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Monthly Archives: October 2016

The Election Has Drained Everyone. The Housing Industry Hasn’t Noticed

We expected to see a pick up in home sales heading into the fourth-quarter of 2016, and that’s exactly what we are seeing.

Late last week, existing-home sales were reported, and the numbers show that sales were up 3.2% to 5.47 million units on an annualized rate in September. Single-family homes were a highlight of the report. They were up 4.1% to 4.86 million units on an annualized rate.

It appears a little more discounting occurred in September compared to most months. The median price of an existing home fell 2.4% to $234,200. The long-term trend is still up, though, with the median price of an existing home 5.6% higher compared to a year ago.

First-time buyers were another highlight. A solid 34% of existing-home sales were to first-time buyers. Should the trend in first-time buyers continue, as we expect, existing-home sales should remain robust as we head into 2017.

New-home sales were also up in September. Month over month, sales rose 3.1% to 593,000 units on an annualized rate.

But will the impending December interest-rate increase spoil the party?

We’d be surprised if it did. Financial markets have priced in a rate hike as if it were a foregone conclusion: Traders in federal funds rate futures contracts are pricing these contracts with a 75% chance of a rate increase. Meanwhile, the yield on the 10-year U.S. Treasury note continues to hold near a five-month high of 1.8%.

What’s anticipated rarely roils markets; it’s the unanticipated that sends everyone for the exits. Because everyone expects a Fed interest-rate hike, the Fed rate hike should be a non-issue. In other words, we see no reason the good times won’t continue into 2017.  

 

The Reverse Mortgage is Making a Comeback

For older investment property mortgage borrowers, there's a certain type of loan they might have overlooked: reverse mortgages.

Reverse mortgages fell out of popularity after the recession hit the U.S. and the housing market collapsed. But as the industry continues to bounce back, owners are starting to give reverse mortgages a second look.

"A mere 14 percent of Americans have considered a reverse mortgage."

To be eligible for these loans, owners must be at least 62 years old, or own their home outright, or be able to pay off their remaining mortgage balance at closing, according to U.S Department of Housing and Urban Development's standards. Reverse mortgages allow homeowners to get cash for the equity in their home if they need money on short notice. This provides a means of insurance for homeowners when other investments - such as those in the stock market - are in a downturn, and it is particularly helpful for those who experience unexpected expenditures and are strapped for cash, according to The New York Times. 

Has the Millennial Homebuying Wave Arrived?

Home builder sentiment posted a strong score of 63 on the Wells Fargo/NAHB’s Sentiment Index for October. This was a two-point slip compared to September, but September was a five-point surge over August. The bottom line is that builders remain overwhelmingly optimistic, and they are even more optimistic about future home sales: the future sales component of the index has risen to 72.  

Now that a growing cadre of younger buyers are finally taking to homeownership, home builder sentiment and activity should remain elevated as we head into 2017. 

Last week, we reported on the increase in millennial interest in homeownership. This week Realtor.com reports that first-timers (mostly the young) will compose 52% of prospective home buyers in 2017. Last year, the same survey found that only 33% of prospective buyers were young first-time buyers. In addition, Zillow compiled a survey of 13,000 respondents and found that half were under age 36. These younger buyers accounted for 47% of all purchases. 

That more millennials are finally embracing homeownership is no surprise (though we expected the trend to take hold sooner than later). Despite the surfeit of reports expounding the benefits of renting, owning imparts important psychic benefits that renting can’t match. Knowing that you can paint a wall, decorate a room, or hang a picture to your liking without defending your actions is what makes a house a home, and you can really only have home if you own the house.     

Women are Buying More, Defaulting Less Than Men

When it comes to investment property mortgages, men and women have their differences. 

That's according to a new study from the Urban Institute, which details several surprising findings around how men and women handle their mortgage payments.

A major finding of the report is that women - particularly single women - are becoming a force to be reckoned with in the mortgage industry. Although single women have a greater likelihood of having poorer credit scores, living in lower-income neighborhoods and paying higher-priced mortgages, they are also more likely to put down a larger down payment and have a smaller loan-to-value ratio than single men, according to the study.

