Monthly Archives: March 2015

Mortgage Rates Slightly Improved Over Weekend

Mortgage rates fell moderately to begin the week, but haven’t yet returned to recent lows.  Even so, the improvement is a relief considering rates had only just begun fighting back against a big move higher that happened on Wednesday and Thursday of last week.  Friday then offered aglimmer of hope and today keeps hope alive.  That said, upcoming events could make for some more volatility, It’s not safe to assume that rates will continue to fall in the short term.

3.75% remains the most prevalently-quoted conventional 30yr fixed rate for top tier scenarios.  Most of the lenders that moved up to 3.875% last week are now back down to 3.75% and a few of the most aggressive lenders are offering 3.625%, but the vast majority are at 3.75%.

Wednesday harder-hitting data begins to come out.  It’s almost always the case that rates can react positively or negatively to important economic data.  The farther away from expectations the data is, the bigger the move can be in rates.  The leading example of this phenomenon is the Employment Situation Report, which has no equal in terms of market moving potential.  It comes out this Friday morning.


Why are interest rates so low?

Interest rates around the world, both short-term and long-term, are exceptionally low these days. The U.S. government can borrow for ten years at a rate of about 1.9 percent, and for thirty years at about 2.5 percent. Rates in other industrial countries are even lower: For example, the yield on ten-year government bonds is now around 0.2 percent in Germany, 0.3 percent in Japan, and 1.6 percent in the United Kingdom. In Switzerland, the ten-year yield is currently slightly negative, meaning that lenders must pay the Swiss government to hold their money! The interest rates paid by businesses and households are relatively higher, primarily because of credit risk, but are still very low on an historical basis.

Low interest rates are not a short-term aberration, but part of a long-term trend. As the figure below shows, ten-year government bond yields in the United States were relatively low in the 1960s, rose to a peak above 15 percent in 1981, and have been declining ever since. That pattern is partly explained by the rise and fall of inflation, also shown in the figure. All else equal, investors demand higher yields when inflation is high to compensate them for the declining purchasing power of the dollars with which they expect to be repaid. But yields on inflation-protected bonds are also very low today; the real or inflation-adjusted return on lending to the U.S. government for five years is currently about minus 0.1 percent.

Why are interest rates so low? Will they remain low? What are the implications for the economy of low interest rates?

If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate. The Fed’s policies are also the primary determinant of inflation and inflation expectations over the longer term, and inflation trends affect interest rates, as the figure above shows. But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.

The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States. What features of the economic landscape are the ultimate sources of today’s low real rates? I’ll tackle that in later posts.

Mortgage Rates Increase Rapidly

Mortgage rates rose rapidly today, almost completely erasing the improvement following last week’s Fed Announcement.  This is especially ironic considering most major media outlets are running Freddie Mac’s weekly mortgage rate survey headline.  Because that survey receives most of its responses on Monday and Tuesday, it fully benefited from the stronger levels earlier in the week after having totally missed out on last Wednesday and Thursday’s big move lower.  As such, the headlines suggest that rates are significantly lower this week.  That was certainly true on Tuesday afternoon, but rates have risen roughly an eighth of a point since then.  That’s a big move considering we’ve gone entire months without moving more than an eighth.

Specifically, what had been 3.625 to 3.75% is now 3.75 to 3.875% in terms of the most prevalently-quoted conventional 30yr fixed rates for top tier scenarios.  The upfront costs associated with moving down to 3.75 from 3.875% are still quite low.  If a borrower prefers paying a bit more upfront in exchange for lower payments, it’s worth looking into.  The breakeven time frame is between 4 and 5 years for most lenders (where the monthly payment savings supersede the additional upfront cost).

Yesterday, we discussed the fact that the move higher was strong enough that it shouldn’t be disregarded, but that it would take another day of similar weakness to confirm.  Instead, today ended up being significantly weaker.  This wasn’t due to trading levels in markets as much as it was simply lenders getting caught up with a quick market move.  In fact, apart from being a bit more volatile, today’s market weakness is almost exactly the same as yesterday’s.

Mortgage Apps Rise at Fastest Pace in 2 Months

Stoked by the lowest interest rates in several weeks the volume of applications for mortgages to both purchase and refinance homes increased by the largest percentages during the week ended March 20 than at any time since early January. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of application volume, jumped 9.5 percent on a seasonally adjusted basis from the week ended March 13 and was up 9.0 percent on an unadjusted basis.

