Mortgage Bond Market Analysis - ADP Private Payrolls disappoint, what does it mean?

It's Hump day of Jobs Week which means we get the ADP Private Payrolls Report.  For the first four months of the year, we've had solid jobs data and the link between the ADP report on Wednesdays has been strong with the Non-farm Payrolls reports we receive on Fridays of Jobs Week.  If the link remains strong this time, expect a weak NFP report on Friday since today's ADP report came in at 156K, 40K less than the 196K expected.  This is providing some support to the bond market since oil is up today after a two day sell-off and, perhaps more importantly, Unit Labor Costs rose 4.1% vs. estimates of 3.3% - inflationary and not good for the prospects of the Fed keep rates where they are.  1Q Non-farm Productivity wasn't as bad as the estimates, coming in at -1.0% vs. estimates of -1.4%.  ISM Non-manufacturing (services) came in a point better than expected at 55.7 vs. expectations of 54.7 - this is strong as well.

From a technical standpoint, the RSI is just below the overbought threshold.  Yesterday the FNMA benchmark bond closed up 32 basis points thanks to the oil sell-off and lots of week data and comments from around the world.  It closed 10 basis points off its high for the day and 15 basis points below the first level of resistance.  It is currently down 5 basis points and is 10 basis points above the first level of support.  Yesterday was an opportunity day - if you didn't lock on Monday morning before the bond slid lower throughout the day then you got an opportunity to take advantage of better pricing before today's jobs data.

If the link between ADP Private Payrolls and NFP remains strong, expect the NFP number to disappoint on Friday.  With all of the recent (fairly) strong economic data that we've had, the ADP data is a bit of a surprise and perhaps an outlier.  If you didn't lock yesterday and you are in a position to be able to lock, I would lock today while the bond is basically flat just in case Friday's NFP is completely different than the ADP numbers today.

BONUS Part 2:  On Monday, I shared a tip regarding real estate investing - I teach seminars where I share real estate investing strategies and the benefits that investing in real estate can provide that other investment options often don't have.  Don't get me wrong, I think we should all be well diversified with investments in a variety of things including stocks, bonds, mutual funds, and real estate - and maybe even some gold and / or some various currencies.  My bonus strategy today focuses on income vs. appreciation.  When it comes to investing there is a rule of thumb that says you should have the percentage of your money invested in income-oriented investments (typically bonds) as your age.  For instance, if you are 60 years old, 60% of your portfolio should be in bonds.  The idea behind this is that the closer a person gets to retirement, 1) the less volatile the investments should be - stocks are more volatile than bonds, usually, and 2) people need more income when they retire to replace the income from their job they just quit.

With this in mind, I think real estate investors should focus on properties that will provide more appreciation in their younger years such as single family residences in desirable parts of town close to good schools, shopping and employment (I wrote about this on Monday when I asked the questions "Would you live in the home?").  As you get closer to retiring, you may want to switch some of your rental properties from single family homes to multi-family units like duplexes or 4-plexes or invest in town homes; with few exceptions, I would stay away from condos because of the (usually high) association fees.  You could use the equity that you've built up in your single family home investments to buy these other units with cash and increase your income while still having the benefit of some appreciation and some great tax deductions.  Depending on the size of your portfolio, you may consider a nice piece of commercial property such as a strip mall or an office building that you could rent to doctors, lawyers, CPAs, etc.  I'll have my final real estate investing bonus information on Friday where I will discuss how you can buy your first investment property with only 5% down and talk about the great tax benefits of real estate investing.  Make it a great day.

Mortgage Bond Market Analysis - Jobs Week, Economic Data and BONUS: My Top Tips for Buying Investment Property

It's Monday of Jobs Week and we've got a bit of data this morning.  I hope you had a great weekend and that your week is off to a great start.  April ISM Manufacturing came in at 50.8 vs. expectations of 51.4 and March Construction Spending came in at .3% vs. expectations of .5%.  While both of these are below expectations, they are still both expansionary.  Additionally, the internal ISM Prices Paid jumped to 59 vs. expectations of 52 which could indicate some inflationary pressure.  The FNMA benchmark bond is currently down 3 basis points from the open and it is 14 basis points off the morning low.  It is 2 basis points below the 1st level of support which is 102.44.  I think that trading will be light / cautious leading up to Wednesday's first employment data:  ADP Private Payrolls.  We have basically no data tomorrow and a veritable plethora of data on Wednesday with the ADP number in addition to Non-farm Productivity, Unit Labor Costs, Trade (im)Balance, Factory Orders and the ISM Non-manufacturing Index.

