Yesterday was the worst day in mortgage bond (MBS) markets since December 15, 2010, and rates skyrocketed past 2013 highs. Today MBS markets are about par, so no more bleeding so far but yesterday’s rate spike is holding. The MBS selloff was triggered by the Fed indicating less rate stimulus—aka quantitative easing, or bond buying to keep rates low—could be a reality in the coming months.

Below is a good discussion Josh Brown and the CNBC FastMoney crew had with WSJ’s Fed reporter Jon Hilsenrath yesterday about the Fed’s rationale.

Also, here’s Hilsenrath today about mixed Fed messages keeping market guessing.

And here’s Josh on what a QE wind down might look like.

Jobless Claims (week ended 5/18/2013)

- New Claims (seasonally adjusted) 340,000. Previous was 360,000

- New Claims (not seasonally adjusted) 301,056 a decrease of 19,767 from the previous week.

- 4-week Moving Average  339,500. Previous was 340,000.

Initial Jobless Claims have been trending downward since their peak at 586,000 in December 2008.  I would regard 350,000 as a neutral level.  The neutral level is a bit difficult to determine because the population has increased since the recession but the number of people working has actually dropped.  The Labor Participation Rate was 66.0 in October 2008 and 63.3% last month.

New Home Sales (April 2013)

- Sales level (seasonally adjusted, annualized) 454,000. Previous was revised from 417,000 to 444,000.

FHFA House Price Index (March 2013)

- Month/Month change +1.3%. Previous was revised to +0.9%

- Year/Year change  7.2%.

Lack of supply has been a big factor pushing prices upward but supply has increased recently which should slow price growth.

PMI Manufacturing Index Flash (May 2013)

- Index level was 51.9. Previous was 52.9.  This still indicates growth and is out of whack with most of the regional Fed reports.

MBA Mortgage Applications

- Purchase Index Week/Week -3.0 %. Previous weeks were -4.0%, +2.0%, – 1.4%, +0.3%, and +4.0%.

- Refinance Index  Week/Week -12.0 %. Previous weeks were -8.0%, +3.0%, +0.3%, +5.0% and +6.0%.

- Composite Index  Week/Week -9.8 %.  Previous weeks were -7.3%, +7.0%, +1.8%, +0.2%, +4.8%, +4.5%.

The decrease in refinancing is due to rates having moved up. The decrease in the Purchase Index is more troubling for the housing market and the economy.  I do not believe that any significant number of people have been driven out of purchasing when rates are this low.

Existing Home Sales  (April 2013)

- Existing Home Sales (seasonally adjusted annualized rate) 4,970,000. Previous month was 4,920,000

- Existing Home Sales Month/Month Change  +0.6%. Previous was -0.6%

- Existing Home Sales Year/Year Change +9.7%.

What is more important is that supply is starting to show some elasticity with 230,000 units added making the supply go from 4.7 to 5.2 months of sales. The “Elasticity” of any commodity means that supply should increase when price increases.  Inelastic supply had been caused by so many underwater potential sellers.

Existing Home Sales are at a 3 year high but just barely above (by 1,000) where they were last October.  Existing Home Sales have been flat for 7 months.

Chain Store Sales (week ended 5/18/2013)

ISCS/Goldman

- Store Sales Week/Week +0.2%. Previous was -2.0%

- Store Sales Year/Year +3.1%. Previous was 1.2%.

Redbook

- Store Sales Year/Year +2.4%. Previous was +2.8%.

For the month of May Redbook sees a 0.5% gain from April and ICSS sees the same period as flat at best.

The Consumer Metrics Institute of online discretionary spending has been flat for the past 8 days.

While the instinct is simply to throw up one’s hands at such inconclusive or contradictory data I think it best to conclude that Chain Store Sales are seeing modest growth.

Treasury markets will pay particular attention to speeches today by two Regional Fed Presidents and Bernanke’s testimony before Congress tomorrow.  Markets expect some indication as to when QE III will end or, at least, start decreasing in the size of the monthly increase in money supply.

Chicago Federal National Activity Index  (April 2013)

- Index Level -0.53.  Previous was -0.23.

