Is this the end of ultra cheap mortgages?
The increase in bond market yields this week raises the question of whether the era of ultra cheap mortgages is coming to an end.
Interest rates
The yield on the 10 year Treasury Note (10T) jumped from 1.79% last Friday to 2.14%, an increase of 0.35%. The latest Freddie Mac 30 year Fixed Rate Mortgage (FRM) of 3.57%, however, reflects data collected only between Monday and Wednesday this week. Bankrate quoted the FRM at 3.74% on Friday.
The rate on the FRM is most closely tied to the yield on 10T. The spread – the difference between the two yields – indicates the extra return investors want when buying pools of mortgages rather than Treasury Notes.
Over the last 4 years the average spread has been 1.71%. Following the leap in yield on 10T the spread was only 1.42%, clearly suggesting that the rate on the FRM will jump next week, as already foreshadowed by the rates quoted on Bankrate.
Source:US Treasury, Freddie Mac
Will interest rates continue to rise?
It is a brave person who makes economic forecasts before we know what policies will actually be enacted but let me offer a few comments.
First of all, interest rates have been rising worldwide since the summer’s lows, as shown in this chart:
For several years, the gridlock in Congress has prevented any significant fiscal policy implementation to encourage economic growth. This has left monetary policy in the form of record low interest rates and Quantitative Easing – the buying of Government and other securities by the Federal Reserve – as the only available tool.
To the extent that Congress passes measures that stimulate growth and/or reduce the stranglehold that some regulations produce, so the dependence on lower interest rates as the primary tool to stimulate the economy will be reduced. Increased economic growth should be reflected in higher yields on the 10T and hence in higher mortgage rates.
How high will interest rates go?
Jeffrey Gundlach of DoubleLine Capital, a respected bond investor, thinks the yield on 10T could reach 2.35% in the short term, while prominent technical strategist Tom DeMark has suggested that 2.15% may be the near-term peak.
Going forward, a lot will depend upon the outlook for economic growth and inflation, while any improvement in the sluggish rate of economic growth of recent years would put upward pressure on wage rates, a key indicator the Federal Reserve considers when setting interest rates.
Is now a good time to lock in my mortgage?
In my What the Fed’s rate increase means for mortgage rates post last year I explained that the the Federal Reserve directly influences only short-term interest rates, while mortgages are priced off the 10T where yields reflect broader economic considerations.
Whether higher rates come from a strengthening economy or higher inflation, a reasonable case can be made that the era of ultra low mortgage rates may be about to end. But current rates under 4% are still historically very low and attractive, especially as a stronger economy would likely boost the demand for housing in market where supply is tight.
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Not sure which broker to use to sell your home? Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Household wealth in US up $22 trillion since 2007
The extent of the recovery from the Great Recession can be seen in this week’s figures from the Federal Reserve on household net worth. The total wealth grew 1.2% in Q2 from Q1. While net worth did not recover to the 2007 pre-Recession level until 2012, the rapid growth since then means that household net worth has grown by one-third, from $66.5 trillion to $89.1 trillion, since 2007. (more…)
Mortgage Rates: Keep Calm and Carry On
Last week in my report Mortgage rates drop again – where next? I showed the historical relationship between the yield on the US 10 year Treasury (10T) and the 30 year Fixed rate Mortgage (FRM), and said there were two reasons I did not expect the FRM to drop as far as that relationship would imply: the safe haven status of 10T,which caused strong buying of Treasuries, and the desire by banks to boost their profit margins.
This week, as markets decided to
we saw the yield on the 10T drop quite sharply, but little change in the FRM.
What happened?
In simple terms, as the fear factor receded, so did buying of 10T as a safe haven. In fact, 10T saw selling and the yield increased from 1.37% last week to 1.56% this week. With the FRM at 3.42%, up slightly from 3.41% last week, the spread – or difference between the two – dropped from over 2% to under 1.9%.
Where are mortgage rates headed?
While the spread between 10T and FRM is still higher than the average of around 1.7% in recent years, two other factors – the desire by banks to increase profits where they can in a low-interest rate environment, and the absence of buying of Mortgage-Backed Securities (MBS)* by the Federal Reserve – suggest that mortgage rates may well stabilize around these levels for the forseeable future.
*Conventional mortgages are placed into pools and sold to investors as MBS. The yield investors require is based upon the yield on the 10T, but in recent years the Federal Reserve was also an active buyer of MBS. This buying had the effect of driving down the yield asked for MBS and hence kept mortgage rates low. The Federal Reserve ended its direct MBS buying program in late 2014. (more…)
Mortgage rates drop again – where to next?
