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Posts Tagged: Economic Data

Mortgage Rates Hold at an 8-Month Low (Could Hold Lower)

Piggy Bank

Here we are halfway through 2017 and mortgage rates are where most people expected them NOT to be.

We find quotes across most mortgage products are lower today than before the 2016 election. It wasn’t supposed to be this way. Post-election everyone was sure rates would rise on President Trump’s pro-growth initiatives. These initiatives would co-op a pro-active Federal Reserve continually raising the federal feds rate to quell any inflationary embers. 

At least one aspect of the narrative has materialized. The Fed has continually raised the fed feds rate. The fed funds rate has been increased three times over the past seven months. 

Most everything else, though, has failed to follow the script. The Consumer Price Index runs below the Fed’s desired 2% average annual rate. This is no surprise when you consider that oil, a key input factor, has seen its price drop through most of 2017. Oil trades at the lowest level in 2017. In addition, the yield on the 10-year U.S. Treasury note is at a 2017 low.  Economic growth remains muted. 

Unfortunately, the yield curve suggests a pickup in economic growth won’t occur until the more-distant future.

We’ve seen a gradual flattening of the yield curve in recent weeks. The spread between the five-year and 30-year Treasury yields has dropped below one percentage point. This is the lowest spread since December 2007. The yield on the five-year Treasury note has risen (on falling prices), while the yield on the 30-year Treasury security has fallen (on rising prices). 

Slow-growth and low-inflation expectations and depressed risk appetites are associated with rising long-term bond prices (which cause yields to fall). Instead of the hyped-up economic growth many were expecting to start the second of half of 2017, we’re more likely to see something on par with the sluggish growth that paced the economy for the second half of 2016. 

Money-supply growth is another indicator that points to sluggish growth and low inflation. Last month, money supply grew 5.9% year over year. This is the lowest year-over-year increase since July 2008. 

Drops in money supply measures have historically accompanied a worsening economy. This was the case in the lead up to the 2008 financial crisis and to the dot-com bust before that. Money supply, in turn, is reflective of lending activity. Lower lending activity leads to lower money supply growth. Both are reflective of overall economic activity.

The good news is that lending activity in our neck of the woods continues to hold its own. 

More refinances have been the upshot of falling mortgage rates. The Mortgage Bankers Association Refinance Index was up again last week, with a 2% weekly increase. Purchase applications failed to maintain pace; they were down 1% for the week. But year over year, purchase activity is up 9%. 

Four percent is the prevalent quote nationally on a prime conventional 30-year fixed-rate mortgage. If the yield curve continues to flatten, don’t be surprised if 4% gives way to 3.875% in the near future. 

Mortgage Rates Drop Below the 2017 Range

Fed Reserve

We’re all but assured that the Federal Reserve will raise the federal funds rate (the rate everyone refers to when everyone refers to the Fed raising interest rates) next week. It appears a done deal, and as such, it is priced in market interest rates.

Because the Fed is in rate-raising mood, an uplift in yields on the short end of the yield curve -- the plot of Treasury yields on 1-month to 30-year securities -- has occurred. The slope of the curve remains normal, with each successive yield higher than the next. This is a good shape because it foretells an expanding economy.

The Fed raising rates should influence the short-end of the yield curve first. We’ve seen some uplift in interest paid on certificates of deposits and passbook savings accounts. But the Fed’s actions have had little influence on lending rates.  Quotes on a 5/1 ARM have generally moved lower with quotes on longer-term loans. If you look at the rate charts of the 30-year loan, 15-year loan, and 5/1 ARM, you’ll find that the rates have moved like synchronized swimmers.

The market today is like no other. Banks hold $2 trillion of excess reserves with the Federal Reserve. Before 2008 they held none, because before 2008 the Fed had not paid interest on these reserves.  The Fed raising and lowering the fed funds rate had a discernible influence throughout the yield curve before then. Today, not so much.