Applications for refinancing made up 61 percent of the total, up 2 percentage points from the previous week with much of the activity centered on refinancing; MBA’s Refinance Index rose 12 percent compared to the previous week. The Purchase Index was 5 percent higher than the previous week on both a seasonally adjusted and an unadjusted basis, each reaching its highest level since January.  The unadjusted Purchase Index was 3 percent above its level during the same week in 2014.

FHA loans had a 13.3 percent share of the market, down from 14.3 percent the week before and 10.1 percent of applications were for VA loans compared to 10.3 percent.  Applications for USDA loans decreased from 0.9 percent to 0.8 percent.

Contract interest rates fell across the board during the week and the effective rate retreated for all products but the FHA-backed loan. The average contract rate for the 30-year fixed-rate mortgage (FRM) with conforming balances of $417,000 or declined to the lowest level since February at 3.90 percent with 0.37 point.  The previous week the rate was 3.99 percent with 0.40 point.

The 30-year jumbo FRM with loan balances greater than $417,000 decreased to 3.89 percent, the lowest level since January, from 3.94 percent.  Points decreased to 0.25 from 0.33.

Also reaching the lowest level since January, the rate for FHA-backed 30-year FRM dipped 3 basis points to 3.71 percent.  Points increased to 0.21 from 0.12 and the effective rate was unchanged.

The average contract interest rate for 15-year FRM decreased from 3.28 percent to 3.22 percent, the lowest level since February 2015.  Points decreased to 0.28 from 0.34.

The share of adjustable rate mortgages (ARM) increased to 5.8 percent of applications from 5.5 percent as contract rates on the 5/1 hybrid ARM fell to the lowest level since January.  The average rate was 2.97 percent with 0.38 point compared to 2.99 percent with 0.43 point the previous week.

MBA’s Weekly Mortgage Applications Survey covers over 75 percent of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100 and rate information is based on loans with an 80 percent loan-to-value ratio and points include the origination fee.

Fed Officials Trim Back Estimates Of Interest Rate Rises

Federal Reserve officials expect the path of future interest rate increases to be less aggressive compared to their projections from the end of last year, according to updated forecasts released Wednesday.

The policymakers also weighed in on their expectations for the economy over the next few years. They cut their outlook for growth. On the jobs front, central bankers see bigger declines in the jobless rate, and project inflation to be weaker. They also believe the jobless rate can fall to a lower level without sparking price pressures.

In the projections, a strong majority of Fed officials–15 out of 17–continue to predict the central bank will raise what are now near-zero short-term rates this year, while two predict the Fed will act next year.

Officials see a reduced amount of rate increases this year. Their median estimate for the Fed’s short-term interest rate target at the end of the year now stands at 0.625%, versus the 1.125% level forecast at the end of December. The median projection for the fed funds target at the end of 2016 is 1.875%, while the longer run estimate of the fed funds target rate held steady to 3.750%.

Slow but Positive Morning; Holding Gains After Data

It’s been an uneventful day so far for bond markets, but a stronger one.  The overnight session got thing off to a positive start as Treasuries made gains during Asian market hours.  The onset of European trading pushed us back in the other direction, but not enough to bring domestic bonds into negative territory.  As such, both MBS and Treasuries opened near Friday’s strongest levels.

From there, they’ve added to the gains, with the economic data being the easiest explanation.  Every report has been weaker than expected this morning with Industrial Production being the biggest miss.  That worked in our favor as it was the biggest report of the morning.  Both stocks and bonds traded that data as if it downgraded expectations for an early Fed rate hike, but only to a small extent.

There are no other major market movers on the calendar for this afternoon.

2015 Could be Best Year for Home Sales Since 2007 – Freddie Mac+

Freddie Mac’s economists restated their February forecast in their Economic and Housing Outlook just released for March, that 2015 could be the best year for home sales and new home construction since 2007.  That year there were 5.8 million sales – this year the economist forecast 5.6 million sales along with 1.18 million housing starts.

Len Kiefer, Deputy Chief Economist said, “This month kicks off the spring homebuying season. Between now and the end of June, we’ll see about 40 percent of all home sales for the year. So these next few months will essentially tell us whether or not 2015 will be a good or bad year for housing markets. Overall, we’re feeling good about housing and we expect this year to be the best year for home sales and new home construction since 2007.”  There are, the report says, several reasons to be optimistic.

