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Will Lower Growth Lead to Lower Housing Activity?

Our expectations for meaningful first-quarter economic growth are low. We’re not alone in our sour sentiment. Many economists -- those at the Atlanta Federal Reserve Bank, Goldman Sachs, and the International Monetary Fund -- also expect little in the way of economic growth. Anything above 2% (annualized) for the quarter would be a minor miracle. 

Many segments of the economy have fallen into inertia. Of greater immediate concern, sentiment has turned less optimistic in the one segment that has continually chugged ahead for the past five years. 

Housing has led the economy since 2012. Over that time, home-builder optimism has trended in one direction -- up. The trend took a detour in April. The home-builder sentiment index posted at 68 for the month. The posting is still positive, but not as positive as in March. 

It’s understandable that home builder sentiment should slip given the recent data on housing starts.

The first quarter ended with a thud, with starts dropping 6.8% month over month to 1.215 million an annualized rate (1.5 million is the historical long-term average) in March. This was the weakest posting since November. The drop in starts dropped quarter-over-quarter growth to break even. A meaningful pickup in starts might not arise until the more distant future. Permits for single-family starts fell 1.1% month over month. 

Of course, one month of data neither makes nor breaks a trend. Starts can be notoriously volatile month to month. Still, we’re eager to see starts regain traction. New-home construction, and all the ancillary businesses it supports, is vital to sustaining what little economic growth is occurring. With many segments of the economy underperforming, the one reliable engine -- housing -- needs to keep things moving in the right direction. 

We’re also eager to see an upshot in corporate earnings -- another indicator of a straightening economy. So far, the numbers are encouraging. Data provider FactSet reports that 6% of the companies that compose the S&P 500 have reported first-quarter financial results. Seventy-six percent of these companies have beaten the mean earnings-per-share estimate; 59% have beaten the mean sales estimate.

The economy might be sputtering at the moment, but we’re still optimistic that we could see it hitting on all cylinders before the year is over. 

How Buyers Can Be Preapproved for a Mortgage

Potential buyers who want to stand out from their competition should obtain a mortgage preapproval. Doing so indicates to sellers that buyers are serious about making an offer on a listing and can match the asking price.

But lenders don't preapprove every buyer. Certain requirements must be met.

Here are a few tips to help individuals increase the odds of being preapproved:

Pay debt

Every individual has to make an effort to pay off debt while still tackling monthly bills. By reducing his or her debt level, a buyer boosts his or her credit score and demonstrates a positive payment history to lenders.

A person may need to be strategic when deciding which debt to pay off first, however. Buyers should handle delinquent accounts first to improve their credit scores. They should then move onto paying off high-interest debt.

Correct credit report mistakes

Credit reports aren't perfect, and buyers must fix those errors. If a report contains false or incorrect information, it should be addressed early in the homebuying process. Doing so will help eliminate unforeseen hiccups during the loan process.

Gather documents

According to HSH.com, buyers will typically need to provide the following documents during the preapproval process:

  • Two years of federal tax returns.
  • Two years of W2s.
  • Thirty days' worth of pay stubs.
  • Sixty days (or a quarterly statement) detailing all assets in checking, savings and investment accounts.

Control spending

Taking on more debt or opening new lines of credit are a few ways to be denied a mortgage preapproval. Buyers can avoid being denied by sticking to a budget and lowering spending, NerdWallet explained.

With 2017 projected to be another hot year for purchasing homes, potential buyers should follow the above tips to better their odds of being preapproved for a mortgage.

Why Are Mortgage Rates at 2017 Lows?

Three months ago, talk of accelerating economic growth and rising inflation was all the rage. Business activity would accelerate once President Trump implemented his pro-growth agenda, which included repeal of the Affordable Care Act and lower income tax rates for businesses and consumers.

In such a scenario, surely the Federal Reserve would be aggressive in raising the federal funds rate -- at least three increases were in the cards. In anticipation of such a scenario, interest rates across the board begin to rise. The yield on the 10-year U.S. Treasury note hit 2.6%; quotes of 4.375% on the prime 30-year conventional loan were occurring with greater frequency. 

