Monday, May 19, 2014

A Prophet on Interest Rates, But What Does This Mean for Housing?

A Prophet on Interest Rates, But What Does This Mean for Housing?
Interest rates are like the weather: They change frequently. More important, if you can get it right predicting them, you can look like a genius. But if you get it wrong? Well, you look like something else.
So far, we've got it right on interest rates. At the beginning of the year, we proffered that the 30-year fixed-rate loan would likely vibrate between 4.25% and 4.5%. Leaving points aside, that's pretty much been the case, at least based on the national average-rate data compiled by and Freddie Mac .
Of course, we want to keep our chest pounding to a mild thump: We also said 5% on the 30-year loan was in the cards by the end of 2014. The 30-year loan hasn't exactly shown signs of bolting north. To the contrary, the rate has been steadily declining over the past month and is about where it was in November.
That said, we're sticking with our 5% prediction, even if we are almost half way through 2014. We like how the job numbers are trending, which is higher. We suspect when we get a first glimpse of second-quarter economic data, the numbers will be significantly improved from the first quarter. Job growth, after all, is reflective of economic growth.
But what about housing?
We like the outlook for housing – a lot. We expect sales and prices to trend higher. What's more, we would not be put off by rising interest rates as long as the economy is grinding forward to support higher job and wage growth. (Wage growth, by the way, is indicative of rising labor productivity, and that, too, has been rising.)
To restate the obvious, we are unconcerned with rising interest rates. Indeed, we welcome them when they come accompanied with rising economic activity. The lower rates that have bubbled to the surface in recent weeks are something of an anomaly, in our opinion. When signs of sustained growth become more evident, you can be assured interest rates will rise.
But housing will rise too. When we look back to the early 2000s, and a little beyond, we find that mortgage rates were a percentage point or two higher. But it was no big deal. The economy was humming along, and so was housing.
In the meantime, we are still struggling a bit. Last week, we were pleasantly surprised to see purchase applications soar 9% and take the lead over refinances in total mortgage activity. Unfortunately, momentum petered out. On Wednesday, the Mortgage Bankers Association reported purchase activity had dipped 1% for the seek of May 9; this despite mortgage rates falling to a six-month low.
Then again, one week does not a trend make. We're already looking forward to early June, when the employment situation for May will be released. If we get another month of 200,000-plus gains in payrolls (which we expect), we'll feel much more assured everything will work out fine this year for both the housing and mortgage markets.


Date and Time
Mortgage Applications
Wed., May 21,
7:00 am, ET
Important. We expect purchase activity to gain on lower rates and an improving job outlook.
Federal Reserve FOMC Meeting Minutes
Wed., May 21,
2:00 pm, ET
Important. The Fed is expected to affirm its commitment to QE tapering and to hold short-term rates low.
Existing Home Sales
Thurs., May 22,
10:00 am, ET
4.7 Million (Annualized)
Important. Sales are finally showing positive momentum on improved inventory and a strengthening economy.
New Home Sales
Fri., May 23,
10:00 am, ET
430,000 (Annualized)
Important. Sales are gaining pace on builder incentives and improving consumer confidence.


Pressure Builds for Change We Can Believe In
What happens in Washington D.C. frequently confounds more than clarifies. New rules and regulations tend to raise the level of frustration more than ally it.
Let's be honest, many people have been frustrated by mortgage underwriting standards. They're viewed as overly stringent. It's difficult to argue with the perception, but the fact is that many private lenders have at least marginally eased underwriting standards this year. Then again, standards can be eased only so far, because they must still adhere to guidelines mandated by Fannie Mae and Freddie Mac. These to government-sponsored organizations guarantee two-thirds of mortgages originated.
The good news is that Fannie and Freddie are loosening rules that have forced banks to buy back billions of dollars worth of home loans. These rules have kept lenders cautious about making home loans to borrowers with imperfect credit, because lenders could wind up absorbing losses if the loans default. At the same time, these regulations have raised the cost of originating mortgages.
These rules have been particularly tough on the entry-level market – homes priced under $300,000. In other words, the important first-time buyer has been under-served. We need the first-time buyer to grow the market.
The good news is that new Fannie and Freddie guidelines will enable us to better serve and grant more credit to all potential borrowers going forward. This can be only a positive for housing.

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