More Solid Growth in Existing Home Sales:

With low interest rates and a labor market that is steadily growing its only a lack of inventory that keeping home sales from rising even more.

Existing-home sales steadily increased for the third consecutive month in July, while stubbornly low inventory levels and rising prices are likely to blame for sales to first-time buyers falling to their lowest share since January, according to the National Association of Realtors®.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 2.0 percent to a seasonally adjusted annual rate of 5.59 million in July from 5.48 million in June. Sales in July remained at the highest pace since February 2007 (5.79 million), have now increased year-over-year for ten consecutive months and are 10.3 percent above a year ago (5.07 million).

The median existing-home price for all housing types in July was $234,000, which is 5.6 percent above July 2014. July’s price increase marks the 41st consecutive month of year-over-year gains.

Total housing inventory at the end of July declined 0.4 percent to 2.24 million existing homes available for sale, and is now 4.7 percent lower than a year ago (2.35 million). Unsold inventory is at a 4.8-month supply at the current sales pace, down from 4.9 months in June.

Lawrence Yun, NAR chief economist, says the increase in sales in July solidifies what has been an impressive growth in activity during this year’s peak buying season. “The creation of jobs added at a steady clip and the prospect of higher mortgage rates and home prices down the road is encouraging more households to buy now,” he said. “As a result, current homeowners are using their increasing housing equity towards the downpayment on their next purchase.”

What Happened to Rates Last Week?

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Mortgage backed securities (FNMA 3.50 MBS) gained +73 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower.  It was a nice reversal after two straight weeks of MBS pricing falling (higher rates).

Our domestic economic data didn’t materially change the landscape as it trended in the same direction that we have been seeing.  And that is strength in some areas such as housing (Existing Home Sales) and labor (Philly Fed employment component) and slow growth in other areas such as manufacturing.   Overall, the economy is growing at a slow to moderate pace which is very bond-friendly as it puts the prospect of inflation further down the road.

The real action started on Wednesday with the release of the minutes from the last FOMC meeting.  There were just as many dovish (keep rates lower longer) as there were hawkish (raise rates now or soon).  The overall tone was that the Fed stands ready to raise rates and that they just need to see a little more growth in the labor sector.  But  the financial markets zeroed in on a comment that the Fed was concerned about China…and that it was off to the races for MBS pricing as story after story out of China showed economic weakness and financial instability which caused foreign investors to dump their stocks and park their cash in the nice and safe warm waters of U.S. Treasuries and Mortgage Backed Securities.

This flight to quality went global with our own stock market (DJIA) tanking over 200 points on Thursday and a whopping 500 points on Friday.

What to Watch Out For This Week:

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The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

Quiz: Are there more or less homes available to purchase this year vs 2014?

Well ask anyone trying to buy a home today, and the vast majority will launch into a story about a bidding war. Demand for housing has returned, but housing supply has not, and the numbers are only getting worse.

The supply of homes for sale nationally in June fell 6.5 percent from a year ago, according to a new report from Zillow, a real estate listing and analytics company.

U.S. home resales rose in June to their highest level in nearly 8-1/2 years, a sign of pent-up demand that should buoy the housing market recovery and overall economy.

The reasons for tight supply are manifold: Homebuilders are putting up single family homes at a far slower pace than historical norms. They cite a shortage of labor for at least some of that weakness, but they also are not seeing strong demand, due to their higher prices.

“Finding a house is the last hurdle for many buyers who have saved a down payment and gotten pre-approved for a mortgage, but low inventory levels like those we’re seeing across the country can bring the homebuying process to a screeching halt,” said Stan Humphries, chief economist at Zillow. “In many markets, there just isn’t a lot to choose from in terms of homes on the market.”

The bigger the city, the bigger the problem. Inventory fell in 19 of the nation’s largest metropolitan areas. Supplies are also falling the most in the lower price ranges, making it even more difficult for already cash-strapped first-time buyers to get into home ownership.

Supply is also directly connected to price. Supplies are lowest in markets where prices continue to rise, but supply is actually starting to ease in markets where home prices have flattened. Take Washington, D.C., for example. Home prices are flat from a year ago, and inventory is now up nearly 19 percent, according to Zillow. In Dallas, however, where prices are still rising, up 12.5 percent from a year ago, inventory is down nearly 20 percent.

“Sellers tend to want to hang in and get the last juice out of the orange,” said Humphries. “If you think you might see 10 percent appreciation over the next year, is it rational to move where you might squeeze more out of the market? No.”

What Happened to Rates Last Week?

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Mortgage backed securities (FNMA 3.50 MBS) gained +47 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve slightly.

Rates moved sideways all week, even with a FOMC meeting and some big hitting reports.  But after Friday’s Employment Cost Index, MBS rallied to their best levels in weeks which caused rates to drop.

The Employment Cost Index rose only 0.2 percent in the second quarter which is far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell to plus 2.0 percent from 2.6 percent in the first quarter. The record low for this reading is plus 1.4 percent back in the early recovery days of 2009.  MBS moved upward in direct reaction to this release.  However, it is important to note that this is OLD data that compares the change in costs from the 1st QTR to the 2nd QTR and is completely removed from our current employment situation which will find out more about on next Friday with our NFP report.

As expected, the Federal Reserve left their key interest rate unchanged.   And if you thought the Fed was on track to raise rates in September, you got a little more fuel as they pointed to improvements in the labor market and used a little rosier language than last time.  They also stated that rates will rise after a little more improvement in the labor market (which makes this Friday’s Non-Farm Payroll very important)  But they kept in their statement that the risks to the overall economy and labor market was “nearly balanced”.  The market was waiting to see if that language would be “tweeked” from the last statement and it wasn’t.  They also continued to give themselves some wiggle room on concern over low inflation.  All-in-all, this was basically what the long bond market expected and as a result, mortgage rates had little to no reaction to this event.

What to Watch Out For This Week:

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The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon