Financial Market Affects November 23, 2015

There was a significant amount of economic news released during the Thanksgiving holiday-shortened trading week.  Overall, the economic data was strong enough to support the idea the Federal Reserve will likely pull the trigger on the first rate hike in nine years when the next rate decision is released on December 16.

The week began with a report on home sales when the National Association of Realtors (NAR) reported Existing Home Sales declined 3.4% on a sequential basis in October, to a seasonally adjusted annualized rate of 5.36 million homes.  However, Existing Sales were still 3.9% above the year-earlier figure.  The consensus forecast had called for an annualized sales rate of 5.50 million homes.  Overall, the median price of an existing home increased 5.8% to $219,600.

NAR chief economist Lawrence Yun remarked “As long as solid job creation continues, a gradual easing of credit standards even with moderately higher mortgage rates should support steady demand and sales continuing to rise above a year ago.”

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Additionally, the latest S&P/Case Shiller 20-city Home Price Index increased 5.5% year-over-year in September at the fastest rate in 13 months as a lower inventory of houses for sale has forced buyers to bid up available properties.  The consensus forecast had called for a 5.2% rise.  Overall, home sales have risen 3.9% in the past 12 months while the number of available homes has declined 4.5%.

Furthermore, the Census Bureau and the Department of Housing and Urban Development reported New Home Sales increased to a seasonally adjusted annual rate of 495,000 in October, an increase of 10.7% from a downwardly revised September rate of 447,000 and an increase of 4.9% compared with the October 2014 rate of 472,000.  The consensus forecast had called for a rate of 504,000.  The Census Bureau also reported the median sales price for new homes sold in October fell by more than $15,000 from $296,900 in September to $281,500, and the average sales price rose by about $2,000 to $366,000.  At the end of October, the number of new homes for sale totaled 226,000 to represent a supply of 5.5 months at the current sales rate.

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As for mortgages, the Mortgage Bankers Association released their latest Mortgage Application Data for the week ending November 21 showing the overall Market Composite Index decreased 3.2%.  The Refinance Index decreased 5.0% from the prior week, while the seasonally adjusted Purchase Index decreased by 1.0% from a week earlier.  Overall, the refinance portion of mortgage activity decreased to 58.7% of total applications from 58.6%.  The adjustable-rate mortgage segment of activity increased to 6.4% of total applications from 6.3% the prior week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balance fell from 4.18% to 4.14%.

For the week, the FNMA 3.5% coupon bond gained 12.5 basis points to end at $103.44 while the 10-year Treasury yield decreased 4.2 basis points to end at 2.22%.  Stocks ended the week with the NASDAQ Composite gaining 22.61 points to close at 5,127.53.  The Dow Jones Industrial Average fell 25.32 points to end at 17,798.49, and the S&P 500 increased fractionally, 0.94 of a point, to close at 2,090.11.

Year to date, and exclusive of any dividends, the NASDAQ Composite has gained 7.63%, the Dow Jones Industrial Average has lost 0.138%, and the S&P 500 has added 1.49%.  This past week, the national average 30-year mortgage rate was unchanged at 4.00% while the 15-year mortgage rate edged higher to 3.25% from 3.24%.  The 5/1 ARM mortgage rate increased to 3.00% from 2.97%.  FHA 30-year rates remained unchanged at 3.75% while Jumbo 30-year rates increased to 3.84% from 3.83%.

Mortgage Rate Forecast with Chart

For the week, the FNMA 30-year 3.5% coupon bond ($103.44, +12.5 bp) traded within a narrower 36 basis point range between a weekly intraday high of 103.50 and a weekly intraday low of $103.14 before closing at $103.44 on Friday.

As projected last week, the bond traded mostly in a sideways direction between technical support located at the 38.2% Fibonacci retracement level at $103.16 and technical resistance located at the 100-day moving average at $103.71.  The ascending lower trend line remains intact while the slow stochastic oscillator indicating market momentum has made a slight positive crossover while remaining far from “overbought” and this is a positive outcome.  If the week’s employment data supports a December rate hike by the Federal Reserve we could see mortgage rates improve slightly.