This is a national index produced by the Chicago Fed.  This is not a survey index but rather a  weighted average of 85 existing monthly indicators of  economic activity at the national level.  Just as every other recent manufacturing index, this one shows that manufacturing in the U.S. is not recovering.  Manufacturing jobs in the U.S. are simply not likely to return despite media hype at the end of last year.  We will have periods of growth but nothing resembling a Renaissance.  Only a major technological breakthrough would change this course.

Yesterday The Economist updated it’s quarterly global home price tables to show where homes are over/under valued relative to rents and income. Local pricing is quite different from national pricing, but this Economist update is still relevant because it reiterates how consumers should evaluate a home purchase.

…To gauge whether homes are cheap or expensive we use two measures, both of which compare current estimates with a long-run average (in most countries, going back to 1975). This average is our benchmark for “fair value”.

…One is the ratio of prices to disposable income per person, a measure of affordability. The other is the price-to-rent ratio, which is analogous to the price-to-earnings ratio used for equities, with rents going to landlords (or saved by homeowners) equivalent to corporate profits. If these gauges are higher than their historical averages, property is overvalued; if they are lower, it is undervalued.

Of these two Economist metrics, the price-to-rent ratio is more important for homebuyers to understand what they’re getting into.

But first comes another ratio: a deb-to-income ratio measures total housing cost (plus all other debt) against income to determine whether a you can afford a home. All U.S. lenders qualify borrowers using this ratio.

The first link below explains how you determine how much home you can afford (debt-to-income ratio), and whether it’s cheaper to rent or buy (price-to-rent) in your local market.

The trick with rent vs. buy is that you need truly local market data do analyze it correctly.

To do so, you can’t look at the table above for home prices—though doing so is encouraging since it shows the U.S. as a whole is undervalued. Your local market isn’t necessarily the same, especially if you live in an area where home prices have been rising faster than rents.

So the second link below explains how to drill down to street-level home pricing in your local area.
—
Reference:
- How To Calculate Rent vs. Buy Correctly

- How To Price A Home Locally (Hint: ignore Case Shiller data)

- For my local readers: Bay Area Home Price Maps (May 2013)

- The Economist’s May 2013 Global Home Price Roundup

- $CLGX, $XHB, $ITB, $KBH, $RYL, $LEN, $TOL, $PHM

Last week, I debuted as a housing contributor on Jim Cramer’s TheStreet.com. My first piece was on a critical consumer deadline coming June 3 that will make FHA mortgages much more expensive. To get an FHA loan, borrowers must first have an FHA case number, and lenders can’t get case numbers without first obtaining a full borrower application and following federally required disclosure processes. So anyone targeting FHA loans should apply with lenders by this Friday, May 24 to get in before the FHA fee changes.

The piece also includes an detailed overview and stats on the government’s role in housing.

Here’s the link: Last Call For Decent FHA Mortgages

My next piece will be an update on the state of the jumbo mortgage market.

I’d like to thank Rocco, Carlton and Cherella at TheStreet.com for bringing my housing content into the mix, and hope you follow along.

On that note, you can also check out the daily rate commentary I do with the MortgageNewsDaily MBS team over on their consumer rates section.

Last week, Bespoke Investment Group said this about the impact of quantitative easing (aka Fed bond buying to keep rates low) on stocks, mortgage bonds (MBS), and the broader economy:

With the Fed continuing to pump $85 billion in liquidity into the markets on a monthly basis, one would expect the party in equities and most areas of fixed income to keep going. The big question is what happens when the music stops. The chart below is one we have shown several times over the last few years and basically compares the Fed’s balance sheet to the S&P 500. As the size of the Fed’s balance sheet increases, the S&P 500 has risen, and each time the Fed paused, equities declined. Based solely on the last four years, investors have every right to be looking over their shoulders to make sure the Fed is still there.

While the outlook for the Financial markets once the Fed starts to try and exit is uncertain, we think the time for them to exit will come later rather than sooner. Going back to 1930, the average annual growth rate of the US economy has been 3.3%, but the last time the economy even grew by 3% in a given year was in 2005, which was the year Bernanke became Fed Chairman. At seven years and counting, Bernanke has presided over the longest stretch of sub 3% growth ever. With a record like that, we wouldn’t expect him to pull the plug until he is extremely confident that the US economy will see 3% growth.

Lower GDP in the Bernanke era is certainly a good rationale for why the Fed might hold steady on QE. But Bernanke is known for his consensus management style, and there’s growing dissent in the Fed ranks on when to wind down QE—or at least signal a wind down. Rates rose last week as bond markets were rattled by such signals.

