Monthly Archives: February 2014

Higher Education or a House: Can Young Americans Have Both?

16 Percent of First-time Homebuyers Say Student Debt Has Kept Them From Buying

 Last week, the Federal Reserve Bank of New York reported that student loan debt rose more than 5 percent in the fourth quarter of 2013 and now exceeds $1 trillion.

Redfin’s Q1 homebuyer survey suggests that these rising debt loads are delaying homeownership among young Americans. From Feb. 20 to 23, Redfin surveyed 1,912 home-buying clients, of which 965 were buying a home for the first time. Among the first-timers,16 percent said that student debt had previously kept them from buying a home.

Student Debt Final Chart * First-time homebuyer respondents only

Of these homebuyers surveyed, 33 percent said that student debt had led them put off a home purchase for one to two years while 31 percent said four years or more.

Student Debt Years Final * First-time homebuyer respondents only

Despite these statistics, Redfin Open Book Lender, John Wheaton, said home buying is still attainable for many student debt holders. According to Wheaton, “Many young people with student loans delay buying a home because they don’t think they can qualify for a mortgage. Yet, many of them actually can. Underwriters generally treat student debt in a more positive light than credit card or auto loan debt.”

For example, a person with $45,000 in student loans (about $500 per month for a 10-year term), a FICO score of 741 and an income of about $75,000 per year could likely qualify for a property starting at around  $375,000 with a 5 percent down payment, Wheaton said.

According to Redfin agent Alex Haried, “For my home-buying clients, student debt hasn’t prevented them from buying a home, it has prevented them from buying the home they want. Instead of buying a $350,000 home, they would rather rent for a few more years as they pay down their student debt and then buy a $500,000 home.”

With tuition costs soaring, potential homebuyers in the future may have even bigger debt hurdles to overcome. From 2008 to 2013, annual tuition for a public four-year university rose 20 percent to $18,391, according to the College Board. For graduate students, tuition growth is even steeper; the cost for a Master’s in Business Administration grew 33 percent between 2008 and 2012. For a top-tier MBA program such as the one at Duke University, students dole out $110,600 in tuition.

More Student Debt, Fewer First-Time Home Sales

As if young Americans aren’t already strained by a weak job market and rising home prices and mortgage rates, climbing tuition costs give them one more reason to put off buying a home. The National Association of Realtors said last week that the share of existing home purchases by first-time buyers slipped to 26 percent of sales, down from 30 percent last year. For the economy as a whole, this means that rising student debt loads — which should, in theory, be a positive sign of a more educated workforce — may be a short-term hindrance to the housing recovery.

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Mortgage Volume down as Rate Rally Cools

 Interest rates increased definitively last week and mortgage application volumes fell according to data released today by the Mortgage Bankers Association (MBA).  The Market Composite Index, a measure of application volume, fell 4.1 percent on a seasonally adjusted basis during the week ended February 14.  The index was down 2.0 percent on a non-seasonally adjusted basis.

The Refinance Index decreased by 3 percent from the week ended February 7 and the share of applications that were for refinancing moved down from 62 percent to 61 percent, the lowest level since September 2013.

The seasonally adjusted Purchase Index also fell, down 6 percent to the lowest point since September 2011.  The unadjusted Purchase Index decreased 2 percent from the prior week and was 17 percent lower than during the same week in 2013.

The average contract interest rate for a 30-year fixed-rate mortgage (FRM) with a conforming balance ($417,000 or less) increased from 4.45 percent with 0.34 point to 4.50 percent with 0.26 point.   The effective rate for this and for all other loan products tracked also increased.  The jumbo 30-year FRM with balances above $417,000 saw rates increase to 4.45 percent with 0.11 point from 4.40 percent with 0.14 point.

The 30-year FRM backed by the Federal Housing Administration (FHA) had a contract rate that averaged 4.16 percent compared to 4.13 percent the previous week.  Points increased to 0.14 from 0.10.

The average contract rate for 15-year FRM increased by 6 basis points to 3.55 percent.  Points rose to 0.33 from 0.25.

The share of applications that went to adjustable rate mortgages (ARMs) rose slightly to 8 percent.  The average contract interest rate for the most common ARM, the five-year hybrid, rose to 3.20 percent from 3.11 percent.  Points increased to 0.38 from 0.31.

MBA’s data comes from its Weekly Mortgage Applications Survey which it has conducted since 1990.  Respondents include mortgage bankers, commercial banks and thrift and the survey covers 75 percent of retail mortgage originations.  Interest rates are quoted for loans with an 80 percent loan to value ratio and points include the origination fee.  . Base period and value for all indexes is March 16, 1990=100.

