Mortgage Rates Improving After Positive Housing Reports

Big improvement in the stock markets yesterday on the news that the House passed its version of tax cuts. This morning, we have seen the key indexes slightly lower. The 10yr yesterday increased to 2.37% on the stock market improvement as MBS prices declined.  However, we have now gone the other way as of 11:00AM, we see the 10yr at 2.34% and MBS positive.

No real change in interest rates at the long end of the curve, including mortgage rates that have been stable, and little changed for over a month now. Tax cuts and better earnings from businesses are continuing to drive equity markets. The lack of inflation is keeping the 10yr note steady - hedge against the possibility of a stock market correction. It has not happened, but as long as those safety moves are not costing anything to the long position holders, investors still willing to hold US long-term treasuries.

The tax-cutting process now in the hands of the Senate that is expected to pass its version next week, but I doubt it will be voted until after Thanksgiving. The details are numerous and tedious the deeper one considers the specifics, but the main battle appears to be the Senate’s willingness to cut deductions for state and local taxes on federal tax returns (SALT). High state and local tax states like the left and right coast and other states likely to be a huge decision. The Senate tax bill would eliminate the deduction for individuals and families of state and local income and sales tax, while capping property tax deductions at $10,000.

The tax cuts working through Congress are expected to lower the production of affordable housing. NAR warning that if the deductions are eliminated, other tax deductions become less valuable. Within the bill, it will end a tax break for private bonds used in affordable housing developers, according to those that score the various parts of the bills. Mortgage Credit Certificates, a tax credit for low- and moderate-income first-time home buyers, would be eliminated. The elimination of the private bond deductions will cut two-thirds of affordable housing over the next 10 years. Limiting the mortgage deduction also likely to be a drag on housing. Private bonds also fund hospitals, roads, charter schools and other needed local needs. The counter-argument is that the lower tax and increased individual and married deductions will offset the cuts. Republicans believe that ending the deductions for private bonds will add $40B of additional revenue over the next 10 years. OMB has estimated that the cuts will add $1.5 trillion to the debt.

This morning, October housing starts and permits were reported. Both much stronger than estimates. Starts were expected at 1190K, starts were 1290K, and September stats were revised higher to 1135K from 1127K; percentage-wise, starts +12% from the revised September starts. October building permits expected at 1250K increased to 1297K, and September revised to 1225K from 1215K, an increase of 5.5% from the September revision. The better housing report follows the increase in the November NAHB housing market index yesterday, increasing to 70, the highest index since last March - current and future sales are very strong, each at 77, and traffic is improving, up 2 points to 50 for its best reading since May. Starts and permits were at a one year high and likely due to the beginning of home replacements caused by those hurricanes.

Still no trending movement in the bond and mortgage markets, tracking the stock indexes like a blood hound on the scent. Stocks also not moving much when seen over the last month - kneejerk reactions like yesterday but not making new highs (DJIA). 

The bellwether 10yr note and 30yr mortgage rates not much different now than a month ago. Tax cuts are the headlines but economic data also improving as have been Q3 earnings overall.