Tuesday, I noted 3 QE wind down signals that were driving bonds lower and rates higher, then Thursday Bloomberg reported that 3 Fed officials want less MBS buying:

…Dallas Federal Reserve Bank President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”

… “When refinancing activity eventually shifts down, the Fed could soon be buying up to 100 percent of MBS issuance if the current purchase program continues,” Fisher said today in a speech in Houston. “Buying such a high share of gross issuance in any security is not only excessive, but also potentially disruptive to the proper functioning of the MBS market.”

… Lacker said yesterday the central bank should reinvest the principal from its mortgage bond holdings into Treasuries. “That would be a really reasonable step to contemplate at this point given the strength in the housing market right now,” he said to reporters in Baltimore.

… Plosser said today in a Bloomberg Television interview he “would like to see us get out of mortgage-backed securities.”

… Fisher said in response to audience questions he wants to see the central bank’s balance sheet eventually returned to an all-Treasuries portfolio. While Fisher has been one of the most outspoken opponents to bond buying among Fed officials, he said in February he didn’t want to stop purchases “cold turkey,” which could destabilize the market.

…“The housing market is on a self-sustaining path and does not need the same impetus we have been giving it,” Fisher said today to the National Association for Business Economics in Houston. With the success of continued buying “questionable,” he said, “I think we can rightly declare victory on the housing front and reel in — or dial back — our purchases, with the aim of eliminating them entirely as the year wears on.”

All relevant arguments for less QE (especially with respect to MBS, which directly impact mortgage rates) so it’s easy to think this counters Bespoke’s theory that QE will come “later rather than sooner.” But it actually supports it because these three Fed officials don’t get policy votes on the FOMC this year—voting FOMC members rotate (schedule) so Plosser and Fisher are alternates this year and will rotate back into voting roles next year, and Lacker won’t rotate in until 2015.

So it might take until next year for Fed Exit chatter to become policy.

Meanwhile, the 2013 votes indicate full tilt QE. On the surface anyway. At the May 1 FOMC meeting, 11 members voted in favor of current agressive QE policy and 1 voted against. We’ll get more details of what those voting members really think this coming Wednesday, May 22 when the minutes from that meeting are released. Market participants parse those minutes for the slightest hints of doubt coming from FOMC members who keep voting for more QE.

Until then, we could see more defensiveness in MBS, which means elevated rate levels.
___
$SPX, $SPY, $TNX, $ZN_F, $TLT, $TBT, $FED, $MACRO

Tonight’s Friday Funk installment is The Last Bongo In Belgium by The Incredible Bongo Band, which wasn’t so much a band as a random pairing of musicians rounded up by record exec Michael Viner to score a movie in 1972. They gained some cult cred then caught fire in late-70s hip hop culture when Kool Herc and Grandmaster Flash latched onto Bongo Band breaks. The Last Bongo In Belgium has a break (beginning at 4:23) I loved for decades before I knew the true source because the Beastie Boys sampled it in Looking Down The Barrel of A Gun from their 1989 Paul’s Boutique album. Below are both songs. May they help you get your cool back for the weekend…

___
Reference:
- The Last Bongo In Belgium – Incredible Bongo Band (youtube)

- Looking Down The Barrel Of A Gun – Beastie Boys (youtube)

- More music and pop culture posts

Leading Economic Indicators (April 2013)

- LEI Month/Month +0.6%. Previous was -0.1%.

LEI is produced by the Conference Board and weights the 10 following bits of data:

- Average weekly hours, manufacturing

- Average weekly initial claims for unemployment insurance

- Manufacturers’ new orders, consumer goods and materials

- ISM Index of New Orders

- Manufacturers’ new orders, nondefense capital goods excluding aircraft orders

- Building permits, new private housing units

- Stock prices, 500 common stocks

- Leading Credit Index™

- Interest rate spread, 10-year Treasury bonds less federal funds

- Average consumer expectations for business conditions.

The Conference Board is a 501(c)(3) non-profit business membership and research group organization.

U Michigan Consumer Sentiment (May 2013)

- Sentiment Index 83.7.  Previous was 76.4.

This is supposed to measure consumers’ predisposition to spend.