Monthly Archives: April 2014
Mortgage rates fell at a solid pace today following a reading on 1st Quarter GDP that was much weaker than expected. Downbeat economic data tends to benefit bond prices, including the mortgage-backed-securities (MBS) that most directly influence rates. When prices rise, rates fall. The good times kept rolling in the afternoon when the Fed Announcement arrived essentially unchanged from the previous version. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains at 4.375% in most cases, but the costs associated with that rate fell back to mid-month levels. That drop in costs translates to approximately 0.05% in rate effectively.
Today was an important one to get through for mortgage rates as we work our way toward Friday’s even more important data. The fact that the Fed didn’t change much in their policy statement is not a surprise, but it is somewhat of a surprise to see just how little markets reacted to it. Most of the day’s activity was concentrated on the morning data, which only adds weight to Friday’s Employment Situation Report.
This morning’s low GDP numbers can be at least be discussed in the context of a weather-related slowdown, but it’s important to keep in mind that those numbers include the cold/snowy months whereas Friday’s jobs numbers are for the month of April. If they’re stronger than expected, or even in line with expectations, rates will have ample justification to undo today’s gains.
Mortgage rates held almost perfectly steady today, with a handful of lenders offering slightly lower costs while others were slightly higher. Once again, weakness in global equities markets provided a benefit for the bond markets that drive mortgage rates, helping to reverse moderate weakness from earlier in the morning. Without the mid-day stock sell-off, rates would have been slightly higher on the day, but as it stands, several lenders released positively revised rate sheets in the afternoon, bringing the average back in line with Friday’s. The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains at 4.375% in most cases.
The current week is a different animal compared to last week. After today, the pace and importance of economic events will continue building until coming to a head with Friday’s Employment Situation Report. These events have lots of potential when it comes to pushing rates out of their cozy, narrow range of the last three months. Combine that with the fact that three months is a historically long time to spend in such a narrow range and it makes sense to be increasingly prepared for the range to be broken.
Even if that doesn’t ultimately happen this week, the important thing to understand today is that the POTENTIAL for it to happen is greater than at any other time since the range began. Adding to the gravity is the fact that markets clearly reacted this morning to an economic report that hardly ever elicits a response–Pending Home Sales. The implication is that the rest of the week’s data will have no problem motivating bigger movement if the reports happen to form some consensus on economic conditions being decidedly stronger or weaker than expected. While disappointing data can always help rates improve, strong data will almost certainly do the opposite, and perhaps to a greater degree than it recently has. Bottom line: volatility is a much bigger risk in the coming days.
MiMi uses proprietary Freddie Mac data and information on local markets to assess where each market currently is in relation to its own long-term stable range for home purchase applications, payment-to-income ratios (which allows measurement of changes in home purchasing power), proportion of on-time mortgage payments, and the local employment picture. And that’s the catch: an index that ostensibly speaks to “the housing market” is currently drawing strength from employment and delinquency rates as opposed to more focused housing metrics like applications and sales.
In February the national MiMi was -3.11 points which indicates a weak housing market overall and was 0.03 points below the January MiMi. However, the number was 0.67 point higher than in February 2013 and the 3-month trend was +0.12 showing an improving housing market. The all-time low MiMi was -4.49 in November 2010 when the housing market was at its weakest.
Eleven states and the District of Columbia were in their stable range of housing activity, the same number as in January and up from seven plus the District one year ago. Four metro areas, three of them in Texas, are considered stable and in range where no areas were considered so in February 2013. Among the states performing the best are North Dakota, Wyoming, DC, Alaska, and Louisiana.
Twenty-eight states and the District are considered to be improving based on their three-month trend as are 27 of the 50 metro areas. The most improved states were South Carolina, Louisiana, and Ohio while the most improving metro areas include Charlotte, Columbus, and Nashville. Kansas City, St. Louis, and Minneapolis lost ground in their three-month trend after declines in purchase application activity and local employment data.
Freddie Mac Chief Economist Frank Nothaft said, “Despite a slowdown over the winter months, the housing market continues to show improvement in most states, although at a somewhat slower pace. And while not all the MiMi indicators are trending in a better direction — in particular, home-purchase applications have weakened in many areas — gains in local employment and loan performance have really helped many markets across the country, especially those that were hardest hit. Outside of these areas we are also seeing positive improvement from the Carolinas and Tennessee as their local unemployment rates fall further.”
Mortgage rates moved sharply higher today on a combination of factors including strong economic data, developments in Ukraine, and prevailing market momentum. That momentum risked turning negative as soon as Monday, when rates ended their impressive 7-day rally. Rather than simply turn around and head the other direction, however, rates managed to hold mostly sideways until today.