Fast forward to the present and we find the outlook has materially changed. Many economists have throttled back their growth expectations, and it appears for good reason when one vets the latest employment numbers. Payroll growth posted at a paltry 98,000 for March. This was the lowest monthly increase since June 2016. 

President Trump’s pro-growth agenda, which was expected to be pushed through Congress at maximum velocity, has hit a political brick wall. Here we are in April, and Trump and the GOP have abandoned the Affordable Care Act issue. What’s more, the Trump administration has signaled there won't be any attempts at tax-rate cuts anytime soon. 

Over the past month, exuberance has given way to apathy, which is reflected in a downturn in stock prices and an increase in risk avoidance. The yield on the 10-year Treasury note has dropped below 2.3%. Traders in fed funds rate futures contracts are giving good odds for a second Fed interest-rate increase; they’re giving only fair odds for a third rate increase. A month ago, they were giving good odds all around. 

So it appears we are caught in an economic stasis. Given the gridlock in Washington, outside of war (which would be an obvious bad thing), there isn’t much on the horizon to get the economy or interest rates moving one way or another. Therefore, we see current rates continuing to dominate, though today we’d be even less surprised to see sub-4% quotes on a 30-year loan pop up with greater frequency.

Why Millennials Still Have Difficulties Finding a Home

Despite historically low interest rates and a growing economy, millennial homebuyers still run into obstacles when trying to buy a home.

These days, millennial buyers simply can't find a home to purchase.

Inventory remains tight

According to the National Association of Realtors, housing inventory increased 2.4 percent in January to about 1.7 million homes, which is equal to a supply of about 3.6 months. However, inventory levels still remain at their lowest point since the NAR started tracking the statistic in 1999, and have declined year over year for the previous 20 months.

Many millennials now find themselves in the challenging position of wanting to buy a home, but there aren't any to purchase. A housing shortage directly affects millennial buyers in three ways.

First, having fewer available homes makes it difficult for buyers to take advantage of low interest rates before future hikes.

Second, a low supply prevents millennials from building more equity and wealth, as they may have to wait months or years to finally find a home, The Washington Post stated.

Finally, low inventory drives up home prices. Millennials finally think they can afford a starter home, but competition between other prospective buyers eventually puts a home out of financial reach. Not only are starter homes becoming more expensive, but they aren't lasting long on the market.

The Unrelenting Ascent

Another week and another indicator show that home prices continue to rise relentlessly. 

The S&P/Case-Shiller Home Price Index confirmed last week what we already know: homes prices continue to rise, as they have since the end of the 2009 recession. This week CoreLogic seconds the confirmation: Its home price index showed prices in February were up 1% month over month. Year over year, CoreLogic’s index shows that prices are up 7%.

CoreLogic sees no end in sight. Its soothsayers see their home price index rising 4.7% in 2017, with monthly increases coming in 0.4% increments. 

Most of the major home-price-data providers  -- Case-Shiller, CoreLogic, Trulia, Zillow -- present their numbers based on a distilled national average of prices. All these national averages have been rising consecutively month-over-month for the past five years. The relentless ascent has upped the “bubble” chatter. 

But as we mentioned last week, there is a mitigating factor to bubble concerns: The indexes are reported in nominal dollars. When adjusted for consumer-price inflation, prices are somewhat less bubbly. In real terms (inflation adjusted), prices are actually still below the 2006 peaks. 

But we have another concern related to relentlessly rising prices: reduced affordability. 

The U.S. Home Affordability Index from ATTOM Data Solutions shows affordability at its lowest level in eight years. In the first quarter, affordability slipped below the average historical lows in 25% of the markets ATTOM follows. 

