Jun. 4, 2007: Mortgages: rates aren’t that bad, are they?

If Wal-Mart is lowering prices every day, how come nothing is free yet?

The stock market keeps rallying, but the yield on the 10-yr ended last week at 4.95%. Although this morning it is down to 4.94%, according to some, the next target is 5.00%… then what? The market may be justified in its view for stronger growth ahead, and concern that the foreign interest in buying our debt has declined, but that perhaps is what has got us to this point. Much of the strong data is behind us, and this week is light – see below. Many analysts feel that if we stay above 5.0% on the 10-yr, then the risk will become 5.25%, which is where we were a year ago.

On Friday prices worsened (rebates declined) after a series of reports showed strength in the U.S. economy: more jobs were created in May than economists forecast, and manufacturing unexpectedly accelerated. The increase in employment adds to evidence the economy may be picking up steam after a moderate first quarter. The 10-year note’s yield reached 4.94%, the highest since 5.003% in mid-August. What is housing up to? Home prices appreciated 4.3% in the first quarter of 2007 from one year earlier, but the pace of year-to-year price appreciation slowing. Seven states, including Florida and California, saw price depreciation from the end of last year to the first quarter of 2007. And two states (Massachusetts and Michigan) experienced year-over-year price declines for the first time in seven years. And an index of pending sales of existing homes in the U.S. unexpectedly fell to the lowest level in more than four years in April, a further sign the real-estate slump may linger.

Most generally agree that rates are still low historically, but are likely to creep higher. The bond and mortgage markets are increasingly oversold technically and both are in store for some kind of consolidation. For months analysts thought that rates were going lower once the Fed began to cut, but now the chance of a Fed increase outweigh a rate cut. This is disappointing for many. In April, for example, PIMCO’s Bill Gross was forecasting four rate cuts from the Fed by year end.

Week of June 04 – June 08