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Monthly Archives: December 2016

How is the Current Housing Supply Affecting Homeowners?

It might be hard to find the right home in 2017.

In addition to rising interest rates, home demand is continuing to outpace the supply of available housing, according to Fannie Mae's November Economic Developments report.

In the report, Fannie Mae noted that the number of existing home sales declined 6.8 percent in the third quarter compared to the same quarter in 2015, which makes it the sixth consecutive quarter of decreases. This drop is also the largest since the second quarter of 2013, the agency noted.

The low demand and high supply is driving the median price of homes up in many markets. In Washington state for example, home and condo prices in November were up 15 percent compared to this past year in several counties, the Puget Sound Business Journal reported. This is making home ownership inaccessible to some buyers right now, the source explained. But there is good news on the horizon as 2017 approaches.

"I believe home ownership rates will increase in 2017," E. Thomas Booker III, managing director at the business advisory firm The Collingwood Group, told DS News. "Continued job growth, sustained income gains, and the expectation of increased economic activity will tempt many who have a bias for owning, but have endured years of steadily increasing rental rates, to a decision point."

Many experts are projecting that millennials will be the driving force behind increased home ownership in 2017. Now that many people have recovered from the recession eight years ago, they are looking to buy homes now, according to the International Business Times. Despite this optimistic outlook, it is uncertain whether the supply of new homes will be able to keep up with the robust demand, the source noted. Right now, it is projected that available housing will fall 2.8 million homes short of meeting demand in the new year, the International Business Times reported.

 

The Beginning of a New Era

Time to say goodbye (at least for the time being) to sub-4% on the 30-year fixed-rate mortgage.

We shouldn’t be surprised. The yield on the 10-year U.S. Treasury note hovers around 2.5%. It hasn’t been this high since September 2014. The 30-year fixed-rate loan is also at a two-year high. The 30-year loan takes its cue from the 10-year note. 

A detractor could riposte that we shouldn’t say goodbye quite yet. Interest rates rose into the Federal Reserve’s December 2015 interest-rate increase. By mid-2016, though, interest rates and mortgage rates were again down to a multi-decade low.

True enough, but 2016 isn’t 2015.  In 2015, yields on much of Europe’s and Japan’s sovereign debt were scraping along at zero, and even below zero. Today, yields on most of this debt (focusing on 10-year debt) is firmly positive. As the United States has moved away from quantitative easing and accommodating monetary policy, so, too, have many Western European and Asian countries. The prospect of the European Union and Japan raising interest rates isn’t so far-fetched anymore. 

And unlike last year, we’ll have a new president as we begin the new year. How Donald Trump will attempt to stimulate growth is still open to speculation. Infrastructure spending has made headlines, but other fiscal palliatives could be forthcoming. Fiscal stimulus, in turn, could stimulate banks to ramp up lending. Banks still sit on nearly $2 trillion in excess reserves. This is money that they could begin to lend. If that occurs, you can be sure that inflation will take flight.

When investors worry about rising interest rates, bonds and other fixed-income investments pay the price. Investors sell bonds and other fixed-income investments because they expect a higher coupon interest rate to materialize: prices fall and yields rise. Buyers, concurrently, seek to pay a lower price for a similar reason. They will buy only at a discount so that they can capture the income from the higher interest rates most investors expect. 

In short, we don’t expect an interest-rate reversal like we saw in 2016. We’ll head into 2017 with rates on the 30-year loan above 4%, which really isn’t all that unusual in recent history. We hit 4% on the 30-year loan in July 2015. From the summer of 2013 through the summer of 2014, the 30-year loan was quoted above 4%.  Home sales – new and existing -- were a little volatile during that time, but the trend held steady over the course of a year. And let’s not forget that home prices continued to trend higher. 

Yes, rising interest rates are a bit unsettling, but this is still a very healthy housing market. If we thought otherwise, we wouldn’t hesitate to say so. 

How to Whip Your Credit Into Shape Before Buying a Home

Mortgage interest rates have dominated the news lately, but there's another aspect of buying a home people shouldn't forget about: credit scores.

It's one of those things many individuals don't even think about it until it's time to make a big purchase. But a poor credit score can be a significant factor in lenders determining whether they will approve someone for a loan.

A credit score of 700 or more will put consumers in a great position to get approved for any loan they apply for, but only half the population of the U.S. meet this criteria, according to Patch.com. But for those who don't quite reach that mark, hope is not lost to get a mortgage because there are several things individuals can do to improve their credit scores, the source noted.

Applicants with a higher credit score are more likely to receive a lower interest rate on the mortgage loans, so there is a big incentive for people to improve it before they apply. A strong credit score can potentially slash an individual's interest rate in half, according to U.S. News and World Report.

One of the easiest ways for an individual to improve their credit score is to pay down existing credit card balances and pay bills on time. Applicants who do this are likely to see a drastic improvement in their credit in as little as one month, Patch.com reported. But not everyone might be in a financial situation to pay down debts quickly, so they need another option. Applicants can also become an authorized user on a family member's credit line, which allows you to share their credit history, the source noted. This is a good option for those who need a little more time to improve their scores but want to buy a house in the near future.

Do Hard Times Lie Ahead?

Rising interest rates dominate credit and housing markets. They surely dominated the October issue of Black Knight’s Mortgage Monitor.

We understand the preoccupation with interest rates. We’ve seen quite the increase in rates since the election. The yield on the 10-year U.S. Treasury note is up 50 basis points; quotes on the 30-year fixed-rate mortgage are up roughly as much. A 4.125% quote on a 30-year loan isn’t out of the norm, but then again, neither is a 4.25% quote.

