Weekly Economic Summary from Bank of America

Last week, mortgage bonds hit their highest levels in 2014, helping home loan rates reach some of their lowest levels this year. Read on for details.

Table Source: Vantage Production, LLC
One of the main reasons bonds and home loan rates have benefitted of late is due to safe haven trades, meaning that when there is uncertainty in the world, like the current situation in Ukraine, investors often move their money out of stocks and into less risky assets like bonds.

This includes mortgage bonds, the type of bond on which home loan rates are based. As tensions have escalated overseas in recent weeks, our bond markets have improved—and as mortgage bonds improve, so do home loan rates.

Another factor helping bonds right now is the old trading adage, “sell in May and go away.” Stock prices have been declining, helping mortgage bonds improve. For even more details on the dynamic between stocks and bonds, see  “Why Bad News Can Be Good for Home Loan Rates,” below.

In housing news, research firm CoreLogic reported that home prices, including distressed sales, rose by 11.13 percent from March 2013 to March 2014. In addition, prices were up 1.4 percent from February to March. The 11.13 percent year-over-year increase is down from the 11.81percent registered in the year ended in February. Given the tighter credit standards and limited inventory that exists in many parts of the country, it seems likely that the big home price gains seen in 2014 may not be sustained. This will be important to watch as we move further ahead this year, as the strength of the housing recovery is a key factor of our economic recovery overall.

Forecast for the week

After last week’s quiet economic calendar, this week brings key reports across a wide spectrum of the economy. 

• Economic reports bagan on Tuesday with Retail Sales, which gave us a read on consumer spending for April.  
• Look for a double dose of inflation data, with the wholesale-measuring Producer Price Indexon Wednesday and the Consumer Price Index on Thursday. 
• Also on Thursday, weekly Initial Jobless Claims will be delivered as usual.
• Two key manufacturing reports are on tap for Thursday, with May’s readings of the Empire State Index and Philadelphia Fed Index. 
• Thursday brings housing news as well via the National Association of Home Builder’s Housing Market Index. More housing news follows Friday with Housing Starts and Building Permits. 
• Ending the week, the Consumer Sentiment Index will also be reported Friday. 

As you can see in the chart below, Initial Jobless Claims declined by 26,000 in the latest week to 319,000. While this was the lowest level in a month, seasonal quirks surrounding the Easter holiday and spring break could have distorted the numbers. The labor market is a key tenet of our overall economic recovery, like the housing market as noted above. With the Jobs Report for April coming in better than expected, it will be important to see if the labor market continues to show signs of improvement.

Chart: Initial Jobless Claims

Table Source: Vantage Production, LL

Why Bad News Can Be Good for Home Loan Rates

It seems counterintuitive that negative economic news can actually be good for home loan rates, but there's a pretty simple explanation.

First, remember that big money managers in search of higher returns avoid holding onto cash by investing in both stocks and bonds.

Second, despite what the financial media often report, home loan rates are based on the performance of mortgage backed securities—a type of bond.

Third, prices of stocks and bonds respond to a supply-and-demand dynamic, just like anything else in the economy.

Putting these facts together, it begins to make sense that when the economy is “on fire” and economic reports are on the uptrend, investors tend to put more money into stocks. That’s because stocks offer higher returns, even though they are generally more risky.

However, in order to put money into stocks, investors must remove money from less-risky bonds. The result is a decreased demand in bonds causing bond prices to worsen, and therefore home loan rates to go higher.  

On the other hand, when the economy is sluggish, world news is unstable, or  economic reports are negative, money managers tend to take money out of higher-risk stocks and move it into less-volatile bonds. As demand for bonds increases, bond pricing improves and home loan rates go down.

While it may seem odd that home loan rates improve when economic news is sluggish, it actually makes sense when you look at the bigger picture!

Feel free to pass this info along to your team, clients and colleagues. If you have any questions about how economic news is impacting home loan rates right now, please call or email any time.
In the news this week (May 12 - 16, 2014)

Table Source: Vantage Production, LLC