Part of the resilience had to do with Geopolitical risk swelling earlier in the week. As we noted on Tuesday, such strength only lasts as long as the risk stays elevated.
“When it comes to bond market rallies that draw strength from geopolitical risk, the ‘catch’ is that they rely on that risk staying elevated if the gains are to persist. That means the longer Ukraine goes without breaking out into civil war, the harder it will be for rates to maintain this morning’s gains without being acted upon by another beneficial force such as lackluster economic data. In other words, today’s improvements present a good opportunity to lock.”
As such, today’s sharpest move in bond markets (which include the mortgage-backed-securities that dictate lenders’ rates) came after Ukraine headlines suggesting solid steps toward deescalation of military involvement. Momentum was already slipping into negative territory after stronger economic data this morning. When economic reports are better than expected, bond markets tend to weaken, which pushes rates higher, all things being equal.
The net effect was a move back to 4.5% for most lenders as the most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution). It had been 4.375% yesterday, and some lenders may still be competitively priced at that rate. When adjusted for day-to-day changes in closing costs, today’s rates are 0.06% higher.
Bond markets are closed tomorrow and only a few lenders will be issuing rate sheets.
Mortgage rates were slightly higher today as investors continued to pull back from yesterday’s geopolitically motivated buying spree. Tensions in Ukraine had created a short term spike in demand for fixed income securities like Treasuries and the mortgage-backed-securities (MBS) that most directly influence mortgage rates. Higher demand means lower rates.
As we saw yesterday, that spike in demand led to moderate improvements in rates, but had already started fading by the end of the day. This morning simply continued in that same vein, resulting in higher mortgage rates. That said, the weakness has been merely moderate. Weaker housing data helped to prevent further bond market weakness (bonds tend to improve when economic data is weaker than expected).
The most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) remains centered on 4.375%. Some lenders are close to 4.25% and fewer still are at 4.5%. When adjusted for day-to-day changes in closing costs, today’s rates are 0.02% higher. Despite the modest weakness, rates are still much closer to their recent lows than they are to the highs seen in early April.
Mortgage rates began the day without any hint of the drama that was to come. The first rate sheets of the day were little-changed compared to yesterday’s latest offerings. Then markets of all shapes and sizes went on a fairly wild ride. Stock markets and currencies took part in a massive move toward safer-haven assets without any obvious catalyst.
While such herd-like movements can happen often in financial markets, they’re rarely this big. Today’s resulted in more than 30 points of weakness in the S&P at times. As far as mortgage rates are concerned, they fell at the fastest pace of the month to their lowest levels in over a month after lenders released better rate sheets in the afternoon–some of them more than once.
he most prevalently quoted conforming 30yr fixed rate for best-case scenarios (best-execution) had been fairly well split heading into today between 4.375% and 4.5%. Today’s move was big enough make 4.375% the higher end of the range, with 4.25% quickly coming back into view for many lenders. Adjusting for changes in closing costs, rates fell 0.08% today.
Will it continue? There’s never any way to know what tomorrow brings for financial markets, only generalities about risk vs reward. Those who do a good job of identifying risk/reward imbalances end up having the most successful hedge funds. But locking a mortgage rate is one decision based on a single facet of the market (whereas hedge funds, etc. will be heavily diversified in the hopes that their bad bets cost them less than their good bets earn). With that in mind, there are several good thoughts in the ‘perspectives’ section below.
It really boils down to personal preference, and there’s no wrong answer right now. That said, if you choose to float on the back of these strong gains, set a limit for yourself as to how much rates would have to rise before you’d lock to prevent further losses. Then be prepared for markets to turn right back around and head to lower rates, seemingly to spite you and you alone (because that’s just how it works sometimes!).
The Mortgage Bankers Association (MBA) noted this morning that mortgage credit was slightly more available in March than it was in February. The Association’s Mortgage Credit Availability Index (MCAI) rose to 114.00 from 113.5 in February. Higher index values indicate higher credit availability or looser guidelines.
Mike Fratantoni, MBA’s Chief Economists said, “Consistent with past months, many lenders and investors are providing borrowers seeking higher loan amounts with a broader range of financing options by introducing new jumbo loan programs. Over the month, some lenders made a complete exit from wholesale lending operations, while other lenders moved to enter that space or expanded operations.”
MBA said the trend of increased availability for jumbo loan programs is consistent with behavior MBA has been monitoring in its Weekly Applications Survey which shows growth in purchase volume for applications with higher loan amounts and contraction in home purchase application volume for lower-balance loans. The association noted that similar trends have been seen in the National Association of Realtors’ (NAR) existing home sales data as well and that lenders are likely moving to create a broader range of jumbo products in order to capture the increasing demand for such financing in the market.
