Do Lower Oil Prices Lead to Higher Housing Demand?

Keeping you updated on the market! For the week of December 8, 2014

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MARKET RECAP Do Lower Oil Prices Lead to Higher Housing Demand?  The question is intriguing, given the steep decline in oil and gasoline prices over the past couple months. After all, less money spent on gasoline, the more money that can be spent elsewhere. Housing is elsewhere.  CoreLogic recently tackled the oil/housing question in a blog post by one of its senior economist Molly Boesel. The quick answer is that it appears that lower oil prices can lead to higher housing demand. A few variables come into play, though: number of miles driven; the actual price of gasoline; and for certain homeowners, the price of oil for heating fuel.  Number of miles driven and gasoline prices are most interesting. Data show that the lower gasoline prices fall, the more buyers are willing to move from urban centers into higher-priced homes. The key is that consumers need to believe that lower gasoline prices are sustainable over the long haul. The longer gas prices fall, or hold lower levels, the more willing consumers are to buy a home, particularly a suburban home.   Predicting oil prices, though, is as difficult as producing mortgage rates, maybe more so. Oil prices can hold low levels for an extended time, as in the 1990s. But oil prices are frequently spiky, and the spikes can be quite volatile. Oil priced at $65/barrel in one year can soon be $140/barrel the next.  In short, we are not banking on oil prices holding these low levels. But if they do, the good news is that housing is likely to be a beneficiary. As for good news in the present, mortgage purchase applications continue to trend higher.  The Mortgage Bankers Association's purchase index was up again last week, posting a 3% increase. Purchase activity has been gradually ratcheting higher over the past month. We are seeing more purchase activity despite a slight decrease in mortgage credit availability.  This suggests more buyers are entering the market, and they are getting credit.  Going forward, sustained lower oil prices would be nice, and so would a sustained rise in purchase application activity. The former gives consumers more money, the latter signifies the return to a more normalized lending market.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Dec. 10, 7:00 am, ET	None	Important. Purchase activity continues to trend higher and portends rising overall housing sales.
Import Prices (November)	Thurs., Dec. 11, 8:30 am, ET	1.5% (Decrease)	Moderately Important. Lower oil prices will continue to depress the import-price index.
Retail Sales (November)	Thurs., Dec. 11, 8:30 am, ET	0.2% (Increase)	Moderately Important. Despite lower energy prices, sales in total dollars are rising. The good news is that more dollars are flowing to bigger-ticket items.
Producer Price Index (November)	Fri. Dec. 12, 8:30 am, ET	0.4% (Decrease)	Moderately Important.  Falling producer prices ensure interest rates will continue to hold today's low levels.

 

Where Do We Go From Here?  We're near the time of the year when people begin to gaze into their crystal ball. What should we expect for 2015? Bill McBride at CalculatedRiskBlog.com gathered estimates from a number of difference sources. So far, nothing is out of the ordinary. Most prognosticators see the recent past extending into the future. New home sales estimates range between 498,000 and 620,000 units on an annualized rate for 2015. (The NAR estimate is on the high end.) Total home starts range between 1.056 million and 1.3 million units on an annualized rate. (The NAR again offers the high-end estimate.)  On the price front, nearly everyone has throttled back price-appreciation expectations for next year. Estimates range between 2.4% and 5.2% annual price increases at the national level. (CoreLogic offers the high-end estimate.) This is no surprise. We've been saying since the beginning of 2014 that price appreciation will decelerate.  We expect it to continue to decelerate to within the range most analysts expect. This is, after all, a normalized range based on historical trends.  As for mortgage rates in 2015, CalculatedRiskBlog doesn't say.  But we see the rate on the 30-year fixed-rate loan hovering between 4.0% and 4.5% for the first quarter of 2015.  After that, it is hard to tell. Rates will depend on economic growth, job growth, wage rates, and inflation. If they are mostly up after the first three months, the Federal Reserve will start to talk up interest rates, which will lead to rates actually rising. Article courtesy of Patti Wilson, American Momentum Bank

The Big View.