Oil's down a bit today so either there's a disconnect between oil and mortgage rates or bonds would be selling off even more if oil weren't down.  Every month this year we have seen solid jobs numbers and expectations are for more solid numbers this time around.  The benchmark bond has just broken out a bit and is now up 5 basis points on the day.  We may not see a lot of movement in bond prices until Wednesday which would mean that floating isn't a big risk but it would also mean that there's likely not much benefit to floating.  I certainly wouldn't float in the release of the jobs data - I would absolutely lock by tomorrow afternoon just to be safe.

Top things to consider when buying investment properties:  I get asked on a regular basis what are the strategies I share when I teach my real estate investing classes.  This week I'm going to share some very important strategies with you and would love to have you share your thoughts in the comments below or you can always contact me with more questions or to give me your opinion (702-812-1214 or 801-853-8720).  The strategy for today is this, "would you live in the home?"  This is a very important consideration and requires much more than a yes or no answer.  I have had many clients over the years who bought investment properties and at first they just wanted to buy the cheapest investment property they could "just to get in the game."  I asked them if they would love in it and the answer was a resounding "NO!!"  My follow-up conversation with them had to do with the type of tenants they would get to rent their property.  Typically, tenants of cheap properties are going to have jobs that are less stable which means late rent or missed payments.  Additionally, they are less likely to take good care of the property.  Properties like this also tend to be in areas with lower appreciation rates.

I advise my clients to "begin with the end in mind."  It's important to have an exit strategy when you (or a client) buys an investment property.  Buying a nice house that would be a nice starter home for a young family is something to think about.  Buying this kind of home in a decent part of town close to employment centers, shopping and goods schools will help to attract a higher quality tenant that can afford to pay more in rent and will likely take better care of the property.  When it comes time to sell the property and do a 1031 exchange into multiple properties or a bigger property, a home like I've just described will likely have experienced relatively decent appreciation and will also likely have a good pool of potential buyers.  What are your thoughts?  Make it a great day.

Mortgage Bond Market Analysis - Lot's of data and guessing

It's the last Friday of April and Jobs Week is next week.  Europe began our day with some strong data which was bad for bonds.  Thankfully, our data was mostly good for bonds and the FNMA benchmark bond is currently up 5 basis points (20 basis points off the morning low) because of it.  March Personal Income rose .4% vs. expectations of .3%.  This is good because the more people make the more people can spend and consumer spending is what drives our economy.  Not so fast - Personal Spending was only up .1% vs. expectations of .2% and the Core PCE (Personal Consumption Expenditures) YOY dropped from 1.7% to 1.6% - hence, people are saving more and spending less which is not good for the economy but it is good for personal finances.

The Employment Cost Index came in at .6% as expected.  The Chicago PMI came in at 50.4, much lower than the estimates of 53 but still above the critical 50 level which means it's still expanding.  You may recall it wasn't too long ago where this data point was in the low to mid 40s consistently.  Lastly, the final April Michigan Consumer Sentiment Index came in at 89 vs. estimates of 90.  You may also recall that just a few months ago this was around 95 or 96 and spending was low - I commented that the consumer sentiment index was quite high considering the fact that consumers weren't backing up their sentiment with the action of spending.  I wrote that perhaps they were confident because the employment outlook was improving but not confident enough to start spending - at any rate, if they aren't confident enough to be spending, the reading, in my eyes, was too high.  Today's reading is much more in line with consumer's spending actions and it will be interesting to see if spending picks up.  With the Core PCE where it is, this gives the Fed more reason to wait before the next rate increase which means there is more opportunity for people to go out and buy a home and get a great low rate on a mortgage.  Additionally, when people buy homes, they usually also buy new furniture, appliances, and stuff to fix up their home which means more income and jobs for the people who sell those things which means that they might be able to buy more stuff, including homes.  But I digress.  I would recommend floating for now but if you do float, make sure you keep your eye on my app - buyerZapp - so that you can act quickly if the market moves against you and I issue a warning to lock.

