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.

One Confounding Market

MARKET RECAP One Confounding Market At the beginning of the year we mentioned that with stronger job growth would likely come higher interest rates. We certainly have stronger job growth. After a lull in August, job growth returned with a vengeance in September, with payrolls increasing by 248,000. This marked the seventh month of 200,000+ monthly job gains in the past eight months. The unemployment rate is now down to 5.9%. We anticipated stronger job growth back in January, and that's been the case. So you can say that we got the equation half right. The other half – rising interest rates – we quite frankly got wrong. More jobs and more economic growth would lead to more loan demand and rising inflation expectations, and thus, higher interest rates. At the beginning of the year, 5% on the 30-year fixed-rate mortgage seamed a real possibility by the time we reached this time of the year. But here we are in the early days of October and the rate on the 30-year loan is down to a 16-month low. Indeed, Bankrate.com's latest survey shows the national average dropped nine basis points week over week to 4.18%. Freddie Mac's survey shows the national average down to 4.12%, a seven-basis-point week-over-week decline. The good news is that lower rates have spurred mortgage demand. The Mortgage Bankers Association data show refinance activity increased 5% last week, while purchase activity increased 2%. When the MBA reports on this week's activity (next week), we expect the percentage gains to be even higher. So what's the skinny on mortgage rates? They were actually trending higher through most of August. Market participants were focused on Federal Reserve language that suggested that rates (all rates) could start moving higher sooner than most market watchers anticipated. But the most recent release of Fed meeting minutes (released this Wednesday) reveals Fed officials aren't so eager to get interest rates moving higher. The following sentence lifted from the minutes supports our contention: “The costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation.” Fed officials even went as far as to stress "patience" in waiting for interest rates to rise. They are concerned with weak global economic growth and a stronger U.S. dollar. Rising geopolitical risk, such as what's occurring in Russia, the Middle East, and in Hong Kong also have the Fed on edge. Here in our own backyard, a few structural issues remain. Though overall job growth has been robust for much of the year, the labor participation rate and unemployment rate among 25-to-54 remains a concern . There are still too many people in this important demographic who aren't working. At the same time, many of those who are working are dealing with stagnating wage growth. So, it appears sub-5%, if not sub-4.5%, on the 30-year fixed-rate loan will be with us for some time to come.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., Oct. 15, 7:00 am, ET	None	Important. Refinance activity will get a boost on new year-low lending rates, but purchase activity remains anemic.
Producer Price Index (September)	Wed., Oct. 15, 8:30 am, ET	0.2% (Increase)	Moderately Important. Price inflation in most segments of the economy remains a non-issue.
Home Builder Sentiment Index (October)	Thurs., Oct. 16, 10:00 am, ET	59 Index	Important. Sentiment has moved meaningfully higher in recent months, but sluggish sales could temper enthusiasm.
Housing Starts (September)	Fri., Oct. 17, 8:30 am, ET	1.017 Million (Annualized)	Important. Starts remain elevated, but we'd like to see more activity in the single-family component.

 

Low Rates as Far as the Eye Can See... That's Not Necessarily Good News Many of our colleagues remain convinced that low-interest rates are vital to rejuvenating home sales (particularly in existing homes) and keeping housing starts on an upward trajectory. But we think that boat has long sailed. We say that because low interest rates are indicative of the issues we mention above: geopolitical upheaval, slow global economic growth, and weakness in employment growth in a key U.S. demographic. In addition, low rates are indicative of banks that are flush with cash and simply aren't seeing the opportunities to put that cash to use. Bloomberg reports that banks have accumulated so much cash that deposits exceed loans by a record amount. Banks make money lending, and are motivated to make loans when the opportunity arises. Instead, they've been plowing money into low-yield Treasury securities. That tells us two things: A dearth of lending means there is still a dearth of economic growth. On the other side of the coin, bank demand for Treasury securities will help keep interest rates – mortgage rates included – low. When Federal Reserve officials begin to back off their cautious talking points and begin to talk up the economy, interest rates will rise. But that will be a good thing, because we'll have an economy marked by more opportunities that can support higher interest rates and a more market-driven lending environment. Article courtesy of Patti Wilson, American Momentum Bank.

