After hitting resistance at price peaks on Monday, Mortgage Bonds are drifting lower. A look at the chart now shows a Negative Stochastic Crossover as well as lower highs each of the last two days. This tells us the recent trend higher is running out of gas…and with a lot more room for Bond prices to fall before hitting support, it's time to lock your rate.
The Core CPI reading jumped to 1.7%, up sharply from the 1.4% reading just two months ago. However, this jump must be taken with a grain of salt, as prior month readings of CPI were skewed lower through the creative accounting used during the now-expired Cash for Clunkers program. The Cash for Clunkers rebate was considered as a reduction in purchase price, which artificially reduced the actual level of CPI. Today's CPI number is a little hotter and the trend looks higher.
This morning's CPI report has already outraged a few Fed members. St. Louis Fed President James Bullard pounded the table this morning about his concerns on inflation and loose monetary policy. He bellowed that an inflation risk has been created due to the expansion of the Fed’s balance sheet – the virtual “printing of money” by the increased debt.
You may be wondering why mortgage rates and Bond prices have remained quite favorable in the face of dwindling Fed purchases of Mortgage Bonds. This is mostly due to supply and demand. The Fed is presently purchasing closed and securitized Mortgage Bonds on loans which were originated back in July and August. A look at past rate sheets shows that rates were significantly higher then. Thus, origination volume level in those months were lower. So the Fed’s reduced levels of purchases are meeting the reduced supply coming to market pretty well. But because pricing and origination volume levels have improved during September and October, more supply will hit the market over the next couple of months. This will arrive at a time when the Fed purchases will be even lower. The result should be worse pricing and higher rates.
Housing Starts during October were 529,000, sharply below the 600,000 expected. While it’s certainly clear that the new construction market has slowed down significantly – it’s only about 25% of where it was a few years ago – is this all bad? Maybe not. Perhaps we need to slow down new supply, so the current housing excess can be sopped up. There may be some longer term benefits to the housing market with a slowdown in new construction.