But again we have a mitigating factor: Averages rarely, if even apply, to any single market. (In fact, averages rarely apply to any individual or any single business.)  What’s occurring in the housing market in San Francisco could be diametrically opposed to what’s occurring in the housing market in Houston. If the two markets are averaged, a figure is produced that would likely be meaningless in describing the economic reality of either market. 

Yes, we frequently report the big nationwide macro numbers (the averages and the aggregates). But it’s important to remember that these numbers have no independent life of their own that’s separate from the individual markets that form them. 

Questions remain on housing market, economy

Is the economy moving too fast or not fast enough?

​The March 15 decision from the Federal Reserve to raise interest rates for the third time since before the 2008 financial crisis has largely been seen as a positive development, even if it could cause mortgages and other forms of debt to become slightly more expensive. More promising was the general consensus view of the U.S. economy's trajectory over the next few years. Fed officials seemed to signal a willingness to continue to raise interest rates incrementally, potentially instituting two more rate hikes in 2017 alone. Since interest rates are increased to slow the rise of inflation, and inflation is generally tied to spending and growth projections, most take this decision as a sign that the U.S. economy is healthier than it's been in some time.

"Economists aren't sure if inflation will become a problem in the near future."

But like so much in economics, there are two sides to this coin. As explained in analysis from Freddie Mac, experts disagree as to whether the economy is over- or under-performing as it relates to inflation.

​On the one hand, inflation as measured by the Consumer Price Index is rising, almost at the rate of 2 percent per year which the Fed considers an optimal level. But with job growth and other indicators as strong as they are currently, some say inflation should actually be higher. Moreover, mortgage interest rates remain historically low as home values continue to rise.

By examining the relationship between inflation and the housing market, Freddie Mac's analysis offers three different scenarios, each with a high, medium or low degree of likelihood (as judged by the current political and economic climate):

​Most likely: Government approves stimulus through tax cuts and spending​

A steady yet manageable rise in inflation leads to a continuation of low mortgage interest rates and just under 5 percent annual appreciation of home prices.​ This scenario is deemed most likely by Freddie Mac.

​Somewhat likely: Government approves major tax cuts and federal spending hikes that exceed expectations

The second-most likely scenario is essentially the first projection on overdrive. With a strong grip on Congress, the U.S. could pass "expansionary fiscal policy [that] exceeds expectations." This would include major tax cuts as well as more federal spending. The result would push total economic growth higher, but also boost mortgage interest rates, home prices and inflation. This could cause home sales to drop precipitously.

​Least likely: Government forgoes stimulus and/or stimulus fails

The least-likely scenario is one where fiscal stimulus either fails in its objectives, or is never enacted. Home sales would rise as lower mortgage rates make it easier to enter the housing market, but real estate investors and financial institutions would suffer.

The latest actions by the Fed have broad implications on the U.S. housing market.

Is there room to grow?

The key question at the heart of this discussion is how close the U.S. economy in general is to its full growth potential. As Neil Irwin of The New York Times explained, answering that question requires first understanding what maximum growth even is. The Congressional Budget Office estimated that the country's gross domestic product will improve to a 2.5 percent growth rate at the end of 2017. However, newly elected President Donald Trump has expressed a willingness to grow the economy at almost twice that rate.

Unlike with how an individual or even a business manages finances, though, high growth can be too much of a good thing. When GDP rises quickly, rapid inflation is often the result. To reach full growth potential, Irwin explained, the U.S. needs to focus on operating more efficiently. Using three different metrics, Irwin noted that the nation may not be reaching the same economic heights as it was in the mid-2000s. Unused manufacturing capacity, office vacancy and, most critically, the unemployment rate of working-age people, are all still higher than they were 10 years ago.

If the U.S. can put people back to work who stopped trying to even reenter the job market after the recession, it could see sustainable growth in the form of more affordable homes, appreciation of real estate and more. How we get to that point, though, is yet another matter entirely.

New home sales numbers beat expectations

The latest data on sales of new construction, single-family homes in February beat economists' expectations, according to HousingWire. The data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development show new home sales increased 6.1 percent on a month-to-month basis and almost 13 percent on a year-over-year basis. With a seasonally adjusted figure of 592,000 total sales in February, analysts said this critical measurement is finally reaching levels in line with historical averages.