An Important Prognostication Comes to Fruition

Keeping you updated on the market!
For the week of

October 6, 2014

MARKET RECAP An Important Prognostication Comes to Fruition Predicting the direction of interest rates over the past two years has been an exercise in futility. One would have had better success predicting the flight path of a butterfly than the direction of interest rates. History has certainly proved to be an unreliable guide. We've been considerably more sapient on housing prices. At the beginning of the year, we expected the rate of price appreciation to slow in many, if not most, markets. Our rationale was predicated on the fact trees don't grow to the sky. Double-digit year-over-year price gains are simply unsustainable. Given sufficient time, momentum peters out. Four years appears sufficient enough. As we head into the waning months of 2014, price appreciation in many markets has indeed throttled back palpably. The widely followed S&P/Case-Shiller Home Price Index again shows slowing price growth in the 20 metropolitan regions it follows. H ome prices were down 0.5% month over month in July. This marks the third-consecutive monthly decline, and is the steepest monthly decline since November 2011. Year over year, prices are still up 6.7%, but the rate of appreciation has been falling through most of 2014. We expect the rate of decline to continue, because we are seeing stagnating prices, and even price declines, in more markets. Case-Shiller's data show that prices in 14 of its 20 metropolitan regions declined in July. As for the remaining six markets, three showed no gain, and three showed modest gains, with Las Vegas leading the field at 0.3%. Zillow has taken to predicting future Case-Shiller index releases, and, like us, Zillow sees the rate of price appreciation further abating. Zillow sees modest month-over-month growth of 0.1% for August, which will drag the year-over-year tally down 5.7%. Of course, all real estate markets are local markets, and a national average very likely has no direct correlation to our neck of the woods. That said, the national number is composed of local numbers. When more local numbers trend in the same direction, the national number will follow. Slowing home-price appreciation will slow the rate that negative equity turns to positive equity. On the other side of the coin, slowing price appreciation should help home sales, which have still yet to establish momentum. Unfortunately, momentum is unlikely to be established in the immediate future. The Pending Home Sales Index fell 1.0% to 104.7 in August from 105.8 in July, and is now 2.2% below August 2013. New lower mortgage rates could provide relief. Rates have been trending down for the past two weeks, which corresponds with the recent stock-market sell-off. The S&P 500 Index is down roughly 4% since hitting an all-time high on Sept. 19. Much of the money flowing out of stocks has flowed into bonds, which is lifting bond prices, and lowering interest rates – including mortgage rates. We would not be surprised to see this trend continue over the next couple weeks.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (August)	Tues., Oct. 7, 3:00 pm, ET	$19 Billion (Increase)	Moderately Important. Credit use has been rising in recent months, which reflects rising consumer confidence.
Mortgage Applications	Wed., Oct. 8, 7:00 am, ET	None	Important. Purchase activity has remained steady, but a move up is needed to offset fewer cash buyers.
Federal Reserve FOMC Meeting Minutes	Wed., Oct. 8, 2:00 pm, ET	None	Important. The economy is improving and inflation remains dormant, but sluggish wage growth will enable the Fed to hold interest rates low.
Import Prices (September)	Fri., Oct. 10, 8:30 am, ET	0.5% (Decrease)	Moderately Important. Falling oil prices and European price deflation will keep domestic inflation in check.

 

Millennials to the Rescue? A few weeks ago, we noted the uplifting news that millennials are still very much interested in homeownership. Since then, we've run across a plethora of articles focused on millennials and housing. (Though when you search for a certain subject, you are sure to find it.) Many of these articles position millennials as saviors. Without millennials, there is little upside left in housing, so the reasoning goes. We don't see it that way. Though we'd love to see more millennials enter the housing market as owners, they are still only a subset of the overall ownership market. What's more, their support is mostly concentrated in lower-priced homes. More important than millennials, baby boomers, gen-x, or any particular demographic is the overall health of the economy. On that front, the data we've seen on the overall economy is encouraging. The latest gross domestic product (GDP) data show growth at a robust 4.6% annualized rate. This is good news for everyone, and should serve as tight backstop to housing, which is why we see no backsliding. To be sure, we welcome millennials, but we don't need to be rescued by them. Rising economic growth will lift all demographic groups.

Article Courtesy of Patti Wilson, American Momentum Bank.

A Mixed Bag, But It's One We'll Take.