About 80 percent of metro markets in the U.S. continue to be affordable based on data through the fourth quarter of 2014.  There are three drivers of affordability and house prices, the first drives, continue to rise across the country, but are still about 10 percent below their 2006 peak.  Peak-to-trough comparison can be misleading as many markets experienced unsustainable highs during the last decade but fundamental drivers, like payment-to-income and price-to-rent ratios indicate that most markets have home values that are sustainable.

The second driver, interest rates, were down in January by 0.75 percent from a year earlier and, while they have rebounded, still remain low on a year-over-year basis.  But, the caveat is that the third component of affordability, household income, will be the key driver of housing markets.  Incomes have largely stagnated over the past decade, barely rising and, after adjusting for inflation, actually falling for the median household, but even with this driver there were glimmers of good news in the most recent jobs report. Over the twelve months ending in February 2015 the economy added nearly 3.3 million jobs, the fastest pace since 2000. And with labor markets tightening there is an expectation the wages and incomes will rise.

One key demographic segment-Millennials aged 25 to 34-have started to see their job prospects improve recently. The employment-to-population ratio for those aged 25 to 34 has increased to 76.8 percent, the highest level since 2008. Better job prospects for Millennials will drive household formation and housing demand.

There has already been an indication of housing demand in rental markets which are seeing the lowest vacancy levels since 2000 which has led to rapidly rising rents across the country – an average of 3.6 percent in 2014 and nearly 11 percent over the last three years.  With rising demand and improving job prospects for younger households, rents will probably rise at or above the rate of inflation this year as well.

Mortgage Rates Lower Today

Mortgage rates continued lower at a steady pace for most lenders today.  The week continues to be slow in terms of domestic events and data, but it has been active in terms of Europe’s reaction to the start of European quantitative easing.  Most notably, European bond yields and the Euro itself have taken a sharp turn lower.  Both of those markets tend to correlate with US interest rates, which have benefited only modestly from this week’s movement in Europe.  That said, there’s no way to know where rates would be going this week if nothing was happening in Europe.

One of today’s domestic events did coincide with improvement, and that was the afternoon’s 10yr Treasury auction.  While mortgage rates are based most directly on mortgage-backed-securities (MBS), movements in Treasuries correlate almost perfectly, though by varying magnitudes.  As such, a sharper move lower in 10yr yields after the auction translated into a slightly less sharp–but still strong–improvement in MBS.  As such, several lenders released improved rate sheets in the afternoon.

We’re now firmly back to 3.875% as the most prevalent conventional 30yr fixed quote for top tier scenarios.  Some lenders are still at 4.0% and a scant few are at 3.75%.  Most borrowers would be quoted the same rate today as yesterday, and in those cases, the improvement would be seen in the form of lower closing costs.

Major Changes Coming for Credit Reporting

It was hailed by NBC news on Monday as the most radical change to credit reporting in decades and New York Attorney General Eric T. Schneiderman said his agreement with the three major national credit reporting agencies (CRAs) will reform the entire credit reporting industry and protect millions of consumers across the country.

The agreement between Schneiderman’s office and Experien, Equifax, and Transunion reported on Monday requires the CRAs to institute a number of reforms to increase protections for consumers, over a three year period.  While the agreement is specific to New York State, it is expected that most of the reforms will be instituted nationwide.

The three major CRAs maintain consumer credit information on an estimated 200 million consumers.  Information provided by “data furnishers” such as banks and collection agencies includes the type and amount of debt, both current and extending back seven years, and how consumers have managed that debt.  The CRAs aggregate information on individuals into files and provide reports to companies who use them to determine whether to grant credit to potential borrowers and at what cost.  The credit reports are also frequently used by employers to check on potential hires.

The Attorney General’s office said that in a 2012 study by the Federal Trade Commission 26 percent of participants found at least one potentially material error in their credit report and 13 percent received a higher credit score after successfully disputing an error.  These findings, Schneiderman’s office says, suggest that millions of consumers have material errors on their credit reports.

