Home sales slow

Wednesday, October 24, 2007

ECONOMIC DATA / NEWS

Existing home sales slowed by another 8% to an annualized rate of 5.04 million, which is about twice as low as economists had estimated.  The slowdown does not come as a surprise to anyone, but the sharpness of the decline may be troubling to some.  These are September sales numbers, which means the transactions originated primarily in July and August.  So, summer sales did not help boost the numbers as we had hoped.  This tells us that there could be weaker sales for several more months.  In other words, another three months or more of home price and mortgage rate declines may be needed before buyers come back into the markets.  We still expect these two occurrences to coincide, bringing back new and speculative home buyers into the housing market.

There were some strong earnings reports again this morning, but the mortgage issues are still affecting lenders and financial companies.  Merrill Lynch was the latest victim, as they miscalculated their loan writedowns by $7.9 billion.  If we can find a silver lining, it is that all of these companies who are experiencing tremendous losses in the third quarter from loan defaults are taking into consideration expected future losses as well.  Therefore, their profitability should be dramatically improved in the fourth quarter, unless their estimates are off by a significant amount.  But solutions such as lenders’ willingness to renegotiate or refinance borrowers adjustable loans at little or no cost should prevent countless defaults, and that would hopefully lead to better rates and looser guidelines as more credit is freed up.

TECHNICAL ANALYSIS

Mortgage bond prices are improving by leaps and bounds, literally.  The FNMA 30-year 6.0% bond gapped higher this morning for the third time in five days.  It is currently up 15bp at 100.97, which is a new six-month high.  But, prices are getting close to a nine-month high at 101.06.  A gap higher usually indicates increased upward momentum, and it certainly did a week ago.  However, this latest jump could turn into an island, which is when a candle or group of candles gap higher, but then quickly gap lower after hitting that peak.  The fact that we’re just 9bp away from a strong resistance and that stochastics are getting deep into overbought territory are two good reasons to believe that this could be an island candlestick.  Prices would just need to open below 100.94 tomorrow morning for the island formation to be confirmed.

The 10-year Treasury yield has made a quick move over the last week from 4.70% all the way down to 4.38% today.  It is quickly approaching a six-month low at 4.30%.  There is no resistance before 4.50%, so if the yield turns around, it could turn in a hurry.  That would drag MBS prices down at a similar pace.

Read more articles on our Mortgage News page, or view our entire Mortgage News Archive.

Mortgage News & More Info

Modesto mortgage news feed provided by Winchester Lending Group