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European Politics Impact U.S. Rates; New-Home Sales Indicate Healthy Market

Overview: Over the past week, political news from Europe was the main influence on mortgage rates. The U.S. economic data came in close to expectations and caused little reaction. The events in Europe were favorable for rates, helping them decline a little from the seven-year highs seen last week.


In Italy, the government is formed through a coalition of the major political parties. It appears that the new coalition that is set to emerge does not favor remaining in the European Union (EU). While there is a long way to go before a decision is made, and it is far from certain that the outcome would be an exit from the EU, the increased risk caused investors to shift to safer assets, including U.S. mortgage-backed securities (MBS). The added demand for MBS helped push mortgage rates lower.

In April, sales of new single-family homes fell a little from March, but they have held relatively steady in recent months. The supply of new homes for sale rose to 5.4 months’ worth, which is generally considered close to a healthy balance between buyers and sellers. By contrast, the supply of previously owned homes was at just 3.6 months. Sales of new homes account for roughly 10% of the market, but they are viewed as a more current indicator of the strength of the housing sector because they are based on contracts signed, while sales of previously owned homes are counted when contracts are closed. Week Ahead

Looking ahead, the Existing Home Sales report will be released on Thursday. The Durable Goods report, an important indicator of economic activity, will come out on Friday. The second estimate of first-quarter gross domestic product (GDP) will be released on May 30. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will come out on May 31. The next Employment Report will be released on June 1.

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