Keeping you updated on the market!
For the week of

September 29, 2014

MARKET RECAP A Mixed Bag, But It's One We'll Take Is it two steps forward, one step back; or one step forward, one step back? Sometimes it's difficult to tell. When it comes to existing home sales, one step forward, one-and-a-half steps back might be the better descriptor. Sales of existing homes drifted down 1.8%, to 5.05 million units, on an annualized basis in August. Year over year, sales are down 5.3%. Supply has again been fingered as the culprit for the sales-volume dearth. Supply for the month fell by 40,000 units, which drops total inventory to 2.31 million units. The good news is that pricing continues to reflect reality. Existing-home prices have been relatively flat for the past six months. Year over year, the median price of an existing home is up 4.8% to $219,800. This is no surprise. We've seen price appreciation moderate through most of 2014. We expect that trend to continue into 2015. When we vet new-home sales, the trend is definitely two steps forward, one step back. New home sales surged 18%, to 504,000 units, on an annualized basis in August. Pricing appears to be more favorable to buyers. The median price of a new home dropped 1.6% for the month to $275,600. Year over year, the median price is up 8%, but that rate of increase is slowing and will likely continue to do so. At the current sales pace, inventory has dropped to 4.6 months. This points to home-builder activity picking up through the end of the year. That's good news for the overall economy. There's more good news specific to housing. CoreLogic reports that nearly 950,000 homes were lifted into positive equity in the second quarter of 2014. Nationwide, home equity has increased by $1 trillion year over year. To be sure, we still have more room to improve. CoreLogic estimates that approximately 5.3 million homes, or 10.7% of all residential properties with a mortgage, were still in negative equity as of the second quarter. But that's a significant improvement over the 7.2 million homes in negative equity a year ago. We expect the equity trend to remain positive deep into 2015. We see more positive news in a recent survey conducted by The Demand Institute, a nonprofit think tank. Demand's survey reveals what we've known all along: Millennials might be transforming the workplace, but at home they are very much like their parents and grandparents. They want to get married and have a family, and many of them want to raise that family in the suburbs – the domain of the single-family home. We never bought into the notion that the United States is becoming a nation of renters. Many surveys we've read over the past year have confirmed our bias. The Demand Institute's survey is simply another arrow for our quiver.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Confidence Index (September)	Tues., Sept. 30, 10:00 am, ET	93.8 Index	Moderately Important. Rising confidence bodes well for housing and other big-ticket items.
Mortgage Applications	Wed., Oct. 1, 7:00 am, ET	None	Important. Purchase activity could be hurt by rising rates, but so far economic growth is countering the rise.
Construction Spending (August)	Wed., Oct. 1, 10:00 am, ET	0.1% (Increase)	Important. Residential construction continues to pace gains.
Employment Situation (September)	Fri., Oct. 3, 8:30 am, ET	Unemployment Rate: 6.1% Payrolls: 218,000 (Increase)	Very Important. After a disappointing August, job growth is expected to pick up pace, which could lead to rising interest rates.

 

Making Sense of Interest Rates Interest rates are confounding to predict. Of course, the Federal Reserve is a lead influence, which is why market participants spend so much time parsing its every word. That said, most of the Fed's influence is focused on the short-end of the yield curve. By way of extrapolation, market participants then estimate longer yields. For example, if the current one-year yield is 1% and the market believes the Fed will lift that yield to 2% next year, the 2-year yield today should be 1.5% (1% plus 2% divided by two). If life were only so straightforward. It's not. Money supply, wealth position, and expected inflation also play important roles. If the money supply increases and wealth and inflation expectations remain the same, interest rates should fall. With everything else held constant, more money can be allocated to financial assets, thus raising their prices and lowering their yields. On the flip-side, if money supply decreases and wealth and inflation expectations remain the same, interest rates should rise. With everything else held constant, less money means less money flowing into capital markets. Financial asset prices fall and yields rise. So where does this leave us? We think wealth will at least remain constant. Inflation will likely remain muted. As for the money supply, it will likely decrease beginning next year due to the Fed withdrawing from quantitative easing and raising short-term rates. Based on this outlook, interest rates should rise in 2015. Admittedly, we've been down this road before. We thought this scenario would play out this year. It hasn't, but it has to one day.