Immediately following Brexit I wrote What Brexit means for the housing market. The key point I made is that any near term increase in interest rates in the US was now off the table. This week we have seen the Freddie Mac 30 year Fixed Rate Mortgage (FRM) drop to 3.41%.
US unemployment rates and bond yields
On Friday, the employment report showed a sharp recovery from May’s swoon, yet bond yields did not jump as might be expected. The main reason is that despite the sharp fall in the yield on US 10 year Treasury (10T), that yield remains above that of all other major counties, attracting foreign buying. The following table shows those yields for the last 2 1/2 years:
Source: Bloomberg
Additionally, despite the headline unemployment rate of under 5%, there are actually three measures of unemployment. U3 is the official unemployment rate. U5 includes discouraged workers and all other marginally attached workers. U6 adds on those workers who are part-time purely for economic reasons. While U6 has come down in recent years it is still close to 10%.
www.macrotrends.net
What drives mortgage rates?
As a reminder, the Federal Reserve can only directly impact short-term rates, such as those on credit cards, auto loans and home equity loans (HELOCs). The 30 year FRM is based upon market interest rates, most notably for the US 10 year Treasury (10T) – which is generally viewed as a better barometer of how the market views prospects for the US economy.
When the Fed finally – and too late – increased short-term rates last December ( and talked of 4 more rate increases) the yield on the 10T was 2.26%. That yield has now dropped to under 1.4%. Note that despite the US being seen as a safe haven, the yield on 10T has consistently been higher than that of other countries’ similar debt, one of the reasons the dollar has been so strong.
The FRN does not move in lock step with 10T because of the safe haven status of the dollar, meaning that in times of political upheaval investors buy US Treasuries as a “safe haven”. Over the last 3 1/2 years the average FRM has been about 1.7% higher than 10T. With 10T at 1.4%, that would imply a 3.1% FRM, but…. part of the reason for the low 10T yield is geopolitical, so I would not expect the FRM to drop that far, unless the 10T yield stabilizes at this level.
Another factor in keeping mortgage rates higher than might be expected is the fact that, at a time of pressure on profits, banks are keen to increase their margins on mortgages, especially when rates are low and the housing market strong.
Comment
I know this may be getting a bit complicated or a real estate blog. A quick and easy way to stay informed is to read the posts on my blog under the Mortgage Rates and Forecasts tab. Here is a link to it: Oliver Reports: Mortgage rate forecasts
Even just reading the summaries will give you a good feel for what has been happening.
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
What Brexit means for the housing market
I am an Englishman and my daughter is a currency analyst in London so it has been an exciting few days in this family!
The immediate response to Brexit was the usual flight to safe havens – including the US dollar and US Treasuries. Since 30 year Fixed Rate Mortgages (FRM) are priced off the yield on the 10 year US Treasury, mortgage rates eased on Friday and are likely to continue at current low levels or go even lower.
I am written consistently over the last year that I have not understood the arguments that the Federal Reserve has been using to justify its intention of raising short-term interest rates (which affect things like credit card and auto loan rates, but not FRM rates), while pointing out that the Fed waited too long before raising rates last December and spent too much time telling the world its every thought on the matter.
In fact, the Fed’ s behaviour reminded me of that great line in The Good, the Bad and the Ugly, when Eli Wallach shoots the man who is explaining at length all he has gone through learning to shoot with his left hand: “When you have to shoot, shoot, don’t talk.”
So what now? The relevant factor for the housing market is that the vote by the UK to leave the EU should end any discussion about interest rates rising in the US. And however much the Fed claims to be apolitical, it is very unlikely it will raise interest rates as we get closer to the election in November. In fact, it is possible that following Brexit we will see moves to lower interest rates elsewhere and the pressure may build for the US to lower rates again. Thus, today’s very low mortgage rates are not going away any time soon.
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Mortgage rates drop again
As the yield on the 10 year US Treasury continues to drop, so do mortgage rates, which are now around 3.5% and very close to the all-time lows of 2013.
I last wrote on mortgage rates in May in a post Mortgage rates still headed lower and I post an extract from that article below. This week the Federal Reserve once again indicated less enthusiasm for raising short-term rates for a number of reasons. One the Fed did not mention – and neither did any commentator I read – is the impact the November Election is having on the economy.
