Mortgage update for the week of August 26, 2013

Keeping you updated on the market! For the week of August 26, 2013

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MARKET RECAP Expectations Theory Sways Markets Existing-home sales soared to 5.39 million annualized units in July, far surpassing the consensus estimate for 5.12 million units. The NAR cited “panic” over rising interest rates for the surge in buying activity. “ Panic” might be an overstatement. Expectations, more than anything, was the likely motivator. More consumers, shocked by the spike in lending rates that occurred two months ago, expect both interest rates and housing prices to push higher. Therefore, it's understandable that buyers acted as they did. The past – at least the near-term past – is frequently prologue. On the lending front, rates have moved to a higher plateau compared to the plateau they occupied earlier this year. This past week, mortgage rates moved notably higher again, as if they were attempting to reach an even higher plateau. Rates today are about where they were two years ago. Rising rates have jarred memories: Everyone today now realizes rates don't move only down; they also move up. A few years ago, it appeared home prices could move only down. Since then, price action continues to prove that's hardly the case. The median price of an existing home rose to $213,500 in July, a 13.7% increase from July 2012. This marked the 17th-consecutive month where prices have increased year over year. As improbable as this might seem, the national median price is a mere 7.3% below the all-time high of $230,000 that existed seven years ago. It can be dangerous to extrapolate a trend indefinitely; trees don't grow to the sky, submarines don't descend to the depths of the ocean. But trends can hold for a while. We expect both trends – higher mortgage rates and higher housing prices – to prevail into the relevant future. The Federal Reserve assures us that mortgage rates will occupy a higher plateau. (We further explicate this subject below.) Home prices will remain at a higher plateau as well. Inventory remains tight, and buyer interest continues to expand. Just as important, the composition of the housing market is as healthy as it has been in years: Foreclosures and short sales continue to drop as a percentage of overall sales. Concurrently, price appreciation continues to lift more owners above water. Expectations point to less affordable housing in the future, so it's perfectly logical to act (buy) on those expectations today.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
S&P/Case-Shiller Home Price Index (June)	Tues., Aug. 27, 9:00 am, ET	0.5% (Monthly Increase)	Important. Home-price appreciation is a major positive that's lifting consumer confidence.
Mortgage Applications	Wed., Aug. 28, 7:00 am, ET	None	Important. Expectations of higher rates are driving purchase-application volume.
Pending Home Sales Index (July)	Wed., Aug. 28, 10:00 am, ET	0.7% (Increase)	Important. Increased supply and rising prices are spurring more sales activity.
Gross Domestic Product (2nd quarter 2013)	Thurs., Aug. 29, 8:30 am, ET	2.4% (Annualized Growth)	Important. GDP growth is expected to be revised upward, though it remains sluggish .

 

It's All About the Federal Reserve Until the recent past, interest rates were driven by the economy: recession or expansion, job growth, inflation, risk aversion, productivity, etc. These factors would converge to form an interest rate that best reflected consumers and investors expectations. It's different today. The Federal Reserve is the overriding factor in lending markets. Everyone is trying to game the Fed's next move on quantitative easing. Specifically, everyone is attempting to forecast when the Fed will begin tapering its purchases of Treasury notes and bonds and mortgage-backed securities. The Fed's purchases – its demand – for these instruments is largely responsible for the low lending rates we've enjoyed over the past few years. The chief reason mortgage rates moved so high so quickly in past months is that many market watchers expected the Fed to begin tapering next month. Markets, after all, are anticipating entities (they act on expectations), so mortgage rates naturally move higher on the prospect of higher rates. Based on the minutes of the last meeting of Fed governors, the Fed is unlikely to begin tapering as early as September. Inflation remains low and job growth remains sluggish. We don't expect either to pick up soon, which is why we think tapering could be delayed until later in 2013, and possibly into 2014. But as long as market participants are anticipating higher interest rates, there is a good chance rates will continue to rise. (Paradoxically, when the Fed actually begins tapering – when expectations become reality – rates could actually fall.) Needless to say, this is confounding market, but it's still one in which we think it's more prudent to act today than to wait and anticipate tomorrow. Article courtesy of Patti Wilson, W. J. Bradley.

