Monday, October 20, 2014

And Off the Cliff They Go!

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 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.


Date and Time
Existing Home Sales
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
Important. Refinance activity has picked up, but flat purchase activity does not bode well for home sales.
Consumer Price Index
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
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.

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