Keeping you updated on the market! For the week of December 1, 2014

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MARKET RECAP The Big View The holidays are a nice respite. Things slow down a bit, which allows us to stand back and take in the big picture. We like what we see, because the big picture includes steady improvement in housing. As we reported last week, housing sales are trending higher. In addition, more sales are being financed with a mortgage. That we are seeing more purchase applications is a sign of more owner-occupied buyers. These buyers have always been the key drivers of the housing market. Recent trends in home prices point to more buyer interest and more inventory from which to choice. On the pricing front, S&P/Case-Shiller's closely followed 20-city price index rose 0.3% month over month for September. Year over year, the index is up 4.9%. This is the slowest pace of year-over-year price growth since October 2012. This is actually good news because we are seeing the pace of price appreciation return to historical norms, and historical norms are sustainable norms. That said, price appreciation is still found in most local markets. Of the 20 markets in Case-Shiller's index, 18 showed price gains for the month. We expect home prices to continue to appreciate in most markets Case-Shiller follows. We say that because we remain confident in the economic outlook. Fortunately, many consumers apparently share our perspective. Consumer confidence , overall, remains encouraging. Though down slightly in November, confidence has been on the rise through most of 2014. Better yet, consumers remain upbeat on the outlook for job creation. The latest data from the Conference Board show more people view the job market favorably. This, in turn, points to another favorable employment report next week. (Look for another month of 200,000-or-more new jobs for November.) The positive data on jobs, housing, and mortgage lending over the past six months gives us even more reason to be thankful this time of year. The good news is that we don't expect this sense of gratitude to abate any time soon.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (October)	Tues., Dec. 2, 10:00 am, ET	0.5% (Increase)	Important. Rising residential spending points to rising home sales in coming months.
Mortgage Applications	Wed., Dec. 3, 7:00 am, ET	None	Important. Purchase activity is on the rise, which is an important development for the owner-occupied market.
Labor Productivity & Costs (3rd Quarter 2014)	Wed., Dec. 3, 8:30 am, ET	Productivity: 1.7% (Increase) Costs: 0.6% (Increase)	Moderately Important. Productivity outpacing costs is a positive for future wage growth.
Employment Situation (November)	Fri., Dec. 5, 8:30 am, ET	Unemployment Rate: 5.7% Payrolls: 230,000 (Increase)	Very Important. Strong job growth points to sustained housing growth.

 

The Best of Both Worlds   The economy continues to hum along. What's more, it continues to hum along at a higher pitch than most economists had expected. Gross Domestic Product (GDP) – the value of all goods and services – was revised up to an annual growth rate of 3.9% in the third quarter. The consensus estimate called for GDP to be revised to show 3.2% growth. Within the GDP data, the trends in private investment were particularly encouraging. Both nonresidential fixed investment and residential fixed investment ratcheted higher. This is good news because more investment today leads to more consumer spending tomorrow. We're not particularly surprised that economic growth is picking up. After all, the economy has been producing new jobs at the rate of 200,000+ per month for most of 2014. On the other hand, interest rates are a surprise. When economic growth ratchets higher, so, too, do interest rates. This time around is different, though. Interest rates continue to remain subdued. The 10-year U.S. Treasury note continues to hover around 2.3%. This is the low-end of the range that has prevailed through 2014. At the same time, mortgage rates remain low. The 30-year fixed-rate mortgage continues to vibrate around 4%. We have rising GDP growth coupled with low interest rates. What's more, growth should continue to rise, while rates should remain low. We say that because consumer-price inflation remains very subdued. So, we have the best of both worlds – strong growth and low lending rates. This unique paradigm suggests housing should get off to a strong start in 2015. Article courtesy of Patti Wilson, American Momentum Bank.

Will Job Growth Start Pushing Interest Rates Higher?

