Realist Real Estate Roundup, December 23–27

Realist Real Estate Roundup, December 23–27 (Part 1 of 7)

10-year bond finally trades with a 3 handle

Why follow the weekly Realist Real Estate Roundup?

The roundup is a weekly series in which we discuss the week’s trading in government bonds and TBA (To-Be-Announced) mortgage-backed securities. We’ll see where mortgage rates have been and we’ll go over the weekly economic data and earnings announcements. Then we’ll look forward to what’s coming up the following week. The information in this series will be relevant to mortgage REITs like American Capital Agency (AGNC), Annaly (NLY), Hatteras (HTS), Capstead (CMO), and MFA Financial (MFA) as well as people who invest in homebuilders.

10 year bond yield - LTEnlarge Graph

Bonds sell off thin volume during a holiday-shortened week

Last week was the Christmas holiday, and most trading desks were staffed by junior people told not to take positions unless they had to. Also, most of Europe takes off the days around Christmas as well. Bond yields drifted up throughout the week, finally trading above 3% on Friday.

Personal spending comes in strong

Personal spending rose 0.5%, while personal incomes rose 0.2%. Several publications wondered if this meant that we’re heading for the good old days (or bad old days) when consumers spent more than they made, primarily by the use of credit. Actually, this is more or less how recessions end. Consumers spend because they have to, not because they want to. Eventually, the clothes wear out and the car becomes unreliable and needs to be replaced. This additional spending is what creates the virtuous cycle of economic growth. Once the unemployment rate begins to fall, we’ll start to see wage growth.

Good housing data

The Federal Housing Finance Agency Home Price Index rose 0.5% month-over-month, and prices are now within 10% of their peak levels. This will mean great things for the economy, and especially the labor market, as it will encourage mobility, which is what the economy has desperately needed.

In the next parts of this series, we’ll look at trading in the TBA market (which is the basis for mortgage rates), see where mortgage rates have been for the week, and then discuss past and upcoming economic data.

The Realist Discussions

  • Red BS

    If the yield investor is a retired person, a pick up in the economy doesn’t really matter – he still needs income. This is the point being missed by most in the market IMHO.

  • Rick

    What is going to happen January 10th when the Frank-Dodd bill takes effect? And why no mention of this or is it just an oversight?

  • Blake Alexander

    Just got off the phone with a customer going over all of this. It’s all relative in the end. If rates go up then typically this is because the economy is doing better or inflation kicks in. If the economy is doing better, then the unemployment rate should be lower. If inflation kicks in, then prices rise (including the price of labor), so in theory we have job creation and income should correlate with the increase in interest rates. The media loves to cover mortgage interest rates since this affects housing and people won’t forget the 2008 mortgage crisis, so as the covers these mortgage rates hard core then we’ll see a much larger proportion of borrowers actually shop around for their mortgage loans then ever before. Online mortgage shopping will increase, which will trigger traffic to places like LendingTree, RateBid, Zillow, etc. Bottom line is that we just can’t have rock bottom interest rates, low inflation, low unemployment, and increased earnings at the same time!