It seems pretty obvious to me that the possibility of a giant step into the unknown and unpredictable must, at some point, have an impact on investment decisions, thereby causing some slowing in economic activity.
Why are the “experts” so wrong?
The FRM is based, not on short-term interest rates over which the Federal Reserve has influence, but on the yield on the 10 year US Treasury (10T), whose price is influenced by a number of factors, notably the anticipated strength of the economy, yields compared with other countries, and geopolitical developments around the world.
When the Fed increased short-term rates last December, the yield on the 10T was 2.25%. On Friday it closed at 1.6%, a drop of 0.65%. In the same period, the FRM has dropped just 0.4%.
The reason the Mortgage Bankers Association keeps getting the forecast for the FRM so wrong is that it keeps forecasting that the yield on the 10T is going to increase. Its latest FRM forecast – published in May – assumes a 10T yield of 2.2% by the end of 2016 and 2.9% by the end of 2017. These forecast rates have dropped from 2.7% and 3.3% just since January.
But it is not just the MBA that gets interest rates wrong. The Fed was so concerned about being “transparent” and explaining, ad nauseam, its thinking on interest rates in order not to “surprise” the market, that it missed the opportunity to raise rates when the US economy was strong and did so just as it became apparent that the continued weakness in the rest of the world was leading to lower interest rates elsewhere, not higher.
Interest rates have long been higher in the US than in most of the rest of the world, leading to demand for US Treasuries from overseas and causing the dollar to strengthen dramatically.
In my comment on the Fed’s increase in December I wrote: “If commodity prices remain weak, there will be a significant deflationary impact felt in several countries; China’s slowdown could continue to be a drag; and of course there is always the risk of a major war or confrontation. The US economy is doing quite well, but will not be immune to what is happening elsewhere in the world.”
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
Mortgage rates still heading lower
I last wrote on mortgage rates in February in a report titled What happened to 4% mortgages? That article started with these words: On the way to the “inevitable” increase in mortgage rates this year, a funny thing has happened – they have gone down again, raising the question: what happened to 4% mortgage rates?
Where are rates now?
Here are this week’s rates, with the 30 year fixed rate mortgage (FRM) at a new 3 year low:
Source: Freddie Mac Weekly Survey
What are the “experts” forecasting?
The Mortgage Bankers Association (MBA) has been forecasting for the last 2-3 years that mortgage rates would soon increase to 5% or more.
In November 2013 the MBA forecast mortgage rates “to rise to 5.1% in 2014”. Actually, the 30-year Fixed Rate Mortgage (FRM) was 4.0% at the end of 2014.
Undaunted, in December 2014 the MBA again forecast a rise to 5.1% by the end of 2015, and once again the actual FRM was 4.0% at the end of 2015.
By January 2016 the MBA had become a little more cautious and forecast an increase to just 4.6% by the end of 2016, but to 5.2% by the end of 2017.
And now in May, those forecasts have dropped to 4.1% by the end of 2015 and 4.8% by 2017.
Why are the “experts” so wrong?
The FRM is based, not on short-term interest rates over which the Federal Reserve has influence, but on the yield on the 10 year US Treasury (10T), whose price is influenced by a number of factors, notably the anticipated strength of the economy, yields compared with other countries, and geopolitical developments around the world.
When the Fed increased short-term rates last December, the yield on the 10T was 2.25%. On Friday it closed at 1.71%, a change of more than half a per cent. In the same period,the FRM has dropped 0.4%.
The reason the MBA keeps getting the forecast for the FRM so wrong is that it keeps forecasting that the yield on the 10T is going to increase. Its latest FRM forecast assumes a 10T yield of 2.2% by the end of 2016 and 2.9% by the end of 2017. These forecast rates have dropped from 2.7% and 3.3% just since January.
But it is not just the MBA that gets interest rates wrong. The Fed was so concerned about being “transparent” and explaining, ad nauseam, its thinking on interest rates in order not to “surprise” the market, that it missed the opportunity to raise rates when the US economy was strong and did so just as it became apparent that the continued weakness in the rest of the world was leading to lower interest rates elsewhere, not higher.
Interest rates have long been higher in the US than in most of the rest of the world, leading to demand for US Treasuries from overseas and causing the dollar to strengthen dramatically.