Keeping you updated on the market! For the week of November 17, 2014

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MARKET RECAP Will Job Growth Start Pushing Interest Rates Higher? The economy continues to manufacture employment at a brisk pace: Payroll jobs advanced by 214,000 in October. This marks the ninth-consecutive month of 200,000+ job gains. Other positives from the October employment report include the unemployment rate, which declined to 5.8%. Better still, the composition of the workforce is improving. The prime working age group – people in their 20s and 30s – is growing again. This developing trend bodes particularly well for housing. After all, we're all waiting for millennials to finally participate in the housing recovery. At the beginning of the year, we speculated that a strong employment trend would lead to higher mortgage rates. That hasn't been the case. But in our defense, our speculation was based on Federal Reserve guidance. The Fed had initially set an unemployment rate target of 6.5% before it would consider raising interest rates. We're obviously well below that rate, yet the Fed is showing no signs of raising rates soon. Fed officials still believe the economy is too weak and job growth too sluggish to raise rates. It's interesting that the Fed remains cautious. The fact is that the economy is on track to add 2.74 million jobs this year. This means 2014 would be the best year for job growth since 1999. Despite the upbeat data on jobs, mortgage rates drifted slightly lower over the past week: Bankrate.com's survey has the 30-year fixed-rate loan averaging 4.13%. Freddie Mac has the 30-year loan averaging 4.01%. Low rates and strong employment gains, yet overall mortgage activity remains subdued. The MBA's refinance index decreased 0.9% last week. The purchase index increased, but only by 1%. The MBA did report positive news on new-home sales. The MBA estimates sales increased by 8.5% in October to an annual rate of 461,000 units. On an unadjusted basis, the MBA estimates that there were 36,000 new home sales in October, a 12.5% increase from September sales of 32,000. The downside to this week's data is that a market dichotomy persists: Job grow and low mortgage rates are driving growth in the upper levels of the housing market. Tight credit, on the other hand, still impedes entry-level growth. We are encouraged, though. With more young people finding employment, we should see more growth in the lower echelons of the housing market in the coming year.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Home Builder Sentiment Index (November)	Tues., Nov. 18, 10:00 am, ET	55 Index	Important. Sentiment remains positive, but has not improved in recent months.
Mortgage Applications	Wed., Nov. 19, 7:00 am, ET	None	Important. Activity remains flat, but job growth points to more activity in coming months.
Housing Starts (October)	Wed., Nov. 19, 8:30 am, ET	1.03 Million Units (Annualized)	Important. Gains have stalled, but starts continue to hold above one million.
Existing Home Sales (October)	Thurs., Nov. 20, 10:00 am, ET	5.1 Million (Annualized)	Important. Sales continue to hold above five million, but show little inclination to move much higher.

 

Does Economic Growth Matter? The short and quick answer is “it depends.” When pundits discuss the economy, they usually speak of gross domestic product (GDP). You'll frequently read that GDP is growing at a 3% annual rate, or some similar number. Financial markets are encouraged when GDP grows at a higher rate, and discouraged when it grows at a lower rate. The Federal Reserve certainly focuses on GDP and will adjust interest rates based on GDP growth. In that respect, GDP growth impacts our business. But in other respects, GDP doesn't really matter. GDP is an aggregated national number. It's a measure of all the goods and services produced domestically. But like in real estate, a number taken from the economy as a whole can be meaningless to any local economy. For example, what occurs in Silicon Valley can have little relationship to what occurs in the Bakken oil shale fields of North Dakota. One local economy could grow, while the other could shrink. A national GDP number would likely be meaningless to either market. What most of us really care about is the specific data in our neck of the woods. The businessperson rightly establishes his or her own network of information concerning a particular venture in a particular market. Only that businessperson will know what type of information he or she needs in order to succeed. Most likely, that information won't be based on national numbers. So don't let the national data overly influence your mood or real estate market outlook. What occurs in our backyard is what matters most. Article Courtesy of Patti Wilson, American Momentum Bank

Post-Election Fallout: What does it mean?

