OVERVIEW ~ for April 5 through April 9, 2010. The remarkable news over this week was that mortgage interest rates surged higher (as you can see to the right). This was the result, largely, of increasing confidence among investors about the economic recovery. And that growing confidence was reflected both in the higher stock market indices and in the apparent readiness among investors to put their money into riskier investments, but was not reflected in any real estate sales data other than the recent Pending Home Sales Index.
FOCUS ~ Two very important questions:
1. Wednesday, April 7th’s auction of 10-year Treasury notes inspired the highest overall demand among investors since 1999. But most interest rates are rising, including mortgage rates. Why, therefore, were the auctions of Treasury securities so successful last week? Wouldn’t investors shy away due to rising rates, which reduce the value of existing securities?
No. Buying Treasury securities bearing higher yields was (and is, today) attractive to investors seeking higher returns on their investments. Further, if an investor takes a risk and buys a Treasury security today yielding 4% and the yield for those securities falls tomorrow to 3.5%, then the Treasury securities yielding 4% gain in value in tomorrow’s market. Of course, the opposite is equally true, but investors are willing to take that risk and, in any case, their investment will provide a higher yield than it would have if they’d bought a short time ago.
2. Where is the upward “bump” in real estate sales we’ve been expecting that the approaching expiration of the $8,000 and $6,500 homebuyer tax credit should bring? Curiously, the Purchase Mortgage Applications index (see to the right) has barely budged since the last tax credit expiration brought it considerably lower. If sales are about to spike, we can often expect the applications for purchase money loans to rise well in advance of the higher completed sales figures.
At the same time, though, the National Association of RealtorsÒ Pending Home Sales Index (PHSI) jumped by 8.2% between January and February. This is a forward indicator, generally reliable, of future real estate sales closings. The mortgage applications then rise after a time to finance the purchases indicated by the PHSI. And the sales eventually show up in the existing-home sales data, which let us know what happened, not what is happening or is about to happen. Clearly, all three indicators are worth watching closely just now.
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