Article courtesy of Patti Wilson, American Momentum Bank.

A Case of Cognitive Dissonance?

Keeping you updated on the market for the week of September 22, 2014

MARKET RECAP A Case of Cognitive Dissonance? Home builders are feeling as perky as they have in nearly a decade. Indeed, the National Home Builders Sentiment Index posted at 59 this month. That's a number last seen in 2005 when the housing market was in full-bore mode. Of course, real estate markets are local markets, and some home builders are feeling more perky than others. Home builders in the South, Mid-West, and West are more optimistic than the national 59 reading would lead you to believe, while builders in the Northeast are feeling less optimistic, if not dour. (The Northeast reading posted at 44.) Home builders when aggregated are obviously anticipating a brighter future, even if the immediate past offers scant reason to break out the bubbly. Housing starts drooped 14.4% in August to an annualized rate of 956, 000 units. The consensus estimate was for 1.03 million units. The mitigating takeaway was that most of the droop was seen in the volatile multifamily component, which fell 31.7% month over month. The more important single-family component was down a more modest 2.4%, which follows an 11.1% surge in July. When we step back to view the big picture, we see housing starts are up 8% year over year. And if we step back even further and remove volatility by looking at the five-month moving average, we see a strong uptrend and significant improvement over the past five years. The long-term trend in housing starts is good news for the economy in full. So many ancillary businesses are dependent on starts – home improvement companies, finance providers, commodity producers, retail merchants, and on and on. The uptrend in starts is nothing but a positive that is worth highlighting because of its importance to overall economic health. Now, we'd like to see an uptrend established in mortgage purchase activity. CoreLogic reports that cash sales have dropped to 33% of total home sales, down from 36.3% a year ago. To be sure, a large percentage of the drop is the result of fewer REO sales and short sales – many of which were cash transactions. Prior to the bursting of the housing bubble, 25% of sales were cash transactions. So, we expect a further reduction in cash transactions in the future. Therefore, to keep sales volume growing, mortgage financing will need to play a bigger role. On that front, the Mortgage Bankers Association purchase index rose 5% last week. Could this be the beginning of a positive financing trend? We hope so, but we're not holding our breath. We've been disappointed too many times in the past to do that.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Exiting Home Sales (August)	Mon., Sept. 22, 10:00 am, ET	5.22 Million (Annualized)	Important. Given recent positive pricing and supply trends, an upward trend in sales appears sustainable.
Mortgage Applications	Wed., Sept. 24, 7:00 am, ET	None	Important. Purchase activity is showing some life, but the trend toward more activity remains elusive.
New Home Sales (August)	Wed., Sept. 24, 10:00 am, ET	435,000 (Annualized)	Important. Rising home builder optimism points to rising new-home sales.
Gross Domestic Product (2nd quarter 2014 revised)	Fri., Sept. 26, 8:30 am, ET	4.7% (Annualized Growth)	Important. GDP growth is expected to be revised higher, which points to stronger economic growth through 2014.

 

The Fed Speaks, Everyone Listens On Wednesday, the Federal Reserve released the long-awaited minutes of the latest meeting of the Fed governors. The minutes revealed what we expected they would reveal: The Fed will wrap up quantitative easing next month, so it will cease new purchases of Treasury notes and bonds and mortgage-backed securities (MBS). (The Fed will maintain its existing policy of reinvesting principal payments in MBS and rolling over existing Treasury debt.) The minutes also revealed that the Fed intends to wait "a considerable time" before raising the influential federal funds rate (the rate banks lend to each other). The idea is that the Fed wants interest rates to remain low until “structural” issues related to the job market are rectified. In other words, the Fed would like to see more job growth in better-paying jobs before raising the federal funds rate. If maintaining the low rates that materialized in the past month is what the Fed wanted, that's not what it got. After we learned the federal funds rates (which is at zero) is unlikely to rise until next year, the rate on the influential 10-year Treasury note rose nearly 10 basis points. Mortgage rates, unsurprisingly, also moved higher. In short, rates on the longer end of the yield curve rose. We doubt this is what the Fed was anticipating. We're not predicting a steady rise in long-term interest rates – including mortgage rates. But it's worth keeping in mind that even if the Fed wants something, there is no guarantee it will get it. Markets are powerful and unpredictable forces. Mortgage rates might hang low for another six months, or even another year, but there are no guarantees.

