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Monthly Archives: November 2016

Interest Rates Just Surprised Everyone, but Relax

Mortgage rates are on their way up.

Before diving into the details, it should be known that this recent rate spike is far from unprecedented. According to Freddie Mac, the average 30 year fixed mortgage rate between 1975 and 2015 was 8.49%. When only counting years 2001-2015, the average 30 year fixed rate was still 5.31%. According to CNBC, the average 30 year fixed rate as of November 30th 2016 was 4.23%

But mortgage rates are still on their way up, and they will change the lending environment a bit.

The half a percentage point increase has added hundreds, or even thousands of dollars, to some homeowners' mortgage payments, according to The New York Times. The quick increase surprised industry experts, and it is expected to have implications for the housing market in 2017 if current trends continue, the source noted. The Mortgage Bankers Association expects refinancing to drop 46 percent in 2017, and experts also predict it will stunt consumer-loan growth, The Wall Street Journal reported.

"Anybody who was floating or didn't lock in a rate is screaming at their lender: 'How could you do this to me?'" Guy D. Cecala, chief executive and publisher of Inside Mortgage Finance told The New York Times.

The spike in interest rates led nervous borrowers to apply for mortgages en masse. According to data from the Mortgage Bankers Association, the number of mortgage applications rose 13 percent the week that ended Nov. 18 from the week before, The Wall Street Journal reported.

Many experts are also expecting the Federal Reserve to raise interest rates when the board meets in December, The New York Times reported. Some expect this to affect the decision of some prospective homebuyers to purchase a home, the source noted. But overall, the increase in mortgage rates shouldn't affect the mortgage industry too adversely.

"Most consumers don't make decisions based on a change in mortgage rates," Svenja Gudell, chief economist at Zillow, told The New York Times. "We're dealing with such a tight inventory, I think they're more focused on finding a home that they can afford."

*content is from Brafton INC, 2016

Interest Rates and Housing Starts: An Unlikely Couple Climb Together

Mortgage rates are at a 17-month high.

But given positive housing activity, we see little reason to fret quite yet over rising mortgage rates. Housing activity remains brisk.

Indeed, construction of new homes surged nearly 26% to the highest level in nine years in October.

Housing starts posted at 1.32 million at an annualized rate, up from a revised 1.05 million in September. Multi-family starts lead the charge, but single-family starts kept pace, reaching a rate of 869,000 units, another nine-year high.

Better yet, permits are running 5% above year-ago levels. This suggests that home builders will continue to ramp-up construction to meet a steady increase in new-home demand. At the rate monthly starts are increasing, we’ll soon reach the historical long-run average of 1.5 million annual new starts. 

Most market watchers expected rising interest rates to restrain new-home activity. The expectation was reflected in home-builder stocks. As interest rates rose through October, home-builder stocks fell. The SPDR S&P Home Builders ETF (XHB), a fund of home-builder stocks, lost 10% of its value from late September through early November. The correlation appears obvious: rates rise, housing activity falls. 

But the causation is somewhat less obvious, and so, too, is the correlation. When interest rates (and mortgage rates) spiked after the November election, so did home-builder stocks. The SPDR S&P Home builders ETF is up 11% in the past two weeks. Investors have regained their confidence in the outlook for new housing.

As for the existing-home market, the news also remains positive.  Sales increased 2% to 5.6 million on an annualized rate to exceed most economists’ expectations. Year over year, sales are up 5.9% and are at their highest level February 2007.

How the housing data shape up for November will be of particular interest, given that mortgage rates are up a half-percentage point for the month. So far, the anecdotal evidence is encouraging. We’re seeing sales, and we’re seeing people still willing to finance their sales. 

We’re not really surprised that interest rates and housing activity have risen hand in hand. We mentioned last week that rising interest rates frequently correlate with gross domestic product (GDP) growth, which correlates with employment opportunities and personal wealth. As for personal wealth, stocks have traded higher this month: The Dow Jones Industrial Average is at an all-time high. The wealthier people feel, the more likely they are to engage a big-ticket purchase like a home. 

Yes, interest rates are an influencing factor on housing, but they’re not the only influencing factor.  Contrary to popular perception, it’s not all that unusual to see housing activity rise with interest rates. This occurred in the previous decade; don’t be surprised if the same dynamic plays out this decade. 

Why the Super Wealthy Choose to Get Mortgages

Mortgages aren't normally associated with wealthy people. When the mega-rich - such as Brad Pitt or Mark Zuckerberg - buy a home, people assume they buy their homes outright because they definitely have enough money in the bank to do it. But there are some surprising benefits for wealthy individuals to take out a mortgage.

"Financing your home allows an individual to take a big tax deduction."

Although some people might be wealthy right now, they could be in a profession where their income drops drastically or goes away altogether at any time. This is particularly true for professional athletes. Aaron Rodgers, quarterback for the Green Bay Packers, took out a $1 million mortgage on his $2 million home, despite having a $110 million contract, according to MarketWatch. Professional athletes can suffer career-ending injuries in any game during the season, so financing a big investment such as a house will allow them to keep more cash on hand, the source reported. 

