBS spreads tightened in four of the past five trading days.  After reaching the widest levels YTD (77bps) near the end of June, 30-year MBS spreads tightened to about 72bps currently.

The marginal outperformance by 15-year MBS vs 30-year MBS can be attributed to the first weekly 2s/10s steepening since May 18, when the 10-year Treasury reached 3.126%, its highest yield since 2011.  The spread between 2s/10s opened at 25bps and closed 4bps higher at 29bps.

The average rates on 30-year fixed and 15-year fixed mortgages remained relatively stable during the past week.  Weekly mortgage applications decreased 2.5% from one week earlier, but loan applications to refinance existing homes rebounded from their lowest levels in over 17 years.  The refinance index improved 2.2% to 979.6 from one week earlier.

Housing starts slumped sharply in June (-12.3%) on weakness in both multi-family (-19.8%) and single family (-9.1%) activity.  Housing permits also slipped, down 2.2% from May; while these data series are prone to volatility, June’s results were notably disappointing.

 

Activity was steady last week with investors focused on the following:

 

 

 

 

Mortgage Rates and Refinance Activity

 

 

Housing:

Mortgage Applications: Mortgage applications fell 2.5%, seasonally adjusted, for the week ending 7/13. Refinancing made a modest comeback after retreating for the previous three weeks, as the Refinance Index increased 2.2% from the previous week. 36.5% of the applications received were for refinancing, compared to 34.8% the prior week.  Housing inventory remains significantly lower than a year ago, while interest rates are higher and home prices continue to rise at more than income growth.

Unusually Weak Report on Housing Construction:   Housing starts fell 12.3% in June, a very disappointing report.  Starts were expected to fall 2.2% after a 4.8% increase in May.  The decline was driven by a 19.8% drop in the volatile multi-family category.  However, single family starts also fell an unusually large 9.1%.  The declines brought the YoY rate down to -14.5% for multi-family activity and +0.0% for single family starts.  The weakness was fairly broad-spread with starts in the Midwest falling 35.8%, falling 9.1% in the South, down 6.8% in the Northeast, and off 3.0% in the West. Building permits, the state prior to actual starts, were also weaker-than-expected.  Permits fell 2.2% MoM (exp. +2.2%), which was driven by a 12.5% decline in multi-family permits and a 0.6% drop in single-family.

Home Builder Confidence Holds in July: The NAHB’s Housing Market Index showed home builder confidence was unchanged in July. At 68, the headline index matched its lowest level of 2018 but equaled the average reading since the beginning of 2017. The index tracking current sales was flat with June and matched its lowest level since September. There were offsetting moves in the other two major indexes. The future sales index slipped to match its weakest reading since November 2016, while foot traffic from prospective buyer perked up to its best level since February.  The NAHB’s chief economists said “Builders are encouraged by growing housing demand, but they continue to be burdened by rising construction material costs.”

 

 



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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