This brings us back to Black Knight’s Mortgage Monitor, which includes commentary on the post-election interest-rate rise. Black Knight notes that the population of refinanceable borrowers has dropped to four million from 8.3 million since early November, matching a low set back in July 2015. 

The good news is that Black Knight tells us that two million borrowers could still save $200-or-more a month by refinancing to realize $1 billion in potential savings. This bad news is this is less than half the $2.1 billion in potential savings that was available just four weeks earlier. The last time the refinanceable population was this small, refinances were 37% lower than in the recent third quarter. 

We’ve read subsequent commentary on the interest-rate insights provided by Mortgage Monitor. Most of the commentary paints a bleak outlook. It’s bleak because most of the commentary is extrapolation: Rising interest rates lead to lower mortgage volume, both from fewer refinances and from fewer purchases. 

But to simply extrapolate is frequently to engage in faulty reasoning. 

Yes, refinances are down perceptibly over the past month. Purchase activity, however, has held steady. What’s more, purchase activity across the country ticked higher last week, so the MBA tells us.  Housing activity – sales and new-home construction – remains brisk. 

To be sure, refinance activity will languish compared with activity earlier in the year.  But once borrowers acclimate themselves to the new norm – a 4%-plus quote on a 30-year loan – activity should regain momentum. 

What’s more, some mortgage activity could pick up sooner than later. Higher interest rates offer an opportunity to reach out on the risk curve to increase mortgage credit availability. Indeed, the MBA reports that mortgage credit availability rose for the third consecutive month in November. 

The upside to higher interest rates is that they enable lenders to bring more low-credit-score borrowers into the fold. As it is, growth is still slow among lower FICO-score credits, accounting for only 15% of all lending (as compared with 40% from 2000-2006).

Whether mortgage rates rise, fall, or hold steady, the mortgage and housing markets should thrive. We’re not alone in this assessment. Wells Fargo, as the largest mortgage originator, serves as a barometer for the outlook on mortgage lending and housing activity. Since the post-election interest-rate spike, Wells Fargo’s share price has risen 25%. 

Conforming Jumbo Mortgage Limits Are Going Up

Jumbo mortgages are about to get a whole lot bigger.

On Nov. 23, the Federal Housing Finance Agency announced that it will raise the conforming loan limit on jumbo loans from $417,000 to $424,100 beginning in 2017, Bloomberg reported. In areas where it is more expensive to purchase a home -  such as San Francisco or New York City - government lenders Fannie Mae and Freddie Mac will raise the limit from $625,500 to $636,150, the source noted.

The move might make it easier for some potential homeowners to purchase a house, according to Bloomberg. Conforming loans are different from other mortgages because they meet criteria that allow Fannie Mae and Freddie Mac to purchase it and package it with others to sell to investors, The Wall Street Journal reported. Conforming loans can be attractive to mortgage applicants because they usually come with lower interest rates due to the higher value of the loan.

The announcement is a reaction to rising home prices, according to The Wall Street Journal. The government is trying to keep homes affordable for individuals by increasing the amount of money they can borrow, the source noted.

"When you raise the limits, it's about giving young, successful people the chance to get in the game," Phil Ganz, a Boston-based loan officer, told Bloomberg.

When legislators created the law that established the original limit, they made it so the limits could not be raised until home prices returned to their levels in the third quarter of 2007, according to The Wall Street Journal. Home prices are now 1.7 percent higher than during that time period in 2007, so the limit was raised by that amount now, the source noted.

Experts say raising the limit might raise some concerns from Republicans in office about government increasing its role in the housing market, Bloomberg noted.

Economic Growth Up, Mortgage Rates Down (Slightly)

The latest data on gross domestic product (GDP) growth all but ensures the Federal Reserve will raise the federal funds rate in December.  The Commerce Department reported that GDP grew 3.2% in the third quarter to post the strongest quarterly growth in two years. 

The Commerce Department goes on to report that U.S. corporate profits increased for the third-consecutive quarter in the third quarter. Net profits rose 3.5% to $1.7 trillion on an annualized rate in the third quarter compared with the second quarter. Compared with a year ago, net profits rose 5.2%, the strongest annual reading since the fourth quarter of 2012.

With positive economic news to further bolster confidence, traders in federal funds rate futures contracts now price a 94% chance the Fed will raise the fed funds rate at its Dec. 14 meeting. Most everyone (including us) side with the traders. The recent trend in interest rates reflects the consensus expectation. 

That said, don’t be surprised that interest rates pulled back recently. Markets are forward-looking processes. Market participants “buy” into anticipation and “sell” into reality. Mortgage rates have been bid up over the past three weeks as most market participants expect higher interest rates. The higher rates are here today (no more anticipation), so market participants have bid down rates (though only slightly). 

With expectations that economic growth will accelerate under a Trump administration, we don’t expect to see the pullback in mortgage rates that occurred after the Fed raised the fed funds rate last year. To be sure, predicting mortgage rates is akin to predicting the flight path of a butterfly. That said, a 4% quote holding until Trump takes office in January is entirely reasonable.   

The pullback in mortgage rates this week, along with more subdued action in stock, currency, and credit markets, hints at a top in mortgage rates. How much lower rates could drift is impossible to know, especially over a short time frame, but our instincts and experience lead us to believe a lock would be prudent.

But not everyone concurs. More risk-accepting borrowers might consider a stop-loss rate – perhaps an eighth of a percentage point higher than the spot-market quote. Just be sure that borrowers who claim to be more risk accepting really are.