“Credit reports touch every part of our lives. They affect whether we can obtain a credit card, take out a college loan, rent an apartment, or buy a car – and sometimes even whether we can get jobs,” Schneiderman said. “The nation’s largest reporting agencies have a responsibility to investigate and correct errors on consumers’ credit reports. This agreement will reform the entire industry and provide vital protections for millions of consumers across the country. I thank the three agencies for working with us to help consumers.”

The new agreement calls for reforms covering some of the most commonly expressed complaints from consumers about the credit reporting process including accuracy, the fairness and efficacy of complaint resolutions, and the harm done to credit histories due to medical debt.

  • Improving the Dispute Resolution Process. Rather than relying as they do entirely in some cases on a fully automated complaint resolution process, the agreement requires that the CRAs have specially trained employees review all documentation submitted by consumers claiming that incorrect information belonging to other consumers has been mixed into their files or that they are the victim of fraud or identify theft. Even in cases where an automated dispute resolution system is employed a CRA employee must review the supporting documentation.
  • Medical Debt. Medical debt constitutes over half of all collection items on credit reports and often results from insurance-coverage delays or disputes. Under the new agreement CRAs must institute a 180-day waiting period before medical debt is included in a credit report. In addition, while delinquencies ordinarily remain on credit reports even after a debt has been paid, the CRAs will remove all medical debts from a consumer’s credit report once the debt is paid by insurance.
  • Increasing Visibility and Frequency of Free Credit Reports. While current federal law provides consumers with the right to receive one free credit report a year from each of the three major CRAs, many are not aware of that fact. The agreement requires the CRAs to include a prominently-labeled hyperlink to the website on the CRAs’ homepages. Consumers will also now be entitled to receive a second free report each year if they successfully dispute an item on their report in order to verify the accuracy of the correction.
  • Furnisher Monitoring. The Attorney General’s agreement requires the three CRAs to create a National Credit Reporting Working Group that will develop a set of best practices and policies to enhance the CRAs’ furnisher monitoring and data accuracy. This group will develop metrics for analyzing furnisher data, including: the number of disputes related to particular furnishers or categories of furnishers; furnishers’ rate of response to disputes; and dispute outcomes. Each CRA will implement policies to monitor furnishers’ performance and take corrective action against furnishers that fail to comply with their obligations.

Construction Spending Eased in January; Most Segments Higher on Annual Basis

Both publicly and privately funded construction dipped slightly in January from February levels the Census Bureau said today, although both total construction and the publicly funded segment did remain above January 2014 levels.  Construction put in place in all categories during the month was at a seasonally adjusted annual rate of $971.4 billion, 1.1 percent lower than the estimated $982.0 billion spent in December.  The number was 1.8 percent higher than the January 2014 estimate of $954.6 billion.

On a non-seasonally adjusted basis spending in January was estimated at $67.3 billion compared to 76.0 billion in December and 66.5 billion a year earlier.  This was an annual increase of 1.2 percent.

Privately funded construction was at a seasonally adjusted annual rate of 697.6 billion in January compared to $700.9 billion in December, a drop of 0.5 percent.  The monthly total, however, was 0.5 percent above the estimated at $694.1 billion of construction put in place in January 2014.

On a non-adjusted basis $50.1 billion was spent on all private construction during the month, down from $55.6 billion in December but an increase of 0.4 percent from a year earlier.

Private residential construction put in place during the month was at a seasonally adjusted annual rate of $351.7 billion, up 0.6 percent from December’s pace of $349.5 billion but 3.4 percent below the estimate in January 2014.  The pace of single-family residential construction was up 0.6 percent month over month to 204.9 billion and 9.7 percent higher than a year earlier.  Multi-family construction rose 1.9 percent from December to $48.8 billion which was nearly 30 percent above the estimate in January 2014.

On a non-adjusted basis there was $23.9 billion in residential construction during the month compared to $25.6 billion in December and 24.7 billion in January 2014, an annual decrease of 3.4 percent.  Single family construction spending totaled $14.1 billion for the month, a 10.3 percent annual increase while multi-family construction, at $3.7 billion, was up 28.6 from the previous January.

Publicly funded construction totaled $273.8 billion on a seasonally adjusted annual basis, down 2.6 percent from December but 5.1 percent higher than a year earlier.  Residential construction is estimated at $5.5 billion, down 1.7 percent month-over-month but 14.5 percent higher than in January 2014.