But that's not the only reason to opt for a mortgage. Financing your home allows an individual to take a big tax deduction while he or she is paying off the loan, according to Go Banking Rates. Homeowners are able to use their mortgage interest and property taxes to get a deduction when they do their taxes. Mortgage interest deductions saved taxpayers $75 billion in the 2015 fiscal year, according to Go Banking Rates.

Even Zuckerberg - whose net worth is valued at more than $56 billion - took out a mortgage for a home he bought in 2012. At that time, he opted for an adjustable-rate mortgage that started out below the rate of inflation, essentially allowing the Facebook founder to borrow money for free, according to The Christian Science Monitor. If his interest rate was to rise substantially, wealthy people such as Zuckerberg are capable of buying their homes outright, saving them money and giving them peace of mind.

Up, Up and Away

It has been a heckuva week for interest rates in general and mortgage rates in particular.  That’s putting it mildly. 

Since the election, the yield on the 10-year U.S. Treasury note has soared nearly 40 basis points to 2.25%.  The yield hasn’t been this high since early January. 

And as the 10-year note goes, so, too, go mortgage rates.  The 30-year fixed-rate loan has kept pace with the 10-year note.  A couple weeks ago, 3.625% was a frequent rate quote on a prime conventional 30-year loan. Today, 4% is the likely quote you’ll receive on the same loan. 

As you’d expect, the spike in rates has set lending activity on its heels. Demand curves are, after all, downward sloping: The more something costs, the less of it that’s demanded; the less something costs, the more of it that’s demanded. Last week, costs rose for mortgages. Refinance applications were down 11%, while purchase applications were down 6%, according to the Mortgage Bankers Association’s latest weekly survey. 

The good news is that mortgage rates are still low by historical standards. The average rate on a 30-year fixed-rate mortgage is 4.9% over the past 10 years. If we go back to the 1990s, the average rate was 8.1%.  The problem is that when people focus on history, recent history anchors expectations. For the past four years, the average rate on a 30-year loan has been below 4%. This year, the average has been significantly lower than 4%, with a 3.6% average rate. (All averages are based on Freddie Mac data.) 

Of course, everyone wonders what higher interest rates mean to the future of housing and mortgage lending. 

To be sure, ultra-low lending rates have helped housing maintain an upward trajectory. The math is simple enough: the lower the financing rate, the more house you can buy.  On the investment end, the lower the financing rate, the higher the present value. Everyone rightly wonders if rising rates will upset the current housing-friendly dynamic.

That said, regulatory reform could provide a meaningful offset.   

Risk aversion has run high since the 2008 financial crisis. But this risk aversion associated with credit-granting has been further elevated by regulatory risk. Lenders have faced greater legal hazards related to mortgage lending. The biggest lenders have paid billions of dollars in fines related to defaulted mortgages.

Yes, the Trump election has brought higher interest rates, but it could also bring regulatory reform. A more-lender-friendly regulatory environment could be in the waiting. During his campaign, Trump trumpeted the need to rollback the more onerous aspects of lender regulation, beginning with Dodd-Frank. How higher lending rates and more liberal lending standards would jibe remains to be seen.

Current financial-market expectations point to an interesting start to 2017, to say the least.

Banks Don't Rule the Mortgage Industry Anymore

Step aside banks, there's a new sheriff in the mortgage lending industry.

According to a new analysis by Inside Mortgage Finance, nonbank lenders gave out 51.4 percent of mortgage loan dollars in the third quarter of 2016, The Wall Street Journal reported. That's up from the 46 percent of total mortgage originations they had for all of 2015, the source noted. Overall, these lenders have accounted for 48 percent of mortgage originations this year, according to 24/7 Wall Street. These institutions have been making up a lot of ground on banks in recent years, as new research is demonstrating.

In a new S&P Global Market Intelligence report on the largest mortgage originators, four major banks still held the top spots, but 12 nonbank lenders appeared on the list as well, according to the Austin Business Journal. The market has been favoring buyers this past year, and low interest rates have caused an increased interest from people in purchasing homes, the source explained.

The Market Preview: Now What?

We’re unsure which is worse: the pre-election analysis or the post-election analysis? It doesn’t really matter because it’s all speculation, and it’s speculation that will likely be proven wrong.

We were told pre-election that Hillary Clinton was the status quo; she was the known quantity. Because she was the known quantity, stock prices would climb if she were elected. Bond prices, on the other hand, would fall (and yields would rise). Bond prices would fall because investors would be less risk averse and the Federal Reserve would be more emboldened to raise interest rates.

Of course, we all know the outcome of the election.

Out of the gate, Trump’s victory set stocks back. Indeed, late into the election night, stock futures priced the Dow Jones Industrial Average for an 800-point drop at the market open on Nov. 9. But as the night progressed, passions cooled. The Dow opened lower on Nov. 9, but only 100 points lower. Within a half hour, the Dow was trading positively.

