Mortgage Market Update - Now What?????

Keeping you updated on the market! For the week of October 7, 2013

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MARKET RECAP Now What? Things have played out pretty much as we expected: The Affordable Healthcare Act (Obamacare) was implemented on schedule. Congress and the president were unable to reach a budget agreement, hence the federal government shutdown. Actually, the federal government didn't really shut down. Roughly 30% of the civilian government workforce was simply furloughed. Most government departments continue to function. So “shutdown” isn't the right word; “cutback” is more like it. Whatever we call it, the furloughs and cutbacks have impacted the mortgage market. Because many IRS employees were furloughed, it's taking lenders longer to verify reported income with the IRS. Without verification, it's impossible to sell mortgage loans on the secondary financial markets. This liquidity is vital to mortgage lending. Needless to say, delays are proving frustrating to lender and borrower alike, especially in light of lower mortgage rates. In the past weeks, we've opined that interest rates would likely fall with the rise in uncertainty the budget impasse and new healthcare legislation imparts. That's been the case: the yield on the 10-year U.S. Treasury note – a bellwether for long-term mortgage rates – has fallen 15 basis points to below 2.60%. In turn, mortgage rates have fallen. Our best estimate was that we'd see the rate on the 30-year fixed-rate loan vacillate between 4.25% and 4.50%. Depending on which survey you look at, we are either right or somewhat right. Bankrate.com's national survey puts the average rate at 4.41%, while Freddie Mac's survey puts it at 4.22%. The frustration on our end is raised because borrowers are having a difficult time exploiting today's lower rates. To be sure, lower rates are a nice relief, but if you're unable to close on a low-rate loan in a timely manner, what's the point? But don't give up. Anyone looking to refinance a mortgage or purchase a house shouldn't delay the financing process. If they are concerned about rates rising, they should consider locking their rate for a longer period. Admittedly, rates could go lower, but they could also go higher – and go higher in a hurry should a budget deal be announced. Of course, none of us knows when that will happen. But with the long-term impetus for rates to rise, the benefits of waiting to capture a significantly lower rate is more than offset by the risk of waiting and being faced with a much higher rate.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (August)	Mon., Oct. 7, 3:00 pm, ET	$10 Billion (Increase)	Important. Credit use is increasing at a slower pace due to falling retail spending.
International Trade (August)	Tues., Oct. 8, 8:30 am, ET	$39.5 Billion (Deficit)	Moderately Important. U.S. businesses remain cautious on global economic growth.
Mortgage Applications	Wed., Oct. 9, 7:00 am, ET	None	Important. Government delays in processing income-verification requests will temper loan activity.
Federal Reserve FOMC Minutes	Wed., Oct. 9, 2:00 pm, ET	None	Important. Credit markets will receive additional insight on the Fed's tapering and interest-rate policies.

 

Has the Housing Recovery Stalled? We've been warning that double-digit year-over-year home-price increases would likely end soon. Perhaps we were too pessimistic. CoreLogic’s Pending Home Price Index report for September puts price growth in the 12.7%-range, and shows 0.2% appreciation month over month. This suggest home prices could continue to grow at a double-digit year-over-year rate through the end of the year. To be sure, home prices could continue to post double-digit gains through 2013, but we doubt they will be sustained much longer than that. Double-digit annual gains are simply unsustainable for an extended period of time. The good news is that single-digit annual price gains – 3%-to-5% – are sustainable, and we think they will prevail from 2014 on. We say that because there is still plenty of pent-up housing demand, particularly for younger adults who are suffering the most from the current economic malaise. When the economy finally kicks into gear, and we expect that to occur sooner than later, more buyer demand will hit the market. Home sales volume will improve and prices will continue to appreciate. We are not alone in our assessment. Goldman Sachs recently released a paper titled “Where is the Pent-Up Housing Demand?” that supports many of the contentions we've made over the past year: namely that lack of job growth, more than anything, is holding back the market. The paper also supports our contention that the vast majority of non-homeowners still aspire to homeownership. We are a buyer, not renter, nation. So, no, the housing recovery hasn't stalled. We still see price appreciation, and we see substantial sales-volume increases when the long-overdue economic recovery finally arrives.

Article Courtesy of Patti Wilson, American Momentum Bank.