Mortgage lending rates have been on the rise, and they've been on the rise in a big way. Over the past week it's possible that someone inquiring on the 30-year fixed-rate loan could have been quoted a price 50-basis points higher than what was available a month ago.
Rates have pulled back slightly, but they remain elevated compared to February's lows. We expect them to remain elevated. Markets appear less risk averse: Investors are no longer huddling behind U.S. Treasury securities every time Greece hiccups. The major stock market barometers – the Dow Jones Industrial Average and the S&P 500 Index – are approaching four-year highs.
In short, investors want more return. They are less satisfied with the 2% return offered on 10-year U.S. Treasury notes, which makes these notes more risky. If more investors demand a higher coupon payment, more investors will sell low-coupon Treasury securities, thus forcing the yield on these securities to rise.
As U.S. Treasury note and bond yields go so goes mortgage-backed securities yields and so goes mortgage lending rates. We are not terribly concerned though. We don't think rising rates will crimp the housing recovery, because higher economic growth and rising employment will more than offset higher interest rates.
Home builders appear to share our sentiment. The National Association of Home Builders sentiment index shows optimism has risen to a five-year high. This suggests to us the bust is officially over and that housing is on sustainable growth trajectory.
That said, housing starts did edge down in February, but from an upwardly revised January posting. Permits were the positive takeaway, increasing 5.1% for the month.
Last week we mentioned that if we saw a reversal of fortune in Las Vegas, then the housing recovery has likely turned the corner and become a nationwide phenomenon. This might just be serendipity, but, lo and behold, the FDIC reports that single-family home permits in Nevada increased 16.1% in the fourth quarter of 2011 compared to the fourth quarter of 2010. Maybe miracles really do happen.
Like new-home sales, existing-home sales are also displaying sustained strength. Sales dipped slightly – by 0.9% to 4.59 million annualized units – in February, but the data follow an extremely strong and upwardly revised January sales posting. Over the past six months, sales have been trending perceptibly higher.
We are further encouraged by the trend in existing home prices, which have been firming and moving higher in 2012. The median price of an existing home moved up 1.3% to $156,600 in February.
Overall, we like the direction the housing market has taken. We also like the idea of mortgage markets moving to more normalized, market-driven pricing. We think this points to a much stronger, sustainable market over the long term.
Economic Indicator, Release Date and Time, Consensus Estimate, Analysis
Pending Home Sales Index(February)
Mon, March 26,10:00 am , et
Important. Recent readings point to higher private residential real estate investment.
Tues, March 27,10:00 am , et
Important. Economic growth is outweighing higher gasoline price concerns.
Wed., March 28,7:00 am , et
Important. Purchase applications have been resilient despite the spike in interest rates.
Gross Domestic Product(4th Quarter 2011)
Thurs., March 29,8:30 am , et
3.0% (Annualized Growth)
Important. Growth above the psychological 3% level could push interest rates higher.
Time to Return to the Real Lending World
One of our soap box issues over the past year has been the lack of private lending money. Our interest was naturally piqued when we read that Institutional Risk Analytics released a report titled "The Real Role of Banks in Residential Mortgage Finance."
The report basically expounds many of our concerns: The Federal Reserve's low-rate policies are discouraging private money from entering the mortgage-backed securities market, which means many lenders have to adhere to the strict standards of Fannie Mae and Freddie Mac. Having the market dominated by the Federal Reserve and two government-backed entities attenuates private credit formation.
Rising mortgage lending rates would draw more private capital into the market, which means there would not only be more credit but more credit that would meet the demands of a more diverse group of borrowers.
To be sure, the spike in rates we've seen over the past week has taken the wind out of the refinance boom. But as more borrowers realize that higher rates are more likely than lower rates, more borrowers will be motivated to act and more lenders will be motivated to lend.
It's also worth remembering that even if mortgage lending rates rise above 5%, the monthly payment on a median mortgage would make up only 14% of the current median income, because homes are so affordable these days. Rising rates would not disrupt the market, they would simply reset expectations to market reality.
Article courtesy of Patti Wilson, Senior Loan officer Mutual of Omaha Bank.
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