Five years ago, we thought quotes of 5%-or-higher on a prime 30-year loan would be the norm. A year ago, we thought 4% would be an opportunity if rates would drift so low. So much for expectations, such is the difficulty in predicting the path of mortgage rates. (Better luck is had predicting the flight path of a butterfly. This applies not only to us, it applies to everybody.)

That said, let’s take advantage of what we’ve got. Refinance applications were up last week, and so, too, were purchase applications. Indeed, purchase apps were up 10% week over week. Perhaps we’ll see an upward surprise in May and June home sales.

Why More People are Choosing Nonbank Mortgages

Main Street

Homeowners and buyers have more mortgage options at their disposal than they may realize. That's truer than ever as a new breed of mortgage lender, known as nonbank lenders, are reshaping the home loan market.

In fact, according to the Washington Post, hundreds of new institutions have come into the fold of the mortgage market, attracting as much or even more business than some of the nation's biggest banks. In 2011, the top five mortgage lenders by market share were all brand-name retail banks. In 2016, this changed dramatically, with one private lender cracking the top three, and a majority of new home loans being underwritten by nonbank lenders.

What nonbank lenders can do

There are many reasons behind this extraordinary shift. Primarily, consumers have discovered they can get better rates and a more personalized level of service through a nonbank lender. But why, exactly?

As explained by Paul Noring, a financial consultant who spoke with the Washington Post, many of these new mortgage lenders deal only in home loans. By focusing on just one product, scrapping traditional banking services like checking accounts, nonbank lenders can save money and pass that onto borrowers.

Borrowers also have been attracted to nonbanks thanks to their faster adoption of new technology and support systems that make the application process easier.

In addition, nonbank lenders are tending toward favoring borrowers who may have been rejected by big banks in past attempts to apply for a mortgage. In the aftermath of the financial crisis of 2008, banks became stricter in their mortgage lending requirements, making it more difficult for those with poor credit history to secure a home loan. As nonbank lenders have entered the market, they have also been able to extend loans to more of these borrowers, according to Mortgage News Daily. Credit reporting agencies have also adopted new ways to evaluate credit history that may favor a wider segment of homebuyers.

Through a combination of competitive rates and innovative support systems, nonbank lenders have been instrumental in the revitalization of the U.S. housing market. That's why it shouldn't come as a surprise that more homeowners and buyers are choosing these loans.

Mortgage Rates Settle at 2017 Lows, but for How Long?

Fed Reserve

We could say that mortgage rates are like the weather: We can talk about them, but we can’t do much but talk about them. 

And talk about mortgage rates we do. On that front, mortgage rates drifted lower through most of May; it’s possible they could drift lower still. 

Many market watchers focus on the 10-year U.S. Treasury note and its yield. The yield on this influential security (as it influences the yield on mortgage-backed securities, which, in turn, influence mortgage rates) has dropped to 2.21%. Market watchers who watch the yield charts, tell us that we could see lower mortgage-rate quotes if the yield on the 10-year note falls below 2.17% (which is seen as a technical support floor). 

For now, though, quotes across the mortgage board are near 2017 lows. Rates have trended lower over the spring months. Concurrently, the federal funds rate -- the rate everyone refers to when the Federal Reserve raises rates -- has trended higher and is at a multi-year high. The Fed raised the range on the fed funds rate to 0.75% to 1% in March. The effective rate -- at 1% -- is at the upper boundary of that range.

The fed funds rate is a short-term rate -- it’s the overnight lending rate for commercial banks. The fed funds rate serves as the base rate for most other lending rates. A change in the fed funds rate won’t necessarily move long-term rates (as we’ve seen), but you would it expect it to have some pull over time. So far, it hasn’t had much pull, even with the increasing likelihood we could end the year with the fed funds rate approaching 2% -- a rate unseen in nine years. 

We suspect that the lack of pull is attributable to lack of consumer-price inflation, which runs at 1.5% annually. Inflation expectations exert greater influence on long-term rates than short-term rates. Low inflation expectations are holding long-term rates in check. 