Mortgage Matters -Update for the week of August 19, 2013

Keeping you updated on the market! For the week of August 19, 2013

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MARKET RECAP Optimism Reigns, Tread Cautiously  Homebuilders haven't felt this upbeat since the waning days of 2005. We know this because the NAHB/Wells Fargo Homebuilder Sentiment Index hit 59 this month, a number last seen nearly eight years ago. Moreover, it appears unlikely optimism will fade anytime soon: Many homebuilders are reporting higher current sales and stronger pricing. Spirits are always buttressed when buyers are willing to enter the market when prices are rising. On the existing-home side, the logjam of tight supply appears to be loosening. Nationally, the number of existing homes for sale remains 5% lower than the number that existed this time last year. Inventory, though, was up 1.4% in June. In many local markets inventory is being drawn in by persistent price appreciation. This is no surprise: rising prices always draw more supply to market. Rising prices have also drawn more housing scrutiny. This, too, is no surprise. The closely followed S&P/Case-Shiller Home Price Index is up 12.1% year over year. Of course, real estate markets are local markets, and in many local markets gains far exceed the national numbers ( Las Vegas and Phoenix come ready to mind). Double-digit average annual price increases are unsustainable over the long term. Price growth within the 2%-to-5% range is the norm. Therefore, we're not surprised to see growing speculation on the prospects of another housing bubble. On that front, we're not terribly concerned. We don't think housing is even close to approaching the bubble that developed seven years ago. Much of the strong price gains we're seeing are off a severely depressed base (again Las Vegas and Phoenix come to mind). When the bigger picture is brought into focus, prices nationally remain reasonable. Since the housing bubble burst in 2007, people continually question whether housing is a safe investment? This is understandable: The perception before the bubble burst was that houses were always a safe investment. It's important to keep in mind that safety, reward, and risk aren't imbedded in an asset class – houses, stocks, bond, etc. – they're embedded in time and price. A house purchased in 2000 was safe and offered a lot of reward with little risk. By 2007, the paradigm had reversed – houses were unsafe and risk was high. As a general rule, the longer the uptrend is sustained, the more risky an asset class becomes. We liken today's housing market to the middle innings of a baseball: There is still more action (price gains) ahead. But there is also plenty of action already behind us, which is why when housing was skimming along the bottom (at the beginning of the game), we continually pounded the table to get in the game.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 21, 7:00 am, ET	None	Important. Rising rates could stimulate higher purchase-loan activity.
Existing Home Sales (July)	Wed., Aug. 21, 7:00 am, ET	5.12 Million (Annualized)	Important. Rising inventory is helping to lift sales volume.
Federal Reserve FOMC Minutes	Wed., Aug. 21, 2:00 pm, ET	None	Important. Hawkish commentary on low rates and bond purchases will push interest rates higher.
New Home Sales (July)	Fri., Aug. 23, 10:00 am, ET	485,000 (Annualized)	Important. Sales are expected to ease in July, but the long-term trend remains on an up-sloping trajectory.

 

Pressure is Mounting For the past six weeks, mortgage rates have been placid – trending in a very tight band. Next week, they could break out of the upper band. We say that because the 10-year U.S. Treasury note – a benchmark lending rate – has broken out to the upside. As the 10-year note goes, so, too, usually goes the 30-year fixed-rate mortgage. Over the past few months, we've frequently opined that the days of the 3.5% 30-year loan that prevailed earlier this year were gone and were unlikely to return anytime soon. At the same time, we've opined that rates are primed to rise. We continue to hold these opinions to this day. That said, we don't see mortgage rates moving materially higher in the short term. Economic growth remains anemic, and job growth continues to lag behind the Federal Reserve's target rate. Therefore, the institutional imperative supports keeping rates low. Our assessment of the mortgage-rate environment points to mildly rising rates (perhaps five to 10 basis points). Longer-term – over the next year – the probabilities overwhelming point to rates moving higher, which is why we continue to say that the risk in this market resides in procrastination.

Article courtesy of Patti Wilson W.J. Bradley.