Keeping you updated on the market! For the week of November 10, 2014

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MARKET RECAP Post-Election Fallout: What Does It Mean? A good way to alienate just about everybody is to talk politics. Sometimes, though, you have to. Politics matters. That said, our intention isn't to pass judgment; it's merely to vet the past and gauge the future. As for the past, the last time we experienced an election outcome similar to Tuesday's occurred in 1994. Democrat Bill Clinton was president when the Republicans took control of the House and Senate. From a business perspective, 1994 lead to prosperous times. From 1994 though the end of the Clinton presidency in January 2001, the economy moved steadily ahead. What's more, it moved ahead at a brisk pace. Five and six percent annual Gross Domestic Product (GDP) growth was the norm. Over those years, the unemployment rate steadily declined to a low of 4% from over 6%. The stock market, as measured by the S&P 500 , nearly tripled. Over the same period, new home sales climbed to over 800,000 units annually from 600,000 units. Existing home sales increased to nearly 5.2 million units annually from just over 3.8 million units. As for mortgage rates, they were nearly double what they are today. The 30-year fixed-rate mortgage averaged 7.9% in 1995 and 8.05% in 2000. Despite what seemed to be high lending rates, the MBA's purchase mortgage index doubled over that time. (This is why we frequently downplay the importance of low lending rates when juxtaposed to growth.) Of course 2014 isn't 1994. The past never repeats in detail. 1994 also ushered in the beginning of a technology and productivity revolution driven by the Internet. Those variables won't be repeated. This isn't to say that the political climate at the time didn't encourage growth. It appeared to do just that. One thing is for certain: the purse strings were much looser 20 years ago than they are today. The loan-to-deposit ratio – a measure of banks' willingness to lend soared to 1.05 from 0.85 during the Clinton presidency. Strong economic growth encouraged more rational risk-accepting behavior, which materialized in continually rising loan volume. Rational risk-accepting behavior is less prevalent today. A couple weeks ago, we mentioned how former Federal Reserve Chair Ben Bernanke was unable to refinance his home. Bernanke had recently stepped down as Fed chair. Technically, he was unemployed, even though he was earning more money speaking and writing than he was as Fed chair. The Bernanke story is a one-off anecdote, but we know that lenders (and regulators) are still too risk averse. Risk averse behavior is reflected in today's low loan-to-deposit ratio. Let's hope that changes post election. To be sure, partisanship and acrimony will always exist in politics. But if past proves to be prologue, the partisanship and acrimony will be tolerable if Democrats and Republicans can set the table for a repeat of the 1994-2000 economic era.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Nov. 12, 7:00 am, ET	None	Important. Recent rate increases have slowed refinance activity. Purchase activity continues to lag.
Retail Sales (October)	Fri., Nov. 14, 8:30 am, ET	0.1% (Increase)	Moderately Important. Declines in furnishings and building material sales are reflective of muted home sales.
Import Prices (October)	Fri., Nov. 14, 8:30 am, ET	1.1% (Decrease)	Moderately Important.Falling oil prices will help hold consumer-price inflation in check.
Consumer Sentiment (November)	Fri., Nov. 14, 9:55 am, ET	86.5 Index	Moderately Important. Sentiment remains optimistic, with more consumers expecting stronger wage growth.

 

Will Interest Rates Ever Rise? We suspect one day they will, but we doubt that day is imminent. We've done an about-face on interest rates compared to our outlook at the beginning of the year. Back in January, we thought the 30-year fixed-rate mortgage would be approaching 5% by now. That hasn't been the case. Today, it appears 5% lies somewhere on the distant horizon. We say that because the Federal Reserve has affirmed that it has no intention of raising the federal funds rate (the important rate banks lend short-term to each other). What's more, the Fed continues to plow money from maturing Treasury and mortgage-backed securities into new issues. Though quantitative easing (QE) officially ended last month, the Fed continues to support the mortgage market. We are still looking at a very accommodating low-rate monetary environment. At the same time, consumer-price inflation remains muted. This means the Fed has the leeway to hold interest rates low. (The Fed had offered a 6.5% unemployment rate and 2% annual inflation as guideposts before raising rates. The Fed has certainly disregarded the former, with the unemployment rate now below 6%.) Maybe interest rates will rise when GDP growth hits 6% annually and the unemployment rate hits 4%, as it did 15 year ago. If that drives the rate on the 30-year loan up to 6%, so be it. We'll take that trade-off any day. Article courtesy of Patti Wilson, American Momentum Bank.

