FRM Update

June 5, 2017

Activity improved late last week as bid list inquiries picked up in the MBS and CMO sectors as bonds rallied on Friday.  Yield spreads widened a couple of basis points and the curve flattening continued last week.  Mortgage rates held at the lowest levels this year and were generally unchanged.  Mortgage applications fell 3.4% as purchase applications weakened for a third consecutive week.  Refi apps and mortgage prepayments remain very low relative to recent history; however, May prepayment speeds, scheduled for release mid-week, are expected to increase MoM due to an increase in day count.  Pending home sales fell 2.5% in April to close out a disappointing month for the housing sector.







Trading activity in CMOs was generally light last week, but bid list inquiries and swap activity did improve as bonds rallied on Friday.  Similar to the MBS sector, yield spreads in CMOs widened 1 to 3 bps last week.  The flattening of the curve is not conducive to strong supply from new CMO production and the availability of specific structures continues to limit activity in the sector.  Depositories were focused on stable structures with 4- to 5-year average lives.


Rates and Refis



Home Prices Continue to Press Higher: The March S&P CoreLogic Case-Shiller Home Price Index showed home prices increased 5.89% YoY as demand remains solid and inventories remain tight.  The YoY increase was the fastest since the summer of 2014. Persistent firming in the U.S. labor market has continued to kindle steady demand, while supply remains at historically low levels. Supply of existing homes was just 3.8 months in March, well below the 6 months considered a good balance between supply and demand.

Pending Homes Sales Decline: Pending home sales unexpectedly declined in April to complete a disappointing month for the U.S. housing sector.  The 1.3% MoM decline in contracts signed on existing home sales was weaker than expectations for a 0.5% bounce back.  YoY pending sales declined the most since the summer of 2014.  The trend in pending sales remains sideways (since the middle of last year) and offers little sign of any change momentum in pending sales.

Construction Spending Disappoints: Construction spending fell 1.4% in April compared with expectations for a 0.5% improvement.  Despite positive revisions to the prior two months’ results, April’s spending levels fell short of estimates.  Non-residential spending declined for a third straight month and a pullback in spending on home improvements offset a seventh consecutive month of increased spending on construction of new single-family homes.



Dan Stimpson, CPA

Senior Vice President

Vining Sparks

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