Mortgage News from Sanibel Florida

Keeping you updated on the market! For the week of August 12, 2013

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MARKET RECAP More of the Same, But for How Long? For now, the cavalcade continues; that is, the cavalcade of home-price increases that began nearly two years ago. CoreLogic's Home Price Index shows prices increased 1.9% in June compared to May, which marks the 16 th consecutive monthly increase. This latest increase lifts the index's year-over-year gain to 11.9%. For 2013, home prices are already up nearly 10%. But not all indicators suggest the trend will continue unabated. Trulia's data show asking prices dropped 0.3% in July compared to June, which marks the first monthly decrease since this past November. A slowdown in home-price gains wouldn't necessarily be bad. We've argued in the recent past, that double-digit yearly price increases are unsustainable. A lower rate of annual increase would be a more sustainable rate, and one more attuned to historical norms. The last thing any of us wants is another bubble market followed by a bubble burst. We've also a seen a slowdown in the rise in the price of mortgage funding over the past month. Rates, though higher than they were six months ago, have stabilized. What's more, it appears consumers are becoming acclimated to the new higher-rate reality. A recent survey by Fannie Mae finds that 60% of respondents believe interest rates will increase over the next 12 months. At the same time, three out of four of these respondents believe now is a good time to buy a home. The prospect of buying an appreciating asset appears to trump the higher cost of financing that asset. But are the respondents expectations properly calibrated? After the latest employment report, we are less sure of interest rates rising. The employment report, issued the past Friday, points to sluggish job growth. In July, businesses increased payrolls by only 162,000, roughly 20,000 below most economists' expectations. To be sure, the unemployment rate dropped to 7.4% from 7.6%, but this was attributed to a lower labor-participation rate, which fell to a 35-year low. The current trend in labor participation runs counter to recent history. After a recession, the labor force usually grows. But this post-recession period has been an anomaly. We are four years into a recovery, yet labor-force growth, as well as job growth, remains stubbornly stagnant. Many economists believe disappointing job numbers won't dissuade the Federal Reserve from throttling back on quantitative easing. In fact, a few economists speculate the Fed could throttle back as soon as next month. At a minimum, that means mortgages won't drop any further. We're not convinced, and we don't think most market participants are either. Mortgage rates have held steady for the past six weeks, as has the yield on the benchmark 10-year U.S. Treasury note. Given stubborn economic weakness, we expect quantitative easing to continue through the remainder of 2013. Moreover, quantitative could even extend deep into 2014, depending on who takes the reigns of the Federal Reserve next year after Chairman Ben Bernanke steps down. Of the frontrunners, one in particular, Janet Yellen, appears keen to keep the Fed's current monetary policies going for a while longer.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Aug. 14, 7:00 am, ET	None	Important. Purchase activity is picking up as consumers become acclimated to higher lending rates.
Consumer Price Index (July)	Thurs., Aug. 15, 8:30 am, ET	All Goods: 0.2% (Increase) Core: 0.2% (Increase)	Important. Consumer-price inflation remains below the Federal Reserve's target rate and will have little impact on interest rates.
Home Builder's Index (August)	Thurs., Aug. 15, 10:00 am, ET	55 Index	Important. Builders remain confident, but optimism appears to be plateauing.
Housing Starts (July)	Fri., Aug. 16, 8:30 am, ET	895,000 Units (Annualized)	Important. Starts are expected to return to their upward trajectory after June's disappointing pullback.

 

The End of the 30-Year Fixed-Rate Loan?  President Obama caused a stir this week when he said he'd like to see the private sector take over as the primary driver behind the mortgage market. The president went as far as to say he'd like to see Fannie Mae and Freddie Mac dismantled. It's a worthwhile idea, but there are a few obstacles. For one, the government, through Fannie Mae, Freddie Mac, the FHA, and the Department of Veterans Affairs, backs 90% of all newly originated mortgages. For the most part, there really is no private mortgage market. At the same time, the president said he'd insist on keeping the 30-year fixed-rate mortgage affordable at today's low rates. Unfortunately, the goal of the prevailing rate on the 30-year fixed-rate mortgage is incongruous with the goal of privatizing the mortgage market. We say that because private money won't lend for 30 years at today's rates without government backing. So does this mean the end of the 30-year fixed-rate mortgage? That's unlikely. At the same time, it's also unlikely we'll see a mortgage market dominated by the private sector. In other words, it looks like business as usual into the relevant future. Article Courtesy of Patti Wilson of W. J. Bradley.