Significant Refinance Potential May Help Mortgage Market in 2014

 

Using an Olympic theme of “Will Housing Take Gold“, Freddie Mac’s economists said today that, while they had expected housing ‘to come out of the gate at a good clip at the start of 2014, bolstered by an improving economy,” the labor market report for January instead showed a slow start for the residential sector with only 113,000 new jobs created, well below the 2013 average of 194,000 per month.  However the unemployment rate dipped, labor force participation edged up, and 48,000 of those new jobs were in construction and nearly half of those in the residential sector.  The economic analysis, prepared by Freddie Mac’s Chief Economist Frank E. Nothaft and Deputy Chief Economist Leonard Kiefer was published Tuesday in the company’s monthly Economic & Housing Market Outlook

The Federal Reserve seems committed to ratcheting down its acquisition of Treasuries and mortgage-backed securities (MBS) as long as growth remains at least at 2013 levels and also likely to taper down its extra purchases to zero by the end of the year which will put some upward pressure on long-term interest rates.  But the effect of Fed actions on MBS yields in the short term are likely to be mitigated by a recent decline in new issuances related to a seasonal slowdown of new purchase mortgages and a drop in refinancing because of higher interest rates.

 

Also global capital market investors have shifted funds into Treasuries and other fixed-income assets out of concern over emerging market growth.  Even as the Fed began to taper at the beginning of the year 10-year Treasury yields and mixed rate mortgage rates generally have eased; down about 0.3 percentage points over January and early February.  This has resulted in an increase in mortgage application volume of 20 percent and applications for refinancing rising by 28 percent.

 

This increase, the economists say, underscores that a significant amount of potential refinancing is out there.  Of the outstanding 30-year MBS for Fannie Mae, Freddie Mac, and Ginnie Mae, over $800 billion have a coupon of at least 5.0 percent.  Even after accounting for servicing and other fees many of the mortgages underlying these securities should have incentive to refinance, provided borrowers can qualify in the current credit environment.

Mortgage Rates Slightly Lower After Employment Data

Mortgage rates were finally lower today, but the drop was modest given that it was the product of a weak jobs report–typically a bigger market mover.  Additionally, when viewed against the past three straight days of weakness, today only got us back to Wednesday’s levels.    The most prevalently quoted conforming 30yr fixed rate for the very best borrower scenarios (best-execution) remains at 4.375% for the most part though 4.25% and 4.5% are both fairly close.  When adjusted for day to day changes in closing costs, rates fell an equivalent of 0.04% today.

Throughout January, rates were moving lower with purpose.  This continued into early February to a point where we were left to consider whether this was a market-based correction that had run its course or potentially just the first phase in a bigger move lower.

Any time rates are approaching those sorts of “crossroads levels” ahead of a report like the Employment Situation, we can infer some indecision on the part of financial markets as well as the hope that the important report will provide guidance.  In that regard this week has ended in somewhat of a frustrating fashion.

While the numbers were weaker, and while this did help rates improve a bit today, the movement didn’t do anything to clear up the indecision.  In other words, rates had been approaching a fork in the road and the jobs report did not clearly indicate which path has been chosen.  When that happens, we move on to the next major potential dose of guidance.  Fortunately, we don’t have to wait long this time as the most likely event will be Janet Yellen’s first congressional testimony next week.  In terms of lock/float risk, ideally, we’d want to be seeing a stronger response to weak jobs data in order to perceive a higher probability that rates continue lower unassisted.

Mortgage Rates Continue Higher

Mortgage rates were higher for a third straight day, substantially weakening a recent run to the lowest levels in nearly 3 months that ended on Monday.  Each of the past 3 days hasn’t been severe in and of itself, but taken together, they erase most of the improvement seen on Friday and Monday.  We’re now back to 4.375% being the most prevalently quoted conforming 30yr fixed rate for the very best borrower scenarios(best-execution).  Scattered offerings of 4.25% were on the table yesterday, and dominated the landscape on Monday.  When adjusted for day to day changes in closing costs, rates rose an equivalent of 0.05% today, bringing the 3 day total to 0.10%.

As is always the case on the Thursday afternoon before the official employment data, floating a mortgage rate that could otherwise be locked is highly risky.  That’s because this monthly report–The Employment Situation–is by far and away the most important piece of economic data available each month.  Nothing else has as much power to cause movement in interest rates.  The risk of rates moving quickly higher usually makes it a good idea to lock (if possible) before this report, but the last one was a great example of how taking the risk to float could pay off.

That said, part of the payoff had to do with financial markets repositioning themselves in the first month of a new year.  A rapid cool-down in stocks and emerging markets helped make it an easy decision for rates to take a similar break after moving exclusively higher over the past two months.

Rates did such a good job correcting that we now face the possibility of that correction being over already.  I’ve heard arguments on both sides of this topic.  One side feels that rates need to correct further before getting back to the longer-term uptrend while the other side thinks the correction has already gone too far.  Based on the shifting popularity of those viewpoints, I don’t think either one of them is stronger than a surprising result in tomorrow’s data.  In other words, if the report is strong, it could indeed create lasting momentum higher in rate.

Conversely, an exceptionally weak report could do more than normal to help rates in this case, because it would stand together with last month’s exceptionally weak report, thus casting significant doubt on the strength of the supposed recovery.  The conclusion is that this one is a bigger deal than most, unless it’s very close to forecast levels.  The only other wild card is the chance that the Bureau of Labor Statistics (the entity responsible for this data), puts a significant amount of blame on the weather.