Mortgage Matters July 15, 2013

Keeping you updated on the market! For the week of July 15, 2013

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MARKET RECAP Mortgage Rates Hit Two-Year High We know more than a few people who are smacking themselves on the forehead these days, frustrated they didn't take advantage of the mortgage rates that prevailed two months and 75-basis points ago. Frustration stems from holding out for another 25-basis point drop. You may know it by the popular idiom “penny wise, pound foolish:” Hope to save 25-basis points, but loose 75-basis points in the process. Of course, no one knows with certainty where mortgage rates are heading, but whenever a market has been in a sustained trend, and mortgage rates were in a sustained downward trend for years, the probability grows that each successive day will bring a reversal of that trend. (Economists refer to this phenomenon as Minsky's “Financial Instability Hypothesis.”) To be sure, mortgage lending rates are higher, but not unreasonably so. Today's rates still remain attractive from a historical perspective. The good news is that there have been a few positives associated with rising rates. Though they have slowed refinance activity considerably, they have prompted more homebuyers into action, for fear rates could go higher still. We're not surprised; we've noted many times in the past that anticipation rules people's actions. With all the focus on mortgage rates over the past few weeks, it's worth noting that the housing market nationally is as healthy as it has been in years. CoreLogic's latest data on distressed properties reveal just how healthier the market has become. The inventory of properties in a state of foreclosure fell 29% year over year in May, which means fewer than 2.3 million mortgages – or 5.6% of home loans – remain seriously delinquent. This is the lowest level since December 2008. At the same time, Lender Processing Services data show the number of borrowers who remain underwater fell 47% from the first quarter of 2012 to the first quarter of 2013, which means the percentage of underwater borrowers has dropped to 14.7% of all active loans. This, too, is a multi-year low. Rising home prices and rising consumer demand for homes will continue to reduce distressed inventory and lift more homeowners into positive equity. When stronger job growth is factored in, we're looking at a very healthy outlook for both existing- and new-home sales over the next 12 months. With that said, many pundits remain focused on rising mortgage rates, but we believe unduly so. As long as the economy continues to improve and create jobs, the housing market will continue to improve regardless if rates rise. We were in the minority a year ago when we said mortgage rates were no longer the key variable in the recovery. It appears we were right on that account.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Price Index (June)	Tues., July 16, 8:30 am, ET	All Goods: 0.3% (Increase) Core: 0.2% (Increase)	Important. The CPI remains below the Federal Reserve's trigger rate of 2.5% and should not impact interest rates.
Homebuilders' Index (July)	Tues., July 16, 10:00 am, ET	53 Index	Important. Homebuilder sentiment points to stronger starts and higher new-home sales through 2013.
Mortgage Applications	Wed., July 17, 7:00 am, ET	None	Important. Rising rates continue to slow refinances, but the four-week purchase trend remains stable.
Housing Starts (June)	Wed., July 17, 8:30 am, ET	954,000 Units (Annualized)	Important. Housing is once again becoming an important driver of economic growth.

 

Job Growth and Interest Rates Last week, we mentioned that Federal Reserve monetary policy is, in essence, closely tethered to job growth: The Fed won't reign in loose monetary policy and low interest rates until the unemployment rate is around 6.5%. The problem, as we noted, is that the unemployment rate is a moving target. Yes, unexpectedly strong job growth can occur, as what occurred in June, with payroll growth hitting 195,000 for the month, roughly 25,000 higher than most estimates. At the same time, unemployment held steady at 7.6% because more people have entered (or re-entered) the job market. So it would appear the Fed would be firmly committed to holding interest rates low for the foreseeable future until 6.5% unemployment is achieved. It's becoming more likely that's not the case. The minutes from the latest meeting of Federal Reserve policymakers show that half want to wind down quantitative easing (money printing, low interest rates) by the end of the year. Given the unimpeded rise in interest rates over the past two months, it's become obvious many credit-market participants are expecting the Fed to wind down sooner than later. The point we need to emphasize is that waiting for 3.5% 30-year fixed-rate mortgages will likely mean waiting for quite a while. At this point, 5% is the more likely future rate, which makes today's rates, in the mid-4% range, look attractive in comparison. Article courtesy of Patti Wilson of W.J. Bradley.