Market Review June 18th

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates higher. Inflation fears continued to dominate trading. Significantly stronger than expected retail sales data caused concern. Fortunately some buyers emerged mid-week after the recent rundown in prices and helped rates bounce back a bit from the lows earlier in the week.
For the week, interest rates on government and conventional loans rose by about 1/4 of a discount point.
The housing starts data Tuesday will be the most important event this week. Leading economic indicators and Philadelphia Fed data will also be important.
LOOKING AHEAD
EconomicIndicator
ReleaseDate & Time
ConsensusEstimate
Analysis
Housing Starts
Tuesday, June 19,8:30 am, et
Down 2.8%
Important. A measure of housing sector strength. Larger than expected decreases may lead to lower rates.
Leading Economic Indicators
Thursday, June 21,10:00 am, et
Up 0.2%
Important. An indication of future economic activity. Weakness may lead to lower rates.
Philadelphia Fed Survey
Thursday, June 21,12:00 pm, et
None
Moderately important. A survey of business conditions in the Northeast. Weakness may lead to lower rates.
Housing Starts
Housing starts data is a leading indicator of the state of our economy and is usually the first indicator to decrease when the economy goes into a recession. This report, provided by the Bureau of the Census, takes into account data from both single-family homes and multi-family dwellings. Building permits are also released with the housing starts data. By knowing the number of permits issued monthly, analysts can attempt to estimate for the upcoming months. Normally, starts are 10% higher than permits since all locations are not required to have a building permit.

Housing starts and permits give a warning of future economic activity. In effect, a rise in housing starts can lead to a fall in the bond market and vice versa. Consumers tend to hold off on the purchase of new homes, new cars, and other big-ticket items if they are worried about the future of the economy. Housing is an important part of our economy. Regular declines in housing starts can lead to an economic slow down and essentially to a recession. On the other hand, increases in housing starts may possibly pull the economy out of a recession.
From the opposite perspective, changes in interest rates often lead to changes in housing starts. High interest rates can cause a significant decline in home sales, which can lead to a drop in housing starts. Just the opposite happens when rates drop. Low mortgage rates affect both home sales and housing starts.
The housing market across the country has been a vital component in sustaining the economy in recent years. Homeowners have generally seen an increase in the value of their homes. However, the recent softening of the housing market has many analysts concerned. Fed Chairman Bernanke stated, "Despite an ongoing drag from the housing sector, the U.S. economy should expand at a moderate pace."
There is still uncertainty regarding the future state of the economy despite signs of recovery. In general, if the economy grows quickly interest rates tend to head higher. In addition, high energy costs are adding some additional price pressures.
The good news is that while interest rates are not at all-time lows, they remain historically low. A cautious approach to mortgage interest rate decisions is necessary to protect against future volatility.
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