The Fed is expected to raise the range on the fed funds rate to 1%-to-1.25% at its next meeting on June 14. In fact, traders in fed funds rate futures contracts are betting a 90% chance that a rate increase will occur. What’s more, most Fed watchers believe two more increases will occur after a June rate increase.

So, the Fed will likely raise the range on the fed funds rate this month. Contrary to popular perception, though, rising mortgage rates need not follow. Indeed, since the Fed began raising the fed funds rate in December 2015, the increase has generally been followed by a slow decline in mortgage rates. If past is prologue, a further decline in rates is within the realm of possibilities as long as inflation remains muted. 

Builders Cool on Luxury Housing, Target Starter Homes

Starter Homes

While demand from U.S. homebuyers continues to outpace the supply of homes on the market, home builders have made significant progress in closing this gap recently. This is especially true now that a broader swath of the homebuyer market is seeing a prime opportunity to invest, with low interest rates and higher wages prevailing.

As a result, new data show builders and developers are increasingly targeting starter homes for younger homeowners. The Wall Street Journal reported that in the first quarter of 2017, nearly one third of new residential construction by the biggest U.S. building firms consisted of properties smaller than 2,500 square feet. This puts them squarely within range of what is usually considered a starter home. At the same time last year, only 27 percent of new housing fell into this category, with an even smaller 24 percent in 2015.

Trend reversal

With two years of considerable year-over-year growth, homebuilders and buyers are finally bucking a trend that persisted through much of the post-recession housing market recovery. Too many younger, less affluent Americans were unwilling to risk homeownership. At the same time, construction firms faced their own financial troubles, compounded by a shortage of workers. The result was a glut of luxury homes on the market but very few that could be considered starter homes.

Even as demand for all housing types picked up around 2015, the inventory of new and existing homes could not keep pace. This has driven home prices up quickly, a trend that continues - home values were nearly 6 percent higher in February 2017 than one year prior, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index.

Still, news of renewed interest in starter homes from buyers and builders adds to the evidence that the U.S. economy overall is growing ever more resilient.


Home Sales Hit a Wall

West Coast Inventory Lowest in Nation While Prices Languish Elsewhere



Home Sales Hit a Wall

Home Sales

A miasma of ennui appears to have enveloped the housing market over the past month or so, at least if we go by the national numbers. Sales (and starts) have gone south recently after heading north to start 2017. 

The unexpected decline in new-home sales induced a spat of brow-furrowing this past week. Sales dropped 11.4% to 569,000 units on an annualized rate in April. The drop counterbalanced the positive sales growth we saw in March and February.

What’s more, meaningful discounting failed to stem the decline. The median price of a new home dropped 3% to $309,200. Year over year, the median price is down 3.8%. If the current sales pace is maintained, we should expect to see more discounting by homebuilders to move inventory, which sufficiently increased last month to push supply up to 5.7 months from 4.9 months in March. 

Fortunately, one month does not make a trend. If we look at the sales trend over the past year, we see the monthly sales are up roughly 55,000 units compared to April 2016. If we look back two years, we see monthly sales are up roughly 90,000. The long-term trend remains our friend. 

When the disappointing news on new-home sales hit the wires, most market watchers adjusted their expectations for existing-home sales. They were right to do so. 

Existing-home sales dropped 2.3% to 5.57 million units on an annualized rate in April. In contrast to homebuilders, though, owners weren’t discounting to move their property. The median price for an existing home actually rose 3.5% month over month to $244,800. Year over year, the median price is up 6%. What’s more, what was offered for sale sold quickly. Days on the market fell to its lowest level since 2011.  

Compared to a year ago, existing-home sales are up 1.6%. That might seem insignificant compared to the year-over-year growth in new-home sales, but new-home sales build off a much smaller base. It’s always easier to go from one to two than it is to go from one million to two million.

As for the future, an immediate pick-up in sales is unlikely. Recent mortgage-purchase activity supports this outlook. Activity has slowed in recent weeks. The MBA’s latest report on purchase loans from a national perspective shows applications were down 1% last week (though thanks to the recent drop in mortgage rates, refinances were up 11%). 

