This mornings Consumer Sentiment Report was the worse it's been since 1992. That's a pretty big deal.  Analysts' expectations were for a reading of 69.0, but the actual figure was 63.2.  Not only is that a low number, but it is statistically significantly different from analyst expectations.  I argued in November that analysts had no idea how much our home price depreciation coupled with tougher underwriting guidelines would impact the consumer.  Here's an excerpt:

And That's Why It's Worse Than Most People Think

We have hundreds of thousands of families across the nation in homes that are worth less than what they owe. They need to refinance to get out of their ARMS, but cannot due to both lending guidelines and home values. These families default or short sell which causes the lenders to take serious damage, which in turn causes lending guidelines to be further restricted. We are only just on the way down now. The crash landing has not yet occurred. As I said, there are more ARMS coming due in 2008 than there were in 2007, coupled with a tougher financing environment. When these come due and default or short sell, it further drives down the already decreasing value of real estate. This in turn harms builders who now have to take much less profit than expected and in some cases, losses. D.R. Horton's CEO said "2007 is going to suck," and he was right.

I argue that the aspects that make 2007 "suck" are the in greater supply in 2008. "Experts" and analysts incessantly like to state that housing only comprises a small percent of the entire American economy. This may be true in terms of jobs, but these "experts," all with much more education than me and much more air time are failing to see the biggest one of several critical factors in all of this: HOME EQUITY HAS FINANCED CONSUMER SPENDING. When we talk about the housing market being a small portion of the economy, that may be true inasmuch as construction jobs, but what about all of the ancillary effects?

Where do these experts think consumers are getting the money to buy the plasma TV? Maybe it's on a credit card, but eventually consumers want to consolidate that credit card with home equity. In the past they have done this, used home equity to increase their lifestyle, run up the credit cards again, and get bailed out again by home equity. BUT this will not be available in 2008! The simple fact that housing is a small part of the economy does not take into effect the interconnectedness it has with the rest of the economy. Builders losing money hurts the economy on it's scale, but what about lenders going out of business? Less people can get financed, so more people default, so more investors lose money, and less people can pump money into our economy, both on the end consumer level and the investor level.

Week after week, report after report, we are finally seeing it happen.  This "underestimation" by analysts is a reflection that the market is also underestimating the impacts.  Of course those on the mortgage side "get it," but unfortunately they are relying on other people's money to keep the MBS market healthy.  And those "other people" rely in part on analysts until economic reports actually come out.  So until institutional investors "get it," I maintain there is more room for rates to fall.  Of course that hinges on numerous other factors, but in a vacuum, simply assuming what we know will continue to happen with the consumer, rates would improve.

 As for today, we're at 101-00 AGAIN on the 5.5% coupon.  After some reprices for the worse yesterday, this is leading to a very minimal price improvement.  Fridays recently have been fantastic days for the MBS market, especially when the data is weak.  Hopefully today will be another one.  But the caution is that whenever we start marching up this hill from 101-00 to 102-00 we get smacked down fairly quickly.  Rates are good enough now that locking makes sense if you can't afford the risk.  Be warned that traders may "take up positions" before the inflation reports next week.  So today may be your safest day if Wall Street starts buzzing about inflation on Monday before the reports on Tuesday and Wednesday.