October 2, 2017
Mortgage rates and Treasury yields rose again last week with a continuation of slightly tighter mortgage yield spreads even as the Fed announced plans to begin the unwinding of their balance sheet in October. Mortgage applications for the week ending September 22 fell 0.5% on a 2.8% increase in purchase apps and a 3.5% drop in refi apps. Housing reports were generally disappointing again last week with both new and pending home sales falling more than expected in August.
- Mortgage yield spreads tightened last week:
- 15-year MBS yield spreads ended the week 3 to 5bps tighter to Treasuries and swaps
- 30-year MBS yield spreads ended the week 3 to 4bps tighter to Treasuries and swaps
- Curve slope measured by 2- and 10-year Treasuries steepened 2bps last week from 82bps to 84bps.
- Investors were active last week in recently issued and new production 15yr MBS, primarily in 3% and 3.5% coupons and in 15yr MBS backed by relo collateral.
- Investors were also active in seasoned 30yr MBS, primarily in 4% to 4.5% coupons.
Trading in CMOs was active last week, as portfolio managers closed out the quarter with elevated levels of bid list inquiries and two-way flows as 2.5% yields are available with the 5-year Treasury yield increasing 23bps in September. Consistent with MBS and other spread products, CMO spreads were slightly tighter last week. CMO investors were active in various types of CMO structures including sequential, PAC, and VADM structures backed by conventional, Jumbo, and Relo collateral.
Mortgage Rates and Refinance Activity
- Mortgage rates increased for the third consecutive week
- 15-year mortgage rates rose 2bps to 3.02%
- 30-year mortgage rates rose 1bp to 3.80%
- 15- and 30-year fixed mortgage rates have now fallen 22 and 26bps year-to-date; however, mortgage rates are 37 and 30bps higher than this time last year.
Mortgage applications for the week ending September 22 fell 0.5% on a 2.8% increase in purchase apps and a 3.5% drop in refi apps. However, the 4-week moving average shows refi apps picking up some pace as mortgage rates have fallen, but purchase apps have pulled back more recently.
- New home sales fell 3.4% (exp. +2.5%) in August; Harvey had an impact, but weakness was broad across all regions; sales are now down 16% from the March peak
- Pending home sales were down more than expected, falling 2.6% in August, as housing data continues to look weak
- The July S&P CoreLogic Home Price index showed a better-than-expected gain in the 20-city index, rising 0.35% MoM and bringing the YoY rate of price gains up from 5.65% to 5.81%.
- Hurricanes Harvey and Irma are likely to impact the September home sales data as well.
New Home Sales Fall in August: New Home Sales for the month of August fell 3.4% as sales were once again affected by Hurricane Harvey. While the weather is wreaking havoc on some of the economic data, the weak new home sales data is not all to blame on the storms. Sales in the South region fell 4.7%, sales in the Northeast fell 2.6%, sales in the West fell 2.7%, and sales in the Midwest were flat. Even excluding sales in the South, new home sales in the rest of the country are now down 16% since March’s peak. On a QoQ tracking basis, new home sales are now down 5.5% in 3Q, down 4.9% when excluding sales in the South.
Pending Home Sales Continue Run of Weak Housing Data: Pending home sales continued this week’s run of weak housing data, dropping 2.6% in August. Pending sales have now fallen in six of eight monthly reports in 2017 and YoY sales are down 2.6%. While Hurricane Harvey is likely to blame for the 3.5% drop in pending sales in the South, every other region of the country showed declines as well. Sales in the Northeast fell 4.4%, sales in the Midwest fell 1.5%, and sales in the West dropped 1.0%. The broader weakness, excluding the storm-related impact, is a growing concern with news sales down 12%, existing sales down 6%, and pending sales down 4% since March.
Dan Stimpson, CPA
Senior Vice President