Article Courtesy of Patti Wilson, American Momentum Bank

Calm Before the Storm..

MARKET RECAP Calm Before the Storm Summer isn't officially over, but once Labor Day passes, for all practical purposes it is for most of us. Now that we are back to work with no sight of a respite in the immediate future, we expect market activity to pick up. It's worth noting mortgage market activity (buying and selling of mortgage-backed securities) has picked up, and rates have become a bit bouncy over the past couple days. Trader activity has surely picked up. To wit: Stocks rallied and bonds sold off on speculation that Russia and Ukraine might hash out a ceasefire. The headline was pure manna from heaven for bond and stock traders, who were given a reason to buy stocks and sell bonds. But once the euphoria passed, stocks sold off and bond yields rallied. The fact is that we remain in a fundamentally low-inflation environment, which is why interest rates in general, and mortgage rates in particular, continue to trade at 2014 lows. At the same time, and somewhat paradoxically, the economy appears to be growing at a brisk pace – one that has been creating 200,000-or-more new jobs per month for most of the year. We say “paradoxically” because when economic growth and job growth take flight, so, too, do interest rates. But not this time around. That said, we expect interest-rate volatility to pick up. We say that because the languid days of summer are over, and that means more people are watching the market and offering their opinion – either through spoken or written words or direct buying and selling. Nevertheless, we don't think we'll see a trend toward higher interest rates to materialize this year. Mortgage rates might be more volatile, but they'll likely be more volatile within this low range. Going forward, the Federal Reserve will remain key. We expect rates won't ratchet higher with any fortitude until the Fed decides to raise the influential federal funds rate – the rate banks lend short-term to each other. When that occurs, rates will likely begin to take flight. But we prognosticate with one caveat: Don't discount the ability of a strong jobs report or unexpectedly stout gross domestic product numbers to get mortgage rates moving higher. What has worked in the past may not be working at the present, but that doesn't mean it won't work again in the future.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (July)	Mon., Sept. 8, 3:00 pm, ET	$15 Billion (Increase)	Moderately important. Credit expansion remains brisk and is an indicator of firming consumer confidence.
Mortgage Applications	Wed., Sept. 10, 7:00 am, ET	None	Important. Purchase activity has again eased. Buyers remain stubbornly inured to today's low-rate opportunities.
Retail Sales (August)	Fri., Sept. 12, 8:30 am, ET	0.2% (Increase)	Moderately Important. Sales growth has moderated in recent months, but the longer-term trend remains up.
Import Prices (August)	Fri., Sept. 12,8:30 am, ET	0.2% (Decrease)	Moderately Important. Falling import prices will help keep domestic inflation under control.

 

The Cost of Financing Is Lower (And Higher) Than You Might Think When pundits discuss mortgage financing, they frequently tout the money saved in interest when paying cash. But is that worth touting? Let's say we have two home buyers: each has $100,000 and each buys a $100,000 home. One pays cash; the other puts $10,000 down and finances the remaining $90,000 with a 30-year fixed-rate mortgage at 4.25%. Both stay put, and 30 years later the 30-year mortgage is paid in full. Over the 30 years, the cash buyer obviously incurred no interest charges. The financed buyer, on the other hand, pays over $69,300 in interest over the life of the loan. It appears the cash buyer comes out ahead, but does he? Keep in mind that the cash buyer did not have use of the $90,000 like the financed buyer did. Let's say the financed buyer took his $90,000 and bought 5,000 shares – $18 a share – of a real estate investment trust (REIT) that pays $0.125 in dividends each month. We'll assume there is no dividend increases (which would be unlikely in the real world). Each month, the REIT pays the financed buyer $625 in dividends. In a year, the REIT owner collects $7,500 in dividend income. Over 30 years, the REIT owner will collect $225,000 in dividend income. In other words, opportunity costs must be factored into the equation. By financing his home with a low-rate loan, the intelligent investor/home buyer was able to use his money to buy a cash-generating investment that far exceeded his interest payments. This example shows that opportunities and opportunity costs must always be factored into a financial equation. When this occurs, the cheaper option can frequently be shown to be the less financially profitable option. Article courtesy of Patti Wilson, American Momentum Bank.