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The S&P Case Shiller June 2010 report of existing home sales showed year-over-year 4.2% price gains averaged across 20 major metropolitan areas. In June, 17 of the 20 metro areas covered by the index were up. However S&P noted that this reporting period was during the peak of activity corresponding to federal homebuyer tax credit deadlines, so data after this might look more like the record low new and existing home sales for July that we saw last week. Full text of press release below.

Case Shiller June 2010 Home Price Index

Jumpy Rate Market Response To GDP & Home Sales Reports
Rates dropped 0.2% early last week then rose Friday to end the week even. The $109b in Treasury auctions throughout last week caused mortgage bonds to sell off slightly, and July’s record low New Home Sales (down 32.4% year-over-year) and Existing Home Sales (down 25.5% year-over-year) helped mortgages rally— rates rise on bond selloffs and drop on rallies. But then two factors caused a huge 59 basis point selloff Friday:

(1) The second of three 2Q2010 GDP readings showed the economy grew at 1.6% versus expectations of 1.4%. This was a big drop from both the first 2Q reading of 2.4% and the final 1Q reading of 3.7%. Normally economic weakness of this magnitude would cause a mortgage bond rally, bringing rates down. But the opposite happened because traders didn’t think the 1.6% number was weak enough. more…

What If All Mortgages Were 1% Lower?
A Wall Street acquaintance of mine wrote to me about dropping trillions of dollars of mortgages by 1%. “I think that something like it may just happen. Many people I’ve talked to have said the same thing: ‘The money would go directly to the borrowers to help our economy, and totally bypass our government. There would be no claims of the government wasting the money on projects or programs at the taxpayer’s expense.’”

TARP Taxpayer Cost Continues To Drop
The government’s $700 billion bailout of the financial system (TARP) will be argued about well into the future, but the cost to the taxpayer for TARP continues to drop. The Congressional Budget Office projected that the overall deficit impact of the TARP will be about $66 billion, down from the $109 billion estimate the Congressional Budget Office made earlier in the year, and a significant drop from the initial projection of $350 billion. TARP, as we all recall (or maybe not) gave the government the authority to use $700 billion to prevent the collapse of the financial industry (and a few automakers along the way). Banks are repaying bailout money and automakers are continuing to payback their loans. more…

Guns & Mortgages
This story speaks for itself, here’s the link and the epic lead paragraph below: Prosecutors: Mortgage Worker Got Drunk, Shot Computer Server

A Salt Lake City mortgage company employee allegedly got drunk, opened fired on his firm’s computer server with a .45-caliber automatic, and then told police someone had stolen his gun and caused the damage. more…

The S&P Case Shiller April 2010 report of existing home sales showed year-over-year 3.8% price gains averaged across 20 major metropolitan areas, which brings prices back to the same level they were in late-summer 2003. S&P cited the homebuyer tax credit (which homebuyers had to be in contract by April 30 to be eligible for) as a reason for recent strength, but cautioned that sharp declines in Existing and New Home Sales—the May reports for each were last week and showed big post-tax-credit drops—could mean that “consistent and sustained boosts to economic growth from housing may have to wait to next year.” Notable and consistent gains are as follows: Dallas, Denver, San Diego and San Francisco have all posted six consecutive months of positive annual rates of return, recording +3.3%, +4.4%, +11.7% and +18.0% in April, respectively.
Case Shiller April 2010 Home Price Index

The index tracks existing single family homes, and is a credible pricing barometer for broad market analysis because it excludes condos and new construction. Condos can have more volatile pricing, and new construction pricing can be artificially set by builders, especially in times of distress when discounts an incentives can skew pricing. S&P refers to 10 and 20 “City” Composites, but these are actually metropolitan regional areas, not just cities. For example, where the city says San Francisco, this isn’t just San Francisco, but rather the entire 9 county Bay Area region. more…

Mortgage Bond Market Update
Yesterday we saw yet another improvement, with lower coupon (current production) prices doing the best. At the close of business yesterday, the spread between a Fannie 4.5% security and a Fannie 5.0% security was 2.5 points. (So .5 in rate equates to 2.5 points, or about .625 points for every .125% move.) As it turns out, apparently some dealers are quoting Fannie 30-yr 3.5% security prices. Although when a new security starts trading, it is very illiquid, but the price drop is about 3 points from a Fannie 4.0% security, or .75 in price for every .125%.