Waiting to buy a home means that the buyer will pay more money for the same home in price and in interest rate - as the economy recovers, rates trend up.  A $200,000 home today will cost $208,000 a year from today with 4% appreciation.  The loan amount for an FHA loan is now $7,720 higher than if the purchase price were $200,000.  The payment, assuming rates stay the same is $66.10 higher at the $200,720 loan amount than at the $193,000 loan amount based on the $200K purchase price.  If rates also go up 1% - which is very possible - the payment would then be $150.36 higher.  This means that some buyers may have to settle for a lesser home if the higher payment makes their debt ratio too high to qualify.  I'm happy to answer any questions you or a client may have and to provide scenarios and options.  Here is a link to my FREE mortgage report:  How to Avoid the Most Common and Costly Mistakes When Getting a Mortgage which contains lots of information regarding the process, fees, interest rates and locking, loan programs, financial strategies and more.  Check it out and feel free to share it as well.  Make it a great day and a better weekend.

Mortgage Bond Market Analysis - Alert to LOCK: Read all the way to the END.

The Fed Interest Rate Decision was just announced and there is no rate increase.  However, the tone is more hawkish than previous comments as they see the global economic risks as less threatening.  Since the market had not priced this in, this is negative for pricing and bonds have sold off since the decision was made public.  The fact that oil is up again is not helping.  Lock ahead of a potential reprice just to be safe.

On the data side, Pending Home Sales came in at 1.4 vs. estimates of .5 - this isn't a factor in pricing because the focus is on the Fed (and oil to a lesser extent today).  Tomorrow we get Jobless Claims and Gross Domestic Purchase Price Index.  Oil will continue to influence bond pricing and traders will now start trying to figure out if the Fed will raise rates at the June meeting or if it will be after that.  That's all for now.  Make it a great HUMP day.

EDIT:  after absorbing the information, traders have done an about-face of their knee-jerk reaction and have started buying again - the FNMA benchmark bond is now up 7 basis points where it was flat just a few minutes ago.  This is not a big swing but it was a quick sell-off when the announcement was made.  It's probably o.k. to continue floating.  If you do float - keep an eye on my app - buyerZapp - in case the market moves against you.

Mortgage Bond Market Analysis - A decoupling between oil and bonds?

Over the last two weeks we have seen the relationship between oil and stocks weaken.  Today we are seeing a decoupling between oil and bonds.  Oil is recovering after a down day yesterday and yet the FNMA benchmark bond is also up 11 basis points after closing down 10 basis points yesterday (a 64 basis point loss over the 5 day slide that began last Tuesday - this is equivalent to an increase in rate of about .125% plus a bit in fees).  Today's decoupling makes sense since March Durable Goods Orders came in much weaker than expected at .8% vs. estimates of 1.8%.  Ex-transportation it was -.2% vs. estimates of .5%.  These are BIG misses and are fueling the rally (if you can call up 11 basis points a rally).  The Case-Schiller Home Price Indicies came in at 5.4 - exactly as expected - which shows solid appreciation but it was below the 5.7 of last month; this is really no big deal since real estate, like all investments and economic data, has an ebb and flow.  The Richmond Fed Manufacturing Index came in at 14 beating the estimates of 12 but well below last month's reading of 22.  Consumer confidence came in at 94.2 - a good reading but below expectations of 96 and the previous reading of 96.2.

This afternoon there is a 5-year Treasury auction.  Considering that our yields, while low, are better than offerings of about every other country around the world (at least for those considered safe-haven investments for their bonds), I would expect the auction to be well received.  Tomorrow we get Pending Home Sales and that at 2:00 PM EDT we get the Fed Interest Rate Decision.  I think we will see them leave the Fed Funds rate right where it is and that is also the market's expectations as well.  With oil near recent highs and the economic data not exactly on fire, I would float into the decision.  If oil sells off in any significant way over the next several days, I think that rates will benefit in spite of what's happening this morning.  The RSI (Relative Strength Index) is also below the the oversold threshold so we could see some benefit from some technical buying if traders get confident enough to buy mortgage bonds in any significant way based on what the Fed says tomorrow and what oil does.

The benchmark bond has sold off three basis points since I began writing this post and is now up just 8 basis points.  A look at the chart leads me to believe that we will likely be in a sideways pattern today unless the auction this afternoon gives traders and impetus to trade with conviction.  My recommendation is to float with caution but, like always, pay attention to my app (buyerZapp - link is at top right corner of my blog) for alerts and news so that you can try to lock before a reprice for the worse should the market move against you.  As always, make it a great day.