Tuesday, August 19, 2014

Is This the New Normal in Mortgage Lending?

Is This the New Normal in Mortgage Lending?
At the beginning of the year, nearly every mortgage commentator (us included) projected mortgage rates would adhere to a northeasterly trajectory by this time. The rate on the 30-year fixed-rate loan would be above 4.5% (likely well above) as we headed into the waning days of 2014.
So much for predictions. Here we are, with nearly two-thirds of the year in the rear-view mirror, and mortgage rates continue to hover near 2014 lows. Indeed, Bankrate.com's latest survey has the 30-year fixed-rate loan averaging 4.27% for the past week; Freddie Mac's survey shows it at 4.12%.
Our prediction on job growth has turned out closer to what we expected, with the economy now averaging 200,000+ new jobs a month – a feat the economy has performed for the past six months. Historically, when economic growth kicks into gear (as evinced by stronger job growth) interest rates kick into gear to trend higher. This time around, they've trended lower.
There are a few mitigating factors this time around.
The most prominent factor is that this simply doesn't feel like an economic recovery. After past recessions (2001 and 1991), there was a sense of heightened activity and optimism. Here we are, nearly five years past the 2009 recession, and a sense of uncertainty and pessimism lingers. Therefore, low interest rates linger.
That interest rates have remained so low for so long has unintended consequences. They perpetuate the belief all is not well. When we look to Europe, we see the rate on German bonds lower than our own. A 10-year German government bond yields 1%. The same bond in the United States yields 2.4%. At the lower maturity range, we actually find negative interest rates: The 2-year German note yields a negative 0.01%. You actually lose money buying a 2-year German note.
We see similar rates throughout Western Europe and Japan. This tells us that most develop economies continue to stagnate.
If we look to Japan, we see that an economic recovery shouldn't be taken as a given. Japan's economy over the past 20 years has averaged roughly 1% annual GDP growth . For the past 16 years, the rate on Japan's 10-year government note has been below 2%. Over the past year, it has trended down to a mere 50 basis points. Japan, in short, is in a prolonged funk.
To be sure, the U.S. economy posted strong gross domestic product (GDP) growth of 4% in the second quarter of 2014, but this was after a 2.1% contraction in the first quarter.
Many of our colleagues argue that we need low interest rates to support housing, but low interest rates are also indicative of a sluggish economy. At this point, we would be willing to trade higher interest rates for more economic growth. That's why we are not keen on perennially low interest rates becoming the new normal.


Date and Time
Home Builders' Sentiment Index
Mon., Aug. 18,
10:00 am, ET
54 Index
Important. Improving builder sentiment points to improving new-home sales.
Housing Starts
Tues., Aug. 19,
10:00 am, ET
979,000 (Annualized)
Important. The rate of starts is picking up pace and points to increased housing activity.
Mortgage Applications
Wed., Aug. 20,
7:00 am, ET
Important. Purchase activity needs to increase to maintain a healthy market.
Existing Home Sales
Thurs., Aug. 21,
10:00 am, ET
5.02 Million (Annualized)
Important. Sales continue to languish on low inventory and rising prices.


If a Tree Falls and No One Hears It, Does It Make a Sound?
The above question is philosophical, but also pertinent: If a 4% interest rate is available on a 30-year fixed-rate loan and no one takes out a loan, does it matter?
Mortgage rates cross the board remain low, and yet few people are taking advantage of them. Demand for refinances remains weak, though this is no surprise. Most borrowers who want to refinance already have. The fact mortgage rates remain low and move within a tight range also crimps refinance demand.
More discouraging is the fact purchase applications have yet to pick up the slack. Purchase-application demand remained flat in the August 8 week, down 1.0% for the second straight week. Year over year, purchase applications are down 10%.
At this point, we had counted on purchase activity, driven by owner-occupiers, to be leading mortgage activity. This hasn't been the case nationwide, and this is frustrating. It's a sign that the sense of uncertainty and pessimism we note above is warranted.
Fortunately, housing markets are local markets. What occurs at the national level often has little relation to what occurs at the local level. Hot and cold markets can be no farther than a mile apart.
That said, we'd feel a lot better if more people entered the housing market and made some noise by financing their purchase with a low-rate mortgage loan.

Article Courtesy of Patti Wilson, American Momentum Bank.

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