The news on sales was disappointing, but not all that bad. Market heterogeneity is always a mitigating factor. As we know, all real estate markets are local markets. Aggregate national numbers may or may not apply to any local market.

That said, we were expecting to see something a little better than what we saw in April, especially after reading recent reports on the rising trend of millennials and other first-timers embracing homeownership. 

West Coast Inventory Lowest in Nation While Prices Languish Elsewhere


The demand for housing around the U.S. has slightly outpaced the available supply of new and existing homes for the last few years. But certain markets have seen a much more dramatic crunch than others. This trend is particularly pronounced throughout much of the West Coast, where home prices are surging due to a shortage of inventory. 

Based on the most recent data available, found that many of the cities with fewer homes for sale last year were concentrated in several markets throughout Washington, Oregon and California. Seattle led the way with the biggest decrease in homes for sale in 2016 combined with the lowest percentage of housing stock for sale. Last year, according to the data, only 1 out of 263 existing homes in the Seattle area were for sale.

The trend hit an extreme in Eugene, Oregon, home to the state's biggest university. Only 0.6 percent of Eugene's homes were for sale in 2016, a year-over-year decrease of more than 27 percent. One real estate agent who spoke with said that homes in good condition around the Eugene area could be expected to sell in as little as 24 hours after listing. The agent did note that she expected 2017 to be slightly less hectic, however.

These supply shortages have not only made housing of any kind hard to find in certain markets, it's becoming especially hard to simply afford it. Four different parts of the Seattle metro area ranked among the top 10 most competitive real estate markets in 2016, according to analysis by Redfin. In some of these neighborhoods, homes sold as much as 80 percent over their list price, while overall home values grew by at least 20 percent. The median sale price of homes in those four white-hot Seattle markets ranged from $324,000 to a high of $708,500.

Optimism Reigns, and Rightfully So

Optimism Reigns

The latest report on purchase applications for new homes produced a pearl-clutching moment for some market watchers. The MBA’s Builder Applications Survey for April 2017 showed new-home purchase applications dropped 4.3% compared with April 2016. Worse yet, applications were down 20% month over month. Could the bull-market run for new homes be approaching the finish line? 

If we dig a little deeper into the data, it appears unlikely. An exceptionally strong showing in March likely pulled forward demand from April. When the two months are combined and averaged, it looks decidedly less onerous. Year to date, mortgage applications for new homes are still up 3%. 

What’s more, the people with the most penetrating insight into the new-home market are hardly gasping. Homebuilder optimism continues to hold at a high level. Indeed, the latest homebuilder sentiment index topped expectations, rising two points to 70, in May. Optimism for future sales was exceptionally strong: The component for the six-month sales outlook was up four points to a giddy 79. Homebuilders expect to sell a lot of homes this year. 

A quick glance at the starts data could lead a market observer to believe that homebuilders are unrealistically optimistic. Housing starts have plateaued in recent months; they were even down in April, dropping 2.6% to 1.172 million starts on an annualized rate.

But if we delve deeper, we find the shortfall is related to the less important multi-family component, which dropped 9.2% month over month. The more important component, single-family starts, was up 0.4% to 835,000 on an annualized rate. 

At the rate of reported in April, starts continue to lag the historical annual average of 1.5 million. What’s more, homebuilders are unlikely to approach the historical average in the near future. The demand is there, but homebuilders are constrained by a shortage of qualified labor and rising material costs (much of the costs are related to lumber, which is why the tariff on Canadian lumber is such a bad idea). 

Mortgage activity bodes well for future sales -- new and existing. Purchase activity has been strong for most of 2017. The latest MBA data on purchase applications show purchases down 3% week over week, but still up 9% year over year. Purchase activity hasn’t been this strong in nearly a decade.