Additionally, single female borrowers are less likely to default on their mortgage payments than their male counterparts, the report found. This conclusion is surprising because lower credit scores might indicate that these borrowers would be more likely to miss payments, but the opposite turns out to be true, the study's researchers explain. This trend held true across all racial backgrounds and even during the recession, the report found. The motive behind this is most likely a higher rate of risk-aversion behavior among women than men, according to the study.

Bloomberg also came out with a recent study which found that in a wide range of markets, including Boston, Charlotte, Columbus, Los Angeles, Louisville, and San Francisco, the share of women making more than $100,000 has increased from 2012-2014. These numbers correspond with a National Association of Realtors report which find single women have consistently been buying homes at a higher rate than single men throughout the 21st century.

History Doesn’t Repeat, but It Often Rhymes.

Payrolls increased by 156,000 last month, and the unemployment rate drifting from 4.9% to 5.0%. The unemployment rate actually rose because more discouraged workers sought employment, a modest but encouraging economic sign that may be just good enough to convince financial markets that it’s “game on” – an interest-rate increase is on the way. 

Election Day is Nov. 8; Federal Reserve officials meet again on Nov. 2. We’d be shocked if the Nov. 2 meeting produced an interest-rate increase. Most people concur with us. Traders in federal funds rate futures contracts are betting only an 11% chance of a rate increase at the next meeting. As for December, that’s a different story. These same traders are betting a 70% chance a rate increase will occur then. 

Of course, we’ve been down this road before. Last year around this time, mortgage rates began to drift higher as the market priced in a rate increase for December. But once the rate increase was announced, mortgage rates plateaued and then drifted lower through the first half of 2016. Those lows held until a few weeks ago. 

As Mark Twain observed, history doesn’t repeat, but it frequently rhymes. Should the Fed raise the federal funds rate in December, the increase will likely be no more than 25 basis points – the same increase as last year. And if history really does rhyme, we could see mortgage rates drift lower again.

HARP Extension a Major Help to Low Equity Homeowners

Last month, the New York Times highlighted Madonna Barwick, a teacher in Canfield, Ohio, whose mortgage rate dropped 4 percent due to a HARP refinance. “It was a blessing,” she said.

The HARP loan program is the go-to tool for homeowners who are either underwater or have low equity. Since the housing crisis, 3.4 million Americans have taken advantage of the program. In January of 2015, the New York Times reported that 700,000 homeowners could still benefit from a HARP refinance. Today, only 323,000 remain.

While this is a sure sign that homeowners are utilizing HARP, the number was still large enough that the government has extended HARP to September of 2017 (it was scheduled to expire at the end of 2016).    

This move will allow more people to refinance their mortgages, and get a reduction in their mortgage payments. Twelve percent of homes fell into this category at the end of June, Erin Lantz, vice president for mortgages with the real estate site Zillow, told The New York Times.

"An estimated 300,000 people are still eligible for the program."

While 3.4 million homeowners have taken advantage of this initiative since it began in 2009, the fact that an estimated 300,000 people are still eligible for the program shows there are still levels of weariness in the public. Experts say this is because many people either aren't aware of the program, believe they are ineligible or think there's some sort of catch for applying. In addition to HARP's extension, the Federal Housing Finance Agency announced another program aimed at assisting struggling homeowners.

Lenders Fannie Mae and Freddie Mac, which are overseen by the federal government, will offer a refinancing option for homeowners with a high loan-to-value ratio - meaning they owe more than on their home than it's valued for - by offering them cash to make mortgage payments, Miami Agent magazine reported. To be eligible for the program, individuals must not have missed a mortgage payment in the past six months, not missed more than one payment in the past year, have a source of income and the refinance must have a benefit for them. Furthermore, homeowners with existing HARP loans are not eligible for this method of refinancing. This option will become available to consumers in October 2017, according to Miami Agent magazine.

Market Preview: Are Words Replacing Data?

