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Monthly Archives: March 2017

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. 

Why a 15 Year Mortgage Makes Sense

Most homebuyers opt to pursue a 30-year mortgage, and while that's an appealing option, buyers should also consider a 15-year loan. 

Buyers should first contemplate a 15-year mortgage if they know they can afford the higher monthly payments. When taking out this type of mortgage, homeowners need to budget appropriately because they'll need to pay off the principal balance in half the time of a standard mortgage. By paying off the balance sooner, homeowners will be able to prioritize other financial matters, such as retirement planning or paying for a child's college tuition.

Homeowners can save money

One major benefit of a 15-year loan is the opportunity to save money due to lower interest rates. According to The Mortgage Reports, a shorter mortgage can make sense if homebuyers don't have a large amount of debt to their name and housing represents their largest monthly expense - they'll likely be able to comfortably pay off the mortgage in a shorter amount of time. Even so, homebuyers should still make sure their income is steady, recommended The Motley Fool. Tackling a bigger mortgage payment can be difficult to overcome if buyers don't have a stable career and income they know will pay the bills.

And after 15 years, homeowners don't have a mortgage to worry about anymore.

Finally, a 15-year mortgage helps homeowners build equity faster because they pay less in interest, Money Crashers explained. With a 30-year loan, interest is higher and more time is needed to pay off the principal, so equity doesn't build as quickly. Homeowners can then use that equity to help buy a new home or fund repairs.

If homeowners have a steady income source and can handle the larger payments, they should consider a 15-year mortgage. By opting for the shorter loan, homeowners can pay off their house faster while saving more money.

It Looks Like a Done Deal

This has been one of the quickest change of sentiments we’ve seen in some time.

Less than a month ago, no one gave meaningful odds that the Federal Reserve would raise the federal funds rate at its March 14-15 meeting. Traders in fed funds rate futures contracts were betting with less than 25% odds a rate increase would occur. As we write, the odds are 86%.

The mortgage market has certainly taken the plunge. The trend in rates -- across product and duration -- is up significantly over the past week.

Surprising to some, the rising trend in lending rates has brought a rising trend in lending activity. The Mortgage Bankers Associations’ latest weekly reading on mortgage lending shows an increase in both purchase and refinance activity.  We’re not terribly surprised. Many potential borrows wait for a potential pullback in a flat market. They anchor to a past rate. But when rates begin to pull ahead and show no signs of a pullback, they switch to action from inertia. 

Purchase activity has been a bright spot since the beginning of the year (and really since the election).  Rates have moved higher, but activity remains brisk. Year over year, purchase activity is up 4%. This confirms our sentiment for the past couple years: A mortgage rate is no longer the overarching arbiter in the decision to buy. 

Other economic variables have come into play. Job growth remains brisk and economic growth appears poised to finally ramp up. More people can afford to service a higher-rate loan. What’s more, a higher lending rate should lead to higher mortgage credit availability. Higher spreads will lead to more lending opportunities to more borrowers. (Though many in the media complain about tight lending standards, the fact is that the MBA’s Mortgage Credit Availability Index has risen 75% in the past four years.)

History supports optimism in the face of rising mortgage rates: In 2004-through-2006, the Fed raised the fed funds rate over four percentage points. Over that time, mortgage rates rose… and so did home sales and home prices. Of course, history doesn’t repeat exactly, but as Mark Twain pointed out, it does frequently rhyme. 

4 Tips to Help Homeowners Refinance Their Mortgages

During her recent testimony before the U.S. Senate Banking Committee, Federal Reserve Board Chair Janet Yellen hinted multiple interest rate increases might occur in 2017, CNN Money reported.

Homeowners should entertain the idea of refinancing their current mortgages to take advantage of historically low interest rates. Here are four helpful refinancing tips:

1. Prepare to act quickly

While Yellen didn't say exactly when rates would go up, a March hike remains possible, in addition to two further hikes in 2017. If that's the case, homeowners should prepare now before the Fed raises rates.

Homeowners can prepare by researching potential target rates and filling out a refinancing application.

2. Boost (or maintain) the credit score

Homeowners need to ensure their credit scores are strong enough to qualify for low rates. If refinancing is in the cards this year, owners should pay bills on time, avoid a high credit utilization ratio and fix any credit report errors. 

3. Consider a short-term refinance

According to NerdWallet, a short-term refinance may help homeowners save money because rates for 15-year mortgages are lower than 30-year fixed loans. Monthly payments will be higher, but homeowners will save money by paying less interest.