The news is certainly promising, but comes tempered with some mixed messages. While new home sales rose, HousingWire noted that their median sales price fell for the second month in a row. New construction sold in February for a median price of $296,200, down from $312,900 in January.

That price drop was itself part of a larger trend of home price behavior. The Federal Housing Finance Agency reported March 22 that their House Price Index, which tracks national market data, recorded no month-to-month increase in January. That marks only the second time since 2012 that home prices have not risen from one month to the next. Compared to January 2016, though, the most recent HPI reading was still 5.7 percent higher.

Census Bureau data also found that even with home prices stalling or falling slightly, there are signs of pent-up demand in the market. Inventory of new homes also fell in February, with an estimated 5.4 month supply of product available at the end of the month. This is a slight decrease from the 5.7 month new home inventory reading in January.

 

Markets Accept Reality

We’ve highlighted numerous times in past missives the difference between perception and reality.  Market participants frequently perceive both as the same when they’re frequently not. 

The perception was that a new president would unilaterally incite instant change: Regulations would be swept away, income-tax rates would be slashed, health care would be reformed, infrastructure spending would ratchet higher. All this would happen, if not in a New York minute, at least as soon as the new president formed his cabinet. The reality is that change -- political change in particular -- comes as a glacier comes, and not as a raging river.

This reality has sunk in with many market participants. The sweeping changes that Mr. Trump proposed on the campaign trail have become less sweeping now that he’s President Trump. No one should be surprised. Political opponents obviously offer resistance. Less obvious, though always inevitable, so do many political allies. People eagerly profess they want change; they’re far less inclined to initiate it.

Reality is less inspiring than perception. This is reflected in recent financial-market activity. Investors have taken more money out of riskier assets and placed more money in less-risky assets: stocks have sold off and bond prices have risen, which has caused bond yields to fall. 

The yield on the 10-year U.S. Treasury note has settled at around 2.4%. The 10-year note influences mortgage-backed securities, which, in turn, influence mortgage rates. In less than a week, mortgage rates have dropped from a three-year high to the lowest level of March.

This suggests that stock market gains will be harder to come by.  At the same time, credit-market volatility should be reduced, which gives us more reason to believe that current interest rates should hold for some time. 

At this point, the odds that financial markets could turn negative outweigh the odds that they could turn more positive. This points to more weakness in equity prices; it could also lead to more strength in bond prices. Though the odds of it not happening are greater than those of it happening, a sub-4% quote on a prime 30-year fixed-rate mortgage isn’t beyond the realm of possibilities. 

Despite Fed rate hike, US real estate in prime condition

The big news out of the business world this week largely concerned the Federal Reserve, which voted March 15 to raise its key interest rate for the third time since 2008. While the rate increase was a relatively minor one (only another quarter of one percent), and the Fed's actions generally go unnoticed by the average American, the move does offer the latest pulse​ check on the economy at large. This information is useful to anyone buying, selling or owning a home in 2017, and here's why:

Rates rise, but stay historically low

When the Fed decides to increase its key interest rate, it essentially raises the cost of doing business for banks in the U.S. and around the world. As a result, the interest rate on products like mortgages will usually tick up. However, this difference is often miniscule, and will still keep the cost of a home loan near its lowest point in history. As Marketwatch explained, if the interest rate on a standard 30-year mortgage rises by just 0.5 percent, that will translate into no more than an extra $80 per month paid by the borrower. While this certainly adds up over the life of the loan, it's a cost that can be reduced or recouped later on through refinancing, purchasing points at closing and several other methods.