The yield on the 10-year U.S. Treasury note spiked 10 basis points last Tuesday after Richmond Federal Reserve Bank President Jeffrey Lacker added his support for raising the fed funds rate sooner than later. The pro-interest-rate-hike contingent of Fed officials is growing. Several regional Fed bank presidents (like Lacker) now believe that implementing a series of small interest-rate increases would be good for the economy, even if the economy continues to post sub-standard growth. (By the way, Fed Chair Janet Yellen isn’t one of the supporters.) 

A rate hike this December appears more likely this week than last week. Traders in fed funds rate futures contracts now are betting a 64% chance a rate increase will occur in December.

This is all rather new in the annals of the Federal Reserve’s 113-year history. That is, Fed officials publicly guiding markets on interest-rate policy.  

In the good ole days, before the 2008 financial crisis, Fed officials were mostly supporting players on the financial stage. Today, they’re lead actors: Any utterance by a Fed official produces a meaningful swing in interest rates.

Accurately forecasting mortgage rates is a difficult enough proposition. It’s all the more difficult when a Fed official can change the outlook with an off-hand remark to the media. How often over the past three years has a Fed official hinted that a rate increase was imminent only to see the rate increase postponed? More than we can count. 

That said, as difficult as it may be, we’ll keep forecasting anyway.

Foreign National Loans Are Making a Comeback

The U.S. is experiencing a boom in foreign national loans.

More and more overseas buyers are shelling out cash for real estate in the U.S. In the past year, 50 percent of foreign homebuyers paid cash for their investments, according to the National Association of Realtors. But a strong market value of the U.S. dollar and rising home prices have blocked some buyers from purchasing homes outright, which means they need to look for other financing options, The Real Deal explained. Strong interest in the American real estate market from foreign buyers has been a large contributor to inflated home prices, National Mortgage News reported.

"Applicants must make as much as a 30 percent down payment."

Many foreign buyers flock to nonconforming loans - which are different from conventional loans and jumbo mortgages - because they allow them to buy more expensive homes than they could through traditional means. But this comes at a price. Applicants must make as much as a 30 percent down payment on loans up to $1 million, and even more for bigger loans, The Wall Street Journal reported.

Market Preview: It's Still Mostly Good

We thought that new-home sales would post a bit higher than they did. After all, home-builder sentiment has been on the rise and is at a multi-year high. What’s more, July saw a 12.4% surge in new-home sales to 654,000 units on an annualized rate.

Unfortunately, the momentum proved unsustainable, at least for August. New-home sales posted at 609,000 units on an annualized rate for the month. This is obviously quite a bit lower than July’s sales, and quite a bit lower than our expectations. 

But taking a glass-half-full view, we see that August sales really aren’t all the disappointing, because the long-term trend remains up. Year over year, new-home sales are up 20.6%. Year to date, sales are up 13.3% compared to the same year-ago period. 

New-home buyers are at least seeing more affordability. Prices have fallen in recent months, which points to builder discounting. The median price, at $284,000, is down 3.1% on the month and down 5.4% on the year. In addition to discounting, there are signs that more lower-priced new homes are hitting the market. This is an obvious positive for drawing more younger first-time buyers into the market. 

Housing – new-housing activity, in particular – has been the one persistent and dependable growth engine in the U.S. economy. Paradoxically, housing’s strength could be another reason the Federal Reserve continues to postpone an interest-rate increase. The Fed doesn’t want to risk stalling the one engine that’s firing on all cylinders. Then again, if the U.S. economy is as strong as some of the Fed officials believe, then the housing engine should be able to endure higher interest rates without stalling. 

As for the economy, it’s growing, but hardly at a gangbuster pace. Second-quarter gross domestic product (GDP) was revised up this week to 1.4% on an annualized rate.  From a historical perspective, 1.4% annual growth is just “okay.” The good news is that the economy saw an uptick in nonresidential investment and consumer spending. Whether that’s enough to turn Fed sentiment more hawkish on interest rates remains to be seen.