Mortgage Rates Hit Bottom–Next Step…, August 3, 2011

Mortgage rates have hit their recent bottom leading to a surge in mortgage applications from borrowers purchasing homes and refinancing their current mortgage loans.  The question is, “Now where do mortgage rates go.”  While analysts, including me, have been focused on the potential negative effects of the debt ceiling debate in Washington, worldwide investment markets have been focused on signs of major economic weakness in the US and Europe and a meaningful slowdown in China.  What is the lesson from this?  The takeaway is that reality always wins out over make-believe…data is real…politics is not!

So let’s get back to reality today.  The ADP Employment Change report this morning showed anemic job growth with 114,000 new jobs created.  This report forecasts that the all-important Non-Farm Payroll report coming on Friday will show 75,000 new jobs which is 10,000 lower than the consensus prior to today.  Regardless of the forecasts, if Friday’s report shows less than 200,000 new jobs it will mean net job losses given new entrants into the job market.

I expect mortgage rates to be under some upward pressure early today as the stock market appears headed for a snap-back rally after more than a week of declines.  However with ISM Services figures and Factory Orders due a t 10:00 AM ET a move in either direction is possible.  With most analysts forecasting weakness in both of these economic measures, rates could actually move lower.  If there is unexpected strength in these reports, then current mortgage rates could tick higher.

In addition to signs of weakness in the US there has been increasing concern over the status of the European economy over the past few weeks.  Bond yields in Italy and Spain have been rising as investors are demanding bigger returns based on perceptions of higher risks in these countries.  A recent report also showed some surprising, and concerning facts about debt in Europe.  For example, it is widely believed that France and Germany have been immune to the debt burden issues plaguing smaller European nations. Yet this report shows that, in terms of overall debt, France and Germany trail only Greece.  The difference between France and Germany and Greece lies in the ability of the larger nations to generate growth in their economies thus enabling them to service their debt.  However, what would a significant recession do to that equation?