Speaking of refinancing, financial professionals often advise against doing so when the Fed begins to raise rates. However, that's not to say a refinanced mortgage isn't an option for anyone right now. Marketwatch offered several suggestions for homeowners looking to retool their mortgages in light of this year's economic developments:

  • Cash-out refinancing is an option that can reduce the amount homeowners pay on non-mortgage debt, like debt from credit cards and other loans. In a cash-out refinance, homeowners convert some of the equity in their home into cash they can use for any purpose. Ideally, this money can be used to pay off higher-interest debt, leaving monthly mortgage payments unchanged but reducing other expenses.
  • Switching to a shorter-term loan might behoove borrowers who have 30-year fixed-rate mortgages right now. By converting to a 10- or 15-year loan, borrowers will need to make additional payments now, but can pay off the total balance faster and usually save money in the long run.
  • Opting out of mortgage insurance, or PMI, is a good move that can be achieved either before a loan is closed or with a refinance. PMI can be avoided by paying a larger down payment upfront, or with a refinance arrangement that focuses solely on eliminating the fee.

Why it's still a good time to buy

Current homeowners and mortgage borrowers have options when it comes to reducing their monthly payments. However, with this latest financial news, should prospective first-time buyers keep waiting on the sidelines, rather than purchasing a home in 2017?

For most, it's still a great time to buy. According to mortgage interest rate data from Freddie Mac, the current average 30-year loan rate of 4.17 percent is neck-and-neck with the average logged in 2014. In addition, since 2008, average mortgage rates have never gone above 5 percent. That means since Freddie Mac started tracking mortgage rate data in 1972, it's never been a better time to be a borrower than in the last decade.

With a wide variety of tools at their disposal, along with unbeatable interest rates, the real estate market appears primed to remain in everyone's favor for the foreseeable future.

Rates on the Rise

Actions are starting to match words. 

For the second time in three months, the Federal Reserve raised the federal funds rate -- the benchmark rate for other interest rates -- this past Wednesday. Specifically, the Fed raised the range on the fed funds rate 25 basis points (a quarter of a percentage point) to 0.75% to 1%. The previous range was 0.50% to 0.75%. Now, all attention turns to anticipating future interest-rate increases.

As for the future, low odds are being given for another fed funds rate increase the next time Fed officials meet in early May. But for the meeting after that, in June, the odds jump to 50/50. Traders in fed funds rate futures contracts are betting another 25-basis-point increase in June, or soon after. They’re also betting that another 25-basis-point increase will occur before the year ends. In other words, they’re betting that we’ll end 2017 with three rate increases, which would put the range on the fed funds rate at 1.25% to 1.5% heading into 2018. 

So, what does this mean to us? 

If market participants have already priced three rate increases (for the year) into the market, it really doesn’t mean a lot.  Market prices aren’t determined by what’s occurring at the present. They’re determined by anticipating the future. If the majority already anticipates a future with two more rate increases, then it’s likely we won’t see much volatility in mortgage rates going forward. 

The fact that market prices are determined on the margin (anticipating the future) is reflected in the financial axiom “buy the rumor, sell the news.” In other words, move to make a profit on the rumor. When the reality sets in, move to lock in a profit (or a loss). 

In our case, we saw the opposite action occur. We saw the rumor sold and the news bought.

Mortgage rates trended higher into the Fed’s rate increase. Higher rates are indicative of lower bond prices (investors selling bonds). When the Fed announced its rate increase, interest rates, including mortgage rates, dropped. In fact, the yield on the 10-year U.S. Treasury note dropped seven basis points after the announcement. Mortgage rates also dropped. Quotes of 4.25% on a prime conventional 30-year fixed-rate loan were offered after the Fed raised the fed funds rate. In some markets, this was a 0.125% improvement over quotes offered earlier in the day. The intraday move was indeed big. 

In short, market participants sold the rumor and bought the news: Money gravitated back to long-term securities, including the 10-year U.S. Treasury note and mortgage-backed securities. Bond prices rose and yields (and rates) fell. 

As we write, the market is priced for two additional 25-basis-point rate increases for 2017. At that  market pricing, which we expect to hold, we see the prime 30-year mortgage settling in a 4.125%-to-4.25% range for the immediate future.