In my comment on the Fed’s increase in December I wrote: “If commodity prices remain weak, there will be a significant deflationary impact felt in several countries; China’s slowdown could continue to be a drag; and of course there is always the risk of a major war or confrontation.The US economy is doing quite well, but will not be immune to what is happening elsewhere in the world.”
Where are mortgage rates headed?
As I have pointed out, the “experts” have been consistently wrong, so their “forecasts” have really become guesses.
The chart below shows the spread – the difference between the rates – on the FRM and 10T. For the last three years this has averaged 1.67% and been pretty consistent: 2013 and 2014, 1.66%, 2015 1.70%. Today the spread is 1.82%, a little higher than the last few years.
Source: US Treasury, Freddie Mac
Summary
While the US economy is stronger than those of most of other countries, it is growing at only a moderate 2 – 2.5% per annum. Elsewhere there are many headwinds, which make it hard – at least for this observer – to see the basis for interest rate increases in the near future.
Trying to guess the bottom in mortgage rates is like trying to time investment in the stock market – great fun, but rarely successful.
What we can say is that mortgage rates today are extremely low by historic standards and to some extent are offsetting home price increases in the last few years.
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
What happened to 4% mortgages?
On the way to the “inevitable” increase in mortgage rates this year, a funny thing has happened – they have gone down again, raising the question: what happened to 4% mortgage rates?
Where are rates now?
Here are this week’s rates:
Source: Freddie Mac Weekly Survey (more…)
Why you understand mortgage rates better than many commentators do
Just over a week ago the Federal Reserve increased short-term interest rates and I explained in What the Fed’s rate increase mean for mortgage rates that the 30-year fixed rate mortgage rate was not affected by the Fed Funds rate but by the yield on the US 10 year Treasury.
If you read my article and were a journalist you would not have written articles I saw this week with headlines such as “Defying Fed hike, 30-year mortgage rate slips” or “30-year mortgage rate drops in spite of Fed hike”. (more…)
What the Fed’s rate increase means for mortgage rates
For the first time since before the introduction of the iPhone the Federal Reserve (Fed) members voted to increase the target rate for federal funds (FF). The increase is 1/4% and was widely expected. What does this mean for mortgage rates? The key is to understand which rates are impacted by the Fed Funds rate and which are dependent upon interest rates set by the market.
Which rates are based upon the Fed Funds rate?
30 year fixed rate mortgages (FRN) are not based on the FF rate, but are most closely tied to the yield on 10 year US Treasuries(10T). More on that in a minute. (more…)
Is this the end of mortgages under 4%?
The “will they won’t they” saga of when the Federal Reserve will increase interest rates took another yesterday as the jobs report saw with 271,000 new jobs added, a decrease in the official unemployment rate to a flat 5 percent, and a pick up in wage growth to an annualized rate of 2.5 percent, the fastest pace in about 6 years. The yield on the 10 year Treasury (the bench mark for 30 year Fixed Rate Mortgages – FRM) jumped to 2.34%, bringing speculation that we could be about to see the end of mortgages under 4%. (more…)
Play Snakes and Ladders with the Federal Reserve
The debate over when the Bank of England and the Federal Reserve will raise interest rates has been running for a very, very long time now.
So economists at Bloomberg Intelligence have managed to make it fun again. With the specific timing depending on a host of moving parts in the economy – wage growth, inflation and unemployment – they reckon those factors will direct policy makers like counters on a snakes and ladders board game.
And so they have created a Snakes and Ladders game and invite readers to “roll the dice”. (more…)
Mortgage rates likely to remain below 4%
I read US inflation better than forecast , written by a distinguished foreign currency analyst, with some surprise. For most of us who are “ripe in years” the challenge for most of our lives has been to prevent inflation from growing too rapidly. But now, the challenge through most of the world is to encourage inflation, which is deemed to be too low. Thus “better than forecast” on inflation now means a higher rate than expected.
What’s all this doing on a real estate blog, you may be asking. The answer, of course, is that mortgage rates are based on the yield on 10 year Treasuries, and those in turn reflect the expectation for interest rates, which are influenced by expectations for economic growth and inflation.
Higher economic growth normally leads to higher prices (inflation) because it becomes easier to pass on price increases. This economic recovery, such as it has been, has taken place to a background of falling commodity prices and little or no growth in wages because of high levels of unemployment or underemployment. And many countries have tried to encourage inflation by adopting a policy of easy and cheap finance.
Commentators – and the Federal Reserve itself – talk of the desire to return to “normalized” interest rates, but this ignores the question of whether the norm has changed. I am in the camp which believes that it has.