More potential buyers are out trolling the nation’s neighborhoods for their dream homes. Unfortunately, they are finding little to look at and, even worse, they are finding higher prices than they expected.
“People quite frankly came out and got sticker shock because they’re coming out to shop now, or they came out in January and February to shop, and they picked up the price sheet and saw, ‘Wow that’s way more than I thought’ because home prices had gone up so much in 2013,” said Brad Hunter, chief economist at Metrostudy.
Home prices are up 12.2 percent from a year ago, according to the latest February reading from CoreLogic. Meanwhile, wages are up just 2.1 percent from a year ago, according to Friday’s report from the Bureau of Labor Statistics. Investors, laden with cash, are buying fewer homes this spring, which leaves regular, mortgage-dependent buyers to pick up the slack.
While home prices are still well off their peak of the housing boom in 2006, it still costs the average homebuyer considerably more to buy a home today than it did then.
That is because mortgage lenders require larger down payments and higher incomes to support the debt. Despite the fact that the rate on the 30-year fixed mortgage is slightly lower than it was in 2006, it is now a far more popular product in the market, because all those “creative” mortgage products of the past are either gone or illegal.
Just 65 percent of mortgage originations in 2006 were fixed rate, while more than 95 percent of them are today, according to Black Knight Financial Services. In 2006, a buyer could put no money down on a teaser-rate loan with a rate as low as 1 percent for the first year. No more.
Rising mortgage rates and costs, tighter credit conditions, higher home prices. Add it all up, and affordability shrinks.
In fact, more than half the homes currently on the market in seven major American metros are currently unaffordable for local residents, according to a Zillow analysis of incomes at the end of last year with respect to mortgage and home value data.*
Among the 35 largest metros nationwide, more than half of homes currently listed for sale in Miami (62.4 percent), Los Angeles (57.2 percent), San Diego (55.3 percent), San Francisco (55.2 percent), Denver (52.8 percent), San Jose, Calif. (50.9 percent) and Portland, Ore. (50.3 percent) are unaffordable by historical standards, according to Zillow.
“As affordability worsens, we’re already beginning to see more of the kinds of worrisome trends we saw en masse during the years leading up to the housing crash. These include a greater reliance on non-traditional home financing, smaller down payments and a greater pressure to move further away from urban job centers in order to find affordable housing options,” said Zillow’s chief economist, Stan Humphries. “We’re not in a bubble yet, but we’re beginning to see the early signs of one in some areas.”
Housing markets like Houston, Phoenix and Charlotte, N.C., are also showing affordability far weaker than the national average. Thirty-three percent of homes nationwide are considered unaffordable for the average local resident.
Home builders, who raised prices dramatically in the past year, are seeing the worst of it; they are reporting higher buyer traffic, but far less pull-through on sales than normal. Some are now offering incentives, like free upgrades in the home. It is tougher for them to lower prices now, because they are still faced with higher costs for land, labor and materials.
Despite weakening affordability, home price growth is still historically strong. That is because there is so little supply on the market for sale nationwide. Millions of homeowners are still underwater on their mortgages, and therefore unable to move. Other homeowners see prices rising and want to wait longer to see how high they go.
On top of that, home builders, while increasing housing starts, are still well below normal rates of construction. And then there is basic consumer confidence, which is not fully back to where it needs to be.
“I think buyers are extremely fickle, and what’s weird about it is the market is in a funk on both sides, it’s like trying to get pandas to mate at the zoo,” said Glenn Kelman, CEO of Redfin, an online real estate brokerage. “Sellers feel like, ‘I can rent it out. I’ve got a very low mortgage rate on this place, and when I sell the house I’m also giving up a 30-year mortgage on it at 3.5 percent.'”
* Zillow determined affordability by analyzing the current percentage of an area’s median income needed to afford the monthly mortgage payment on a median-priced home, and comparing it to the share of income needed to afford a median-priced home in the pre-bubble years between 1985 and 2000. If the share of monthly income currently needed to afford the median-priced home is greater than it was during the pre-bubble years, that home is considered unaffordable for typical buyers.
The U.S. economy created nearly 200,000 new private-sector jobs last month, a closely watched economic indicator reported on Wednesday, feeding hopes about the economic recovery and a thaw in labor markets.
The ADP National Employment report said total private payrolls jumped by 191,000 in March, but sharply revised upward February’s figure, to 178,000 from 139,000. Analysts in a consensus estimate had expected a gain of 195,000 jobs.
Small business created 72,000 total jobs, ADP said, while medium-sized firms generated 52,000. Large businesses created 67,000 new positions during the month.
The data heightened Wall Street’s expectations over Friday’s non-farm payrolls report.
“It was a nice spring rebound and we had an upward revision for February,” said Yelena Shulyatyeva, an economist with BNP Paribas in New York.