The hidden homebuying costs that you should prepare for

While your lender and mortgage broker will disclose the set costs related to your home financing, the truth is that homebuying can be an expensive proposition. First-time homebuyers may not fully understand or be prepared for what purchasing a property has in store.

The sticker price is just one of many costs related to becoming a homeowner. Here are some of the secret expenses that often pop up once you have entered the market.

Earnest money deposit
When you make an offer on a house, often a seller may want you to put down a deposit as a sign of good faith and to facilitate the transaction. This is called the the earnest deposit and typically amounts to between 1 or 2 percent of the asking price. Ultimately this deposit can be applied to closing costs, but it means that if you find a home you like, be prepared with a few thousand dollars cash to secure it. 

"Often a seller may want you to put down a deposit as a sign of good faith." 

Escrow refers to the way that homeowners pay property taxes in advance via a certain amount of money set aside in an untouchable account. However, this is often not widely understood by those entering the market. 

"Escrow is such a confusing part of the loan process," Jason Auerbach, divisional manager at First Choice Lending in New York City, told US News. "Four out of 10 times, we are having a discussion about escrow costs upfront, at the start of the lending process, and then right before closing as well."

Some lenders you work with will require you to escrow your first year of homeowners insurance premiums and property tax payments, particularly if you are making a less than 20 percent down payment. Payments are made directly from the account by the mortgage company. While these costs can sometimes be wrapped up in your overall financing, doing so may mean that you end up paying more over time.


Mortgage Rates at a 5 Month High, but Will They Stay There?

A quick glance at the yield on the 10-yield U.S. Treasury note offers a clear picture. 

The yield on the 10-year note continually hovers above 1.8% these days.  Because the 10-year note influences mortgage-backed securities, which, in turn, influence mortgage rates, mortgage rates also hover at a higher level these days. 

Of course, we all know why mortgage rates hover higher – the Federal Reserve. Fed officials want to raise the federal funds rate before the end of the year. After their meeting this past Wednesday, where officials declined to raise rates, they basically have one shot left: the last scheduled meeting of the year on December 14.  Most everyone, and we include ourselves, believes a rate increase will emerge from the December 14 meeting. 

Does this mean that after the Fed raises the fed funds rate that mortgage rates will hover even higher?  If we could offer only a simple answer; unfortunately, the answer isn’t simple. 

When the Fed raises the fed funds rate, an overnight lending rate among large commercial banks, it’s really raising only the range. It does this through a couple mechanisms: It raises the rate it pays on required and excess reserves banks held at the Fed.

The rate the Fed pays on deposits strongly influences the fed funds rate. Banks won’t lend to each other at a rate lower than what the Fed pays on deposits. Why lend to your brother when you can lend to your father who will pay a higher rate? 

The fed funds rate is a very short-term rate, but this short-term rate serves as a base rate for all other rates. That said, it doesn’t necessarily follow that all rates will rise if the base rate rises.  The supply/demand dynamic for loanable funds plays a role. The Fed may raise the base rate, but it’s not mandatory that all other rates rise accordingly.  Mortgage rates aren’t forced to follow suit. 

Last year, mortgage rates (and the yield on the 10-year Treasury note) trended higher while anticipating a fed-funds-rate increase. When the rate increase occurred, mortgage rates initially trended higher, but they were soon trending lower. The fed funds rate was higher, but long-term rates were again down to pre-rate-increase levels.

Keep in mind, too, that market participants anticipating an event moves markets more than the actual event.  We wouldn’t be surprised if mortgage rates crept higher this month and then reversed course as December approaches. Of course, our prognostication comes with a caveat: There are no guarantees.

Thinking About Refinancing? Do it Before November 8th.

Waiting for the presidential election to end? Consider refinancing your investment property mortgage before heading to the ballot box.

Although the election is rapidly approaching, there is still time to refinance, and there are many advantages for those who choose to do so. For one, interest rates on the 30 Year Fixed Rate, and 15 Year Fixed Rate loans are extremely low. While the Federal Reserve has been cautious of moving them so close to the national election, the vast majority of futures traders believe rates will rise come December.

"Refinancing at current rates could potentially save individuals thousands of dollars."

Today’s low rates mean that homeowners won't need to worry about high monthly payments as they continue to pay down their mortgages. Refinancing at current rates could potentially save individuals thousands of dollars each year, Money Tips reported. A lower monthly payment will make room in an individual's budget, but homeowners will also always have the option to make payments larger than the minimum amount if they want to pay their homes off faster.

As with any election year, there is also uncertainty about where the markets will go once a new president is inaugurated. With rates at such low levels, it would be wise to lock in a fixed rate right now, according to KIRO, Seattle's CBS Radio affiliate. If inflation rises, those who refinanced before the rate hike will actually be paying back their mortgages for less money than before, KIRO reported.

In addition, a new president might spur changes in the market that influence monetary policy, which could result in the Federal Reserve raising interest rates, according to KIRO.

Many experts believe an interest rate hike is imminent after the election due to signs of economic growth, and Federal Reserve chairwoman Janet Yellen has said that "the case for an increase in the federal funds rate has strengthened in recent months," Money Talks News reported.