FOMC and Economic Preview
Today the FOMC wraps up its two-day meeting. Looking at the big picture, the economy is projected to expand 3.2% this year and slightly less in 2011, with the jobless rate staying above 9% for the foreseeable future. With no inflation, housing and employment scraping by, and European problems, there is no need for overnight rate hikes by the Fed. Many feel that although many areas are stable or improving housing-wise, but in many there are signs of some renewed weakening in home prices. Foreclosures continue (although 70% of them are concentrated in 11 states), bank repossessions hit a record monthly high for the second month in a row in May, and existing home inventories are increasing – none of which help home prices. On the flip side, housing starts are down. Of course, why build more when there are plenty of “used” houses around? more…

The S&P Case Shiller March 2010 report of existing home sales showed year-over-year 2.3% price gains averaged across 20 major metropolitan areas. This is the second positive number since December 2006, following a 0.6% YOY gain posted for February, which is a significant rebound from the record low decline one year ago when Q12009′s 20-city return was -18.9%. See returns for each metro area in the table below.

However S&P issued strong caution, saying that high foreclosure rates and resulting inventory of unsold homes weigh on the recovery. They also noted that “it’s especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices. Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.” Full text of press release below.
Case Shiller March 2010 Home Price Index

Which Bonds Are Mortgage Rates Tied To?
Rates on mortgage loans up to $417k and up to $729k are tied to trading in “agency” mortgage-backed bonds—meaning bonds issued by Fannie Mae, Freddie Mac, and Ginnie Mae. So while many look to the 10yr Treasury Note for clues on mortgage rates, they should be looking at mortgage bonds. And specifically, there are different duration mortgage bonds to watch during different times in the market to predict what rates might do, and how to properly lock a rate at the best time.

Prices on agency mortgage bonds have been slightly abnormal lately, so we have to look at the security price difference between a 4% and a 4.5% security to see what’s going on. Historically, on average, price differences between .125% for a 30-yr mortgage is about .5 in price, or 2 points for .5%. This relationship, however, has gotten out of whack with the latest volatility and prepayment fears in the mortgage-backed security sector. Currently the price difference between a 4.0% security and a 4.5% security is now 2.75 in price (instead of 2.00), so therefore the difference in price between a 4.75% loan, which would typically be slotted into a 4.50% security, and a 4.625% loan, which would go into a 4.00% security, same impounds, same LTV, same credit score, is now much greater. more…

The S&P Case Shiller February 2010 report of existing home sales showed year-over-year 0.6% price gains averaged across 20 major metropolitan areas. This is the first positive since December 2006—see returns for each metro area in table below.

S&P acknowledged the improved condition of the housing market but said that high foreclosure rates and the resulting inventory of unsold homes weigh on the recovery. They also pointed out that 19 of the 20 metro areas and the 10 and 20 metro composites declined in February over January, and 14 of the metro areas and both composites have now fallen for at least 4 consecutive months. Full text of press release below.
Case Shiller January 2010 Home Price Index

Rates Up On New Home Sales & Durable Goods Numbers
Today we had Durable Goods (very volatile) and a big New Home Sales number. Durable Goods were expected to be +.3% for March and originally reported as +.5% in February, the third consecutive monthly increase (although most of the gain in February’s number was due to a 4.7% monthly increase in machinery bookings). New Home Sales surged 27% in March, fueled by the Federal homebuyer tax credit which expires April 30. Mortgage bonds are currently down about 25 basis points on these better than expected economic reports. More on why rates are moving up in the last section below.

Varying Home Sales Data
Existing Home Sales rose 6.8% in March to an annualized pace that is the fastest since December. Total housing inventory is now at an 8 month supply. The median price was $170,700 in March, up 0.4% from March 2009. Distressed homes accounted for 35% of sales last month – unchanged from February. Sales have been above year-ago levels for nine straight months, and inventory has trended down from year-ago levels for 20 straight months. But FHFA’s Purchase-Only House Price Index (it covers only conforming loans) fell 0.2% in February and is down by 3.4% from its level in February 2009. The regional indices came in mixed, with declines in the South Atlantic, New England, and West North Central divisions offsetting moderate increases in the Middle Atlantic, Pacific, and West South Central regions. more…