Chart:  FNMA 30-Year 3.5% Coupon Bond

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Economic Calendar – for the Week of November 30

The economic calendar is heavily weighted with reports on the labor sector highlighted by the November Employment Situation Summary on Friday, December 4.  Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

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Road Signs – So when should you book that flight? The truth on airline prices

By Yuriy Gorodnichenko, Associate Professor of Economics, University of California, Berkeley and Volodymyr Bilotkach, Senior Lecturer in Economics, Newcastle University

How airlines price tickets is a source of many myths and urban legends.  These include tips about the best day of the week to buy a ticket, last-minute discounts offered by the airlines, and the conspiracy theories suggesting that the carriers use cookies to increase prices for their passengers.  None of these three statements is entirely true.

Studies have suggested that prices can be higher or lower on a given day of the week – yet, there is no clear consensus on which day that is.  Offered prices can in fact drop at any time before the flight, yet they are much more likely to increase than decrease over the last several weeks before the flight’s departure.  Further, the airlines prefer to wait for the last-minute business traveler who’s likely to pay full fare rather than sell the seat prematurely to a price conscious traveler.  And no, the airlines do not use cookies to manipulate fare quotes – adjusting their inventory for a specific customer appears to be beyond their technical capabilities.

What is true about pricing in the airline industry is that carriers use complex and sophisticated pricing systems.  The airline’s per passenger cost is the lowest when the flight is full, so carriers have incentive to sell as many seats as possible.  This is a race against time for an airline and, of course, no company wants to discount its product more than it has to.  Hence, the airlines face two somewhat contradictory goals: to maximize revenue by flying full planes and to sell as many full-fare seats as possible. This is a process known in the industry as yield or revenue management.

Airlines and their bucket lists

Here is how yield management works.  For each flight or route (if we are talking about multi-segment itineraries), the airline has a set of available price levels – from the most expensive fully refundable fare to the cheapest deeply discounted non-refundable price. The industry jargon for these prices is “buckets.”  Then, seats can be interpreted as balls that are allocated among these buckets.

Initial allocation of seats between the price buckets is determined by historical data indicating how well a certain flight sells.  For example, fewer deeply discounted seats will be offered on a flight on Thanksgiving week than on the same flight during the third week of February.  As the seats on a flight sell, yield managers monitor and adjust the seat allocation.  If, for instance, the sales are slower than expected, some of the seats might be moved to lower-priced buckets – this shows up as a price drop.  As noted above, such price drops can occur at any time before the flight.  However, the general trend of price quotes is upward starting from about two to three weeks before the flight departure date.

Of course, an average traveler wants to know when he or she should buy the tickets for the next trip.  Another important question is where to buy this ticket.  Airlines distribute their inventory on their own websites and on several computer distribution systems, meaning that prices can sometimes differ depending on where one looks.  We are not entirely sure what precipitates this phenomenon – likely explanations include differences in contracts between the airlines and the distribution systems/travel agents, implying that different travel agents may not have access to the airline’s entire inventory of available prices.

When to book

The airlines’ yield managers start looking at flight bookings about two months before the departure date.  This implies that it generally does not pay to book more than two months in advance: studies show that initially the airlines leave the cheapest price buckets empty, and yield managers may move some seats into those buckets if a couple of months before the departure date the flight is emptier than expected.  Between two months and about two to three weeks before the flight date, the fare quotes remain mostly flat, with a slight upward trend.  However, and perhaps paradoxically, there is a good chance of a price drop during this period.  We tend to monitor prices for several days – sometimes up to a week – hoping for a potentially lower quote.  It does not always pay off, but sometimes we do manage to save a considerable amount of money.

Two to three weeks before the flight date, the price quotes start increasing.  This is the time when business travelers start booking.  While price drops are still possible, a chance of a price increase is much higher if you wait to book within this time period. This is also the time when one can find significant differences between price quotes, depending on where one looks and what contract they have with the airlines.

Thus, if we book a trip earlier than three weeks before the flight date, we tend not to delay the purchase.  At the same time, we check quotes from multiple travel agents, or go directly to a site that allows for a quick comparison of prices (such as kayak.com or skyscanner.net).  Or check the airline itself.

As for answering the original question we posed, here are some simple tips.  First, if you have to travel during a peak period, such as Thanksgiving week, it is generally best not to delay buying that ticket.  Otherwise, it might pay to monitor the offered prices for some time before committing.  The best strategy for booking within the last couple of weeks before the flight, however, is not to delay the purchase, but to try getting quotes from several agents, which is easy to do in the internet age.