Many sectors of the economy continue to struggle since the last recession ended in 2009. Housing is the one sector that has continually maintained an upward trajectory. Recent housing data show nothing to suggest the trajectory is likely to change this year, and possibly not for many years after. 

Spring Fever Takes Hold

This spring offers a dichotomy.

On the one hand, we have seen an increase in housing and lending activity. Home sales are up (and up for 2017), and so are housing starts and residential investment. Purchase-lending activity has trended higher in weekly comparisons since late March. 

Movements in mortgage rates, on the other hand, have adhered to the typical perception of spring fever: They’ve remained relatively staid and inert, having settled into a range where movements at best come in languid steps. In fact, the steps have been so languid that Mortgage News Daily tells us that the average effective rate across the spectrum has moved only 11 basis points over the past two weeks. It should be no surprise, then, that the fixed-rate 30-year loan for top-tier borrowers continues to hold the 4%-to-4.125% range that it has held for the past two months. 

That said, let’s be careful not to extrapolate indefinitely. It’s not foreordained that the events of today must invariably occur tomorrow. Rate quotes stretched the upper limits of the range this past week. 

Some economists are again thinking about economic growth (after thinking there was little of it to be had) and rethinking interest rates, and with good reason: The employment data from last week show job growth regaining its footing. Payrolls increased by 211,000 in April to drop the unemployment rate to 4.4%. Payroll growth was more than doubled that of March. 

The good news on jobs has pushed the yield on the 10-year U.S. Treasury note up to 2.4%; two weeks ago it was below 2.2%. Gold, $1,270/ounce a fortnight ago, trades at $1,220/ounce today. (The gold price moves inversely to interest rates.) 

We could see 4.25% become the new upper bound on quotes for prime 30-year loans. The spring fever that has overcome mortgage rates could be about to break.

 Spring Home

The Normalization Trend Continues

The Wall Street Journal ran an article titled “Rent or Buy? More Young People Are Choosing Homeownership” last week. The Journal tells us that the first quarter saw more new households buy a home than rent one. This phenomenon hasn’t occurred in a decade.  

We’re not surprised that young people are backing away from renting and embracing buying. Data from Fannie Mae and other sources have long shown that the vast majority of us prefer to own a home than to rent one. Most of us have a nesting instinct, and we can’t really nest in a home we don’t own. No matter how magnanimous  the landlord might be, he or she will never be magnanimous enough to let the renter fully his way. 

For the aforementioned reasons, we’ve never bought the narrative that the country is morphing into an agglomeration of mobile, transient renters. The single-family housing market has, and always will be, driven by owners who occupy their properties, and for good reason: A stable neighborhood of homes occupied by their owners contributes to higher levels of social cohesion, lower levels of crime, and lower levels of other socially undesirable behaviors.

This is no revelation on our part. A1942 paper, authored by sociologists Clifford Shaw and Henry McKay, suggests that residential instability leads to many social problems. Instability is marked by a neighborhood of renters continually coming and going. (We’ve always been somewhat skeptical of the business sustainability of the recent industrialized approach to single-family-home rentals.) 

We understand that rental properties serve a useful economic purpose, but we also understand that housing dominated by occupied owners serves an even greater purpose. The good news is more data show that more people are turning to what they really want -- a home of their own that they own.

Recent data also show the trend in homeownership should continue to rise.

For one, the trend in mortgage purchase applications remains up. Purchase applications were up 5% week-over-week last week. The longer-term trend -- year over year -- is also up 5%. With the prime 30-year mortgage holding at a steady 4%-to-4.125% range across the county, more potential home buyers should consider elevating their situation to actual home buyers. 

And there should be more homes for home buyers to buy. Home builders continue to invest in what they do best. Bureau of Economic Analysis data show investment in single-family structures was $257 billion for the first quarter, up a stout 13.7% compared to the previous quarter. But at 1.4% of GDP, it’s still low compared with historical norms.  Single-family investment has averaged roughly 2% of GDP since 1959.   

Housing has come a long way since the 2008-2009 recession, and it still has a long way to go. Good for us.