And we now learn that the San Francisco Fed, home of Fed Chair Janet Yellen, in a recent paper has suggested that the natural rate of interest rates may currently be negative, which in turn suggests that our ultra low rates may not actually be stimulative at all.
“Monetary conditions remain relatively tight despite the near-zero federal funds rate, which in turn is keeping economic activity below potential and inflation below target,” writes economist Vasco Curdia.
The insight centers around the concept of a natural rate of interest. This is the hypothetical interest rate at which money would be lent and borrowed in equilibrium, leading the economy to neither grow nor shrink. If actual interest rates are above this natural (or neutral) rate, then less money will be lent out than otherwise might be, leading economic growth to slow. Conversely, if actual interest rates are below this neutral rate, then economic expansion should result.
Source: FRBSF
And according to Curdia, the neutral rate is currently below zero. Actually, he says it is currently at negative 2.1 percent, in contrast to a long-run level of 2.1 percent. If he’s correct, the direct implication is that right now, even a federal funds rate target of 0 percent to 0.25 percent is high enough to slow down the economy rather than contribute to expansion.
And with 4 Fed Members talking this week of not raising rates soon, the outlook is that mortgage rates will remain below 4% for the forseeable future.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or [email protected].
Read Which broker should sell my home?
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
You can REGISTER to receive email alerts of new posts on the right hand side of the home page at www.OliverReports.com.
@OliverReports
New mortgage rules start TODAY!
Starting today the Consumer Financial Protection Bureau (CFPB) is introducing new disclosure rules – which it calls Know Before You Owe – which will change the disclosures borrowers receive in a real estate transaction.
What will change: forms received
For borrowers applying for mortgages from today onwards what will change is that three documents, the HUD-1 Settlement Statement, the Good Faith Estimate, and the Truth-in-Lending disclosure, will be reduced to two new closing forms called a Loan Estimate and a Closing Disclosure.
When will the borrower receive these forms?
When the consumer receives the Loan Estimate form, he or she will know what the loan amount and the interest rate will be, how much the monthly payment is, an estimate of taxes and insurance based on local rates, and how much down payment is required.
This form is provided twice:within 3 days of receipt of the loan application, and again no later than the 7th business day before closing.
Read the CFPB’s Loan Estimate Explainer for more details.
The Closing Disclosure, which has the full details of all costs and payments relating to the mortgage, must be provided to the borrower at least 3 business days before closing to allow the borrower to verify the terms of the deal. (Often the first time the borrower currently sees the very complicated HUD Statement is at closing, so that the borrower relies heavily on the assurance from her attorney that all is correct.)
If no issues are identified, the closing can take place as scheduled, but if certain specific items need to be changed then the borrower must receive a revised Closing Disclosure and be given an additional 3 business days to review it.
Read the CFPB’s Closing Disclosure Explainer for more information.
Which changes require a revised Closing Disclosure?
– an increase of more than 1/8% in the APR for fixed-rate loans or 1/4% for adjustable-rate loans
– the addition of a pre-payment penalty
– any change in the type of loan, such as from fixed-rate to adjustable-rate.
Will other discoveries trigger a new 3 day waiting period?
No, only the three above. Items discovered on the walk-through before closing, or changes to such as utilities paid at closing, will not cause a delay.
What will be the impact?
Three things seem likely:
– there will, initially be a delay in some closings and these may have a knock-on effect on other closings which were scheduled to take place on the same day (e.g. somebody selling one home and buying another).
– a buyer’s agent and/or attorney will incorporate contingencies in any offer to cover any delay that may occur. Indeed, the Massachusetts Association of Realtors has already produced a form to allow for this.
– after a while, everybody will adjust and this will become a normal part of a real estate transaction.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or [email protected].
Read Which broker should I choose to sell my home?
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
You can REGISTER to receive email alerts of new posts on the right hand side of the home page at www.OliverReports.com.
@OliverReports
Mortgage rates: déjà vu all over again
Well the Federal Reserve did not increase short-term interest rates this week and there was little movement in mortgage rates, which remain under 4% for the 30 year fixed rate (FRM) and close to historic lows:
The underlying assumption behind the Fed’s forecasts and those by groups such as the Mortgage Bankers Association (MBA) is that there will, inevitably, be an increase in inflation at some point and that interest rates will start to rise as that becomes more certain.
How accurate have past forecasts been? (more…)
Recent Comments