Market Analysis

Below I am going to paste a market update from Larry Baer with a service called Market Alert in its entirety because I think it is very insightful.  I am very conservative in my locking strategy.  As such Iron Harbor is now recommending to clients to go ahead and lock and take the gains that have come our way.  If the market improves later, we can renegotiate.  Below is Larry's perspective:

Daily Commentary

By Larry Baer, Market Alert

SHORT-TERM TREND (20 days or less) Tilted in favor of lower note rates and higher investor prices but very vulnerable to a sudden shift in direction.

SUGGESTED PIPELINE STRATEGY: Be prepared to convert any "floating" loan is this category to "locked" should the price of the Fannie Mae 5.5% mortgage-backed security fall below 100.406 on a closing basis.

LONG-TERM TREND (21 days or more) Favors higher note rates and lower investor prices.

SUGGESTED PIPELINE STRATEGY: Avoid initiating new "floating" loans in this category until/unless the price of the Fannie Mae 30-year fixed-rate mortgage-backed security can manage to close above 101.093.

Commentary: As I mentioned here yesterday recent mortgage market friendly economic data cranked up investors' appetite for mortgage debt -- just as the Treasury Department put $71 billion of interest income and principal payments in their pockets. The price rally that developed as a result of investors re-deploying a significant amount of that capital into mortgage-backed securities fueled all of yesterday's rally. It's a new day and traders are having a hard time deciding on what to make of the most current round of macro-economic news.

The Commerce Department got things started this morning when they reported housing starts rose by a surprisingly strong 8.2% in April and applications for new building permits turned up for the first time in five months. Traders' fist-take on the stronger-than-expected housing data was that it would strongly reduce any chance for further short-term interest rate cuts from the Fed. But as they say, the devil is always in the detail.

A closer examination of the housing data revealed that the entire surge in the housing start figure was created by a massive jump in multi-family construction. On its own, single-family home building declined 1.7% to its lowest monthly level since January 1991. Year-over-year housing starts are 30.6% below the level of construction in April 2007. The bright spot in this otherwise rather dreary report was that applications for new building permits turned up for the first time in five months - posting a 4.9% gain over March levels.

As Steve Kerch with MarketWatch pointed out in his column this morning there are a couple of things to consider with respect to the April starts and permits report; (1) while multi-family starts do not portend a rebound in single-family construction, they do create jobs. Multi-family starts have now posted double-digit gains in three of the past four months. (2) Applications for building permits in April broke a yearlong string of declines - a hopeful sign for the future. The take away here is that while the data in no way suggests we've hit a bottom in home construction, it is showing at least a glimmer of chance that the bottom is near.

Mortgage interest rates began a slow but steady slide to fractionally lower levels as soon as the University of Michigan's consumer sentiment index hit the wires. According to the index, confidence among consumers fell to its lowest level in almost 28 years last month as record-fuel prices, lower home values, and fewer jobs took a toll on Americans' psyche. The Reuters/University of Michigan preliminary index of consumer sentiment posted a reading of 59.5, the weakest level since June 1980. The measure averaged 85.6 in 2007. The fact that consumers are saying they are "bummed" pumped up mortgage invertors' expectation that consumer spending, which accounts for two thirds of economic activity, may erode sharply. The "so what" factor here revolves around the idea that slower economic activity ultimately reduces the demand for capital - which pushes rates lower and prices higher - making now the opportune time for mortgage investors to deploy their cash in order to get the biggest bang for their buck.

In my opinion, I find it difficult to get too excited about how consumers say they are feeling - when the numbers that show what they are actually doing don't jive. Earlier this week the April Retail Sales numbers posted stronger than expected gains. Hmmm - I guess those "bummed" consumers are trying a little retail therapy to chase their blues away.

It is also worth noting that this consumer confidence report -- the catalyst behind this morning's rally in the mortgage market -- reflects the opinion of 300 households. I don't know about you - but that sure seems to me like an exceptionally small sample when we're talking about a population of considerably more than 200 million people. Some economists will say "yeah, but don't forget the index will be revised by the end of the month" -- when the sample size balloons to 500 households. Sorry, I just can't help but be skeptical here - and if I skeptical - you can't bet a lot of more experienced mortgage investors are as well.

Looking ahead to the coming week the economic calendar will offer mostly second tier data. Tuesday's April Producer Price Index will draw some attention even though it is expected to show inflation at the wholesale level is essentially well-behaved. The few traders still at their desk on Friday will likely give the expected 1.6% decline in April Existing Home Sales little more than a passing glance -- before wrapping things up prior to the mortgage market's early close for the Memorial Day Holiday at 2:00 p.m. ET.

A divergence is beginning to develop between the fundamental and technical perspectives of the mortgage market. It has been my long-term experience that technical analysis tends to be the more accurate of the two - and therefore I strongly recommend that you manage your pipeline risks by market price action -- rather than waiting for forthcoming economic data to be revealed.