Better Pricing Driving More Sales

Keeping you updated on the market! For the week of November 3, 2014

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MARKET RECAP Better Pricing Driving More Sales We've frequently mentioned that a slowdown in home-price appreciation would help drive sales volume. So far, our thesis has proven correct. New home sales surged to 467,000 units on an annualized rate in September. This was the best monthly display since July 2008. Discounting by home builders was a key factor in driving volume. The median price of a new home dropped 9.7% to $259,000 in September. Before the decline, the year-over-year median price was trending higher. But now the median new-home price is actually 4% lower than it was this time last year. New-home prices should stabilize going forward. Supply remains muted, with 207,000 new homes on the market. This means that supply relative to sales is at a reasonable 5.3 months. It appears existing-home sales might start trending higher with new-home sales. The pending home sales index was up 0.3% in September. This isn't a monumental increase, but it does point to another monthly gain in existing-home sales for October. The year-over-year trend in the index is another subtle plus. It had spent most of 2014 in the red but is now back in the black with a 1.0% gain. As for home prices, the S&P/Case-Shiller Home Price Index shows they were down in 12 of the 20 cities the index follows. In aggregate, this translates to a 0.1% index decline. This marks the fourth-consecutive monthly decline, which drives the year-over-year gain down to 5.6% compared to 6.7% in July. The downward trend will likely persist: Zillow projects the year-over-year gain will drop to 4.7% when Case-Shiller reports September numbers. Continued improvement in gross domestic product (GDP ) growth should keep home sales moving forward through the end of the year. GDP growth decelerated in the third quarter, falling to 3.5% on an annualized rate, compared to the second quarter's 4.6% annualized rate. That said, 3.5% is respectable, and still beat the consensus estimate for 3.1% annualized growth. What's more, GDP growth at the current level should keep monthly job growth above the coveted 200,000 level. Now, we just want to see an uptick in purchase-mortgage activity. Last week's numbers from the Mortgage Bankers Association weren't terribly encouraging. Purchase volume was down 5.0% for the October 24 week despite the fact rates remain low: sub-4% is still regularly quoted on the 30-year fixed-rate loan. What's more, rates are showing little inclination to move materially higher. The question is, will mortgage rates remain sedated now that the Federal Reserve has ended quantitative easing?

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Construction Spending (September)	Mon., Nov. 3, 10:00 am, ET	0.7% (Increase)	Important. The trend in residential construction spending points to stable housing activity.
Mortgage Applications	Wed., Nov. 5, 7:00 am, ET	None	Important. Low purchase activity points to muted home-sales growth.
Employment Situation (October)	Fri., Nov. 7, 8:30 am, ET	Unemployment Rate: 5.9% Payrolls: 235,000 (Increase)	Very Important. Continual strong job growth will pull forward the Fed's schedule for raising interest rates.
Consumer Credit (September)	Fri., Nov. 7, 3:00 pm, ET	$13.1 Billion (Increase)	Moderately Important.Gains in non-revolving credit(auto and home loans) has been anemic and is reflective of pockets of market weakness.

 

What Does the End of Quantitative Easing (QE) Mean? This past week, the Federal Reserve announced it would cease using new money to purchase longer-term Treasury securities and mortgage-backed securities (MBS). This has lead many market watchers to believe interest rates will start to rise. After all, reduced Fed demand will lead to higher yields. It's not quite that simple. For one, the Fed will continue to reinvest the proceeds of maturing notes, bonds, and MBS into new notes, bonds, and MBS. The Fed has also said that it won't allow its portfolio of these holdings, which exceeds $4 trillion, to shrink until it starts raising short-term rates. This isn't expected to occur until the second-half of 2015 at the earliest. In addition, banks are picking up the slack in demand. Recent rules approved by the Fed, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. leave banks about $100 billion short of the $2.5 trillion in easy-to-sell assets that they need to meet new liquidity standards. Treasury securities and MBS help banks meet the standards. At the same time, supply of Treasury securities is expected to drop. A falling fiscal deficit will result in less Treasury-debt issuance going forward. According to the CBO , the deficit for 2014 – for the fiscal year that ended on September 30 – was $486 billion, $194 billion less than the $680 billion deficit recorded in 2013. That’s the lowest deficit since 2007. In short, we don't expect a meaningful increase in mortgage rates for some time, possibly not until the second quarter of 2015. Article courtesy of Patti Wilson, American Momentum Bank.

Decelerating Price Appreciation Leads to More Sales.