4. Look into a cash out refinance

Since home values are also rising, homeowners may be interested in a cash out refinance. Bankrate explained this financial move is when homeowners refinance for more than the amount currently owed on the house. They secure a new mortgage with a lower rate and walk away with extra money.

A cash out refinance is risky, though. Homeowners should only invest that extra money in things that build equity, such as home repairs.

If homeowners want to save money, they need to seriously entertain the idea of refinancing.

March Rate Hike Looking More Likely

Lower, Though It Could Easily Be Higher

Sentiment continues to shift to an interest-rate increase occurring sooner than later. In fact, more people are giving meaningful odds for the Federal Reserve to raise interest rates this month. 

We refer to traders in federal funds rate futures contracts. (These contracts enable people to speculate on, or hedge, the future price of the fed funds rate.) As recently as a couple weeks ago, traders were giving scant odds that the Fed would raise the fed funds rate this month. As we write, these contracts are priced for a 68% chance of a rate increase when Fed officials convene again in two weeks.

Should the Fed raise the fed funds rate, it’s likely to raise it no more than 25-basis points. (Actually, the Fed raises the fed-funds-rate range, which would increase to 75 basis points-to-1 percentage point from 50 basis points-to-75 basis points.) If the Fed raises the fed funds rate this month, we could see a total of three 25-basis-point increases by the end of the year. Indeed, traders are giving the best odds that the fed funds rate will range between 1.25% and 1.50% when we head into 2018. 

As for our prediction to start 2017, we thought one increase was all that was guaranteed. A March increase would put our prediction on the outs. 

So, why the change in sentiment? 

The odds for three increases spiked after President Trump’s speech last Tuesday. Trump offered a lot in the way of economic spending, which could pressure wages and consumer prices to rise.  New York Fed President William Dudley further stoked expectations when he said that “a case for raising rates has become a lot more compelling” on the same day as Trump’s speech. As president of the New York Fed, the most influential of the 12 Fed banks, Dudley’s opinion matters more than most. 

We mentioned last week that 30-year mortgage rates could hold near 4.25%. Our rationale was based on the Fed’s balance sheet, which still supports ample market liquidity. Given that consumer-price inflation continues to hover just at the Fed’s stated 2% annual goal, it could still take a while for today’s fed-funds-rate increases (which targets overnight lending rates among commercial banks) to work their way to the long end of the curve. 

That said, we still stand by our prediction that we won’t see regular sub-4% (on a national average) quotes on a prime 30-year conventional mortgage anytime soon. We also don’t believe that we’ll see quotes exceed 4.5% and hold above that level either.

But we offer a caveat: Consumer-price inflation is key. If consumer-price inflation begins to trend higher, mortgage lending rates (along with most interest rates) are sure to tag along. 

3 Mortgage Myths that are Wrong

As the spring and summer buying seasons quickly approach, prospective homebuyers have to remain careful about falling for mortgage myths.

Let's dispel the following three mortgage myths:

No. 1: Buyers must have a high credit score

Having a high credit score won't hurt, but subpar scores won't bar buyers from purchasing a house. Buyers can still take out a mortgage if they have scores below 700, sometimes even in the 620-630 range, according to SmartAsset. The catch, however, is that buyers with lower scores typically pay more in interest.

Buyers shouldn't let low credit scores stop them. They should work to increase that number and look into taking out a Federal Housing Authority-backed mortgage.

No. 2: Pre-qualification and pre-approval are the same

Achieving pre-qualification isn't the same as being pre-approved for a mortgage, Realtor.com explained. Pre-qualification only gives buyers an idea of a mortgage amount they qualify for. Realistically, pre-qualification is not a concrete document and won't help in the buying process.

Instead, buyers should seek pre-approval because it indicates a lender has already collected the necessary documents and pre-approved a buyer for a certain mortgage amount. Sellers know pre-approved buyers are serious about making an offer, so it's best to go to through the pre-approval process.

No. 3: 30-year fixed rate mortgages are the best

While 30-year mortgages are the most common, they aren't necessarily the best option.

Buyers who can afford higher monthly payments may want to opt for a 15-year mortgage so they can pay off a house in half the time.

In other instances, buyers may want to consider an adjustable-rate mortgage if they want lower interest rates and monthly payments early in the loan's life and can handle future variable rates, Bankrate stated.

Taking out a mortgage is a life-changing decision, which is why it's important buyers bust common mortgage myths.