Keeping you updated on the market! For the week of October 27, 2014

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MARKET RECAP Decelerating Price Appreciation Leads to More Sales Existing home sales picked up pace in September, rising 2.4% to 5.17 million units on an annualized rate. This was unexpectedly good news, because the consensus estimate was for 5.0 million units. We shouldn't be terribly surprised that existing home sales are rising. We've been mentioning for months that decelerating price appreciation would likely lead to more sales. That appears to be occurring. The median price for a new home was $209,700 in September, which is a 5.6% year-over-year gain. But over 2014, the year-over-year gain has gradually diminished. It's also worth noting that the fundamentals of the existing home market continue to improve. All-cash sales, which are reflective of distressed and investor transactions, were 24% of all transactions in September, a significant decrease from the 33% of transactions a year ago. Unfortunately, mortgage financing of home sales has yet to gain traction. The rate on the 30-year fixed-rate loan is regularly quoted below 4% i n many markets, but the Mortgage Bankers Association (MBA ) weekly survey shows its purchase index actually decreased 5% last week. To be sure, refinances benefited from the steep drop in lending rates that has occurred this month, but we would really like to see a pick up in purchase activity. Whether sub-4% on the 30-year loan is a passing fad is difficult to say, but it's looking more like that might be the case. The yield on the 10-year U.S. Treasury note has moved higher in recent weeks, and could move higher still. The 10-year note influences many long-term lending rates, including long-term mortgage rates. Earlier this month, rates trended lower on rising global risk: ISIS, Ebola, Russia and Ukraine, Hong Kong protests, slowing European economic growth, and more. When risk perception rises, investors flee riskier assets, such as stocks, for haven assets like highly rated notes and bonds (U.S. Treasury notes and bonds top the list). But risk perception appears to be fading: Stocks have rebounded during the same time yields have been rising. This suggests that investors are becoming less risk averse. When risk aversion abates, you can expect yields and interest rates to rise. Predicting the direction of mortgage rates can be a frustrating endeavor. Our best guess is that if another bombshell isn't dropped on the world stage, rates will be more inclined to move higher than lower in coming months. We say that because of the strength in the economy and the job growth we've seen this year.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (September)	Mon., Oct 27, 10:00 am, ET	0.2% (Increase)	Important. The outlook for sales remains stubbornly flat, due mainly to a dearth of first-time buyers.
S&P/Case-Shiller Home Price Index (August)	Tues., Oct. 28, 9:00 am, ET	6.0% (Increase)	Important. The rate of year-over-year price appreciation will continue to slow.
Mortgage Applications	Wed., Oct. 29, 7:00 am, ET	None	Important. Refinance activity has picked up, but purchase activity remains muted.
Federal Reserve FOMC Meeting	Wed., Oct. 29, 2:00 am, ET	None	Important. The Fed will offer more insight into quantitative easing and interest rate policy.
Gross Domestic Product (3rd quarter 2014)	Thurs., Oct. 30, 8:30 am, ET	3.1% (Annualized Growth)	Important. The current rate of growth suggests interest rates are unlikely to move meaningfully lower.

 

Are Things Getting too Lax These Days? A recent Reuters article shows that some people think mortgage lending is becoming a little too lax. A new rule was recently passed by the Securities and Exchange Commission (SEC) that requires banks to keep at least 5% of the risk on their books when a loan is securitized. Also in the rule are definitions of “qualified loans.” Here, a couple SEC commissioners protested, believing the definitions are too lax on underwriting standards, and, therefore, are risky. Many of us in the mortgage market would politely challenge the assertion that things are too lax. If anything, they are likely too rules based, where there isn't enough of an opportunity to apply intelligent qualitative inputs. For example, we recently learned that of all people former Federal Reserve Chairman Ben Bernanke was unable to refinance his home (valued at $814,000). This seems absurd, but it's true. This is a person who earns hundreds of thousands of dollars per speech and has recently signed a book deal that is likely valued at over $1 million . Bernanke is likely earning more today than when he bought his house in 2004 when he was Fed chairman. Bernanke's problem is that he recently stepped down from the Fed after an 11-year run. Bernanke went from salaried compensation to something more akin to consulting and commissioned-based compensation. He's earning more money, but in a day were lending has become more rules based, he appears a greater credit risk. The problem – with all forms of lending – isn't about being too lax or too rigid; it's about being insufficiently flexible. Underwriting standards have rightfully become more accommodating since 2009, but our hope is that more flexibility will be infused into the process going forward.

Article Courtesy of Patti Wilson, American Momentum Bank.

And Off the Cliff They Go!

MARKET RECAP And Off the Cliff They Go Last week, we mentioned that we would not be surprised to see a further reduction in mortgage rates, given the many conflagrations and overall rise of worry around the world. It appears that we were somewhat reserved in our expectations, because we didn't expect to see the drop in rates that occurred over the past week. Looking at the national numbers, we see Bankrate.com is reporting an average rate of 4.01% on the 30-year fixed-rate loan, which is a dramatic 17-basis-point week-over-week reduction. Freddie Mac's survey shows the national average on the 30-year loan is down to 3.97%, a 15-basis-point week-over-week drop. Today, mortgage rates are about as low as they've been in the past 18 months. That mortgage rates have fallen off a cliff in the past two weeks is no surprise, given that the yield on the 10-year U.S. Treasury note has also fallen off a cliff. If you want a good proxy for mortgage rates, follow the yield on the 10-year note. Risk aversion among financial market participants has certainly risen over the past month. Stocks, as most of us are aware, have experienced a harsh sell-off. The S&P 500 Index, which is composed of 500 of the United States' largest corporations, is down over 7%. That's a dramatic move. Because bonds – Treasury bonds in particular – are viewed as alternative investments (safer alternatives) to stocks, much of the money that has moved out of stocks has found a new home in bonds, which is why we've seen such a steep drop in yields. A weakening global outlook is the overarching concern these days. With economies interconnected like they've never been before, when one country's economy weakens it can impact another country's economy. To be sure, the United States' economy is chugging along fairly briskly, with gross domestic product (GDP) posting at 4.6% on an annualized rate in the second quarter. The problem is the rest of the world, particularly Europe, Japan, and China, are showing signs of running out of steam. This has investors in the United States worried: If the rest of the world sneezes, we could catch a cold, meaning the strong growth we've seen in recent months could prove fleeting. Now, toss in ISIS, Russian and European hostilities, and Ebola, and it's easy to understand why financial market participants are so risk averse these days. Low interest rates, including low mortgage rates, are the silver lining in these worrisome clouds. Given the level of uncertainty and fear permeating financial markets, we don't expect mortgage rates to move meaningfully higher in coming weeks. Many lenders view this as good news. We, on the other hand, are more circumspect, as we'll explain below.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Existing Home Sales (September)	Tues., Oct 21, 10:00 am, ET	5 Million Units (Annualized)	Important. Sales remain mired in purgatory; recent economic news suggests they will remain mired through the rest of 2014.
Mortgage Applications	Wed., Oct. 22, 7:00 am, ET	None	Important. Refinance activity has picked up, but flat purchase activity does not bode well for home sales.
Consumer Price Index (September)	Wed., Oct. 22, 8:30 am, ET	All Goods: 0.1% (Increase) Core: 0.2% (Increase)	Moderately Important. Consumer-price inflation continues to support low interest rates.
New Home Sales (September)	Fri., Oct. 24, 8:30 am, ET	455,000 Units (Annualized)	Important. Sales have turned sluggish. Given the plunge in buyer traffic, they could stay that way.

 

Mortgage Rates Down, Will Housing Follow? The drop in mortgage rates has fueled a surge in refinance activity. Last week, the Mortgage Bankers Association reported that refinances were up 11% week over week. When the MBA reports on this week's activity (next week), we expect to see continued strong demand. It's been a different story for purchase activity. Last week, the MBA's purchase index was down 1%. Year over year, the purchase index is down 4%. This is not good news, especially when you consider that cash sales are dropping as a percentage of overall sales, and will likely continue to do so. Now, we get the report that home builder sentiment is dropping too. The National Association of Home Builders' (NAHB) sentiment index dropped to 54 in October, which is a considerable decline from the 59 posted in September. Home builders, like a lot of other people, are feeling less sure of themselves these days. We hope the drop is a one-off reading, but time will tell. Falling interest rates, as we note above, are an indicator of falling confidence and rising risk aversion. This is why we don't get terribly excited when rates continually fall. To be sure, falling rates are good for refinance business, but for the overall health of housing and mortgage lending, we need to see a pick up in purchase activity. For that to occur, we need more confidence and less risk aversion. This, we believe, will be reflected in rising interest rates. So if we cheer-lead on occasion for rising rates, it's not because we favor rising financing costs, it's because we favor more business and consumer confidence and more economic growth. Article Courtesy of Patti Wilson, American Momentum Bank.