A Calmer Mortgage Market
After the spike in mortgage rates two weeks ago, the market has calmed down as the Federal Reserve stepped in to buy mortgage-backed securities (MBS).
As I commented in my Why are Mortgage Rates Jumping? post two weeks ago: “Lenders are overwhelmed by refinancing requests and are keeping rates up to slow demand; and the buyers of mortgage-backed securities – the ultimate determinant of rates – are balking at lower rates.”
The traditional spread between the 30-year Fixed Rate Mortgage (FRM) and 10-year Treasury (10T) remains elevated, as this table shows:
The most likely outcome is that, as the US economy rebounds later this year, the yield on 10T will rise and the risk premium demanded by buyers of MBS decline, narrowing the spread. But there are no models for this pandemic, and no forecasts – just guesstimates at this stage.
Andrew Oliver
www.OliverReports.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Why are Mortgage Rates Jumping?
Regular readers of this column are aware of the link between the 10-year Treasury (10T) and the 30-year Fixed rate Mortgage(FRM). Over the last several years the spread – the difference between FRM and the yield on 10T has averaged around 1.75% (see table below). So with the 10T yielding 1.15% the FRM should be say 2.9%. Right?
Wrong. Today’s Freddie Mac weekly survey, taken on Monday-Wednesday this week, showed an average rate of 3.65%, up from 3.36% last week and the all-time low of 3.29% recorded two weeks ago.
Why is that? The simple answer is Supply and Demand, a basic economic equation I have been applying to the housing market in recent years. While simple, this is a fundamental of understanding markets – whether for housing, mortgage rates – or toilet paper.
In recent years there have been more buyers – Demand – than sellers – Supply- in the housing market, and this has led to bidding wars and rising prices. In my Recession and Recovery piece I wrote that the imbalance between Sellers and Buyers was quite likely to change in the coming weeks, as some buyers hold off and more sellers come forward.
My hope is that this will lead to a more balanced market when conditions stabilise.
Coming back to mortgage rates, in my Mortgage rates Stabilise post last Saturday I wrote: “Lenders are overwhelmed by refinancing requests and are keeping rates up to slow demand.”
In other words, Demand is exceeding Supply and prices are rising.
I under-estimated the degree to which the quoted mortgage rate would rise in the short-term. This was Freddie Mac’s comment today: “Mortgage rates rose again this week as lenders increased prices to help manage skyrocketing refinance demand. This is expected to be a short-term phenomenon as lenders work through their backlog.”
And here is a very short video from Bankrate explaining what has been going on this week: Why aren’t mortgage rates lower?”.
The table below shows the spread over the last 15 years. Noe that in a previous time of stress – 2008/09 (although for a very different reason) the spread widened before reverting to the mean when conditions stabilised.
I expect the same phenomenon to occur again in due course.
I’ll end with the same Wall Street Journal quote I used to end one of my earlier posts:
“For all the foreboding about the novel coronavirus—foreboding that is justified—it is heartening to see the American people responding in ways reminiscent of the frontier spirit. Most people are doing what they have to do to survive a clear and immediate threat to their lives and communities.”
And I ended: “And that spirit will also determine that the recovery will come.”
As it shall.
Andrew Oliver
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Recession and Recovery
Statistics tell us about the past, while markets look to the future. I have no doubt that the world will see negative growth in the second quarter and possibly the third quarter – which would make it officially a recession – but I also expect a strong recovery fueled by the amount of monetary and fiscal stimulus that has already been provided by some countries and will be by others.
Perhaps the best coordinated response so far has come from the UK where monetary, fiscal and regulatory measures were announced together on Wednesday. The US has been slow to acknowledge the seriousness of COVID-19 and the fiscal measures announced so far are, rightly, largely aimed at helping those most affected by the economic impact of the shutdown of so much of the country. I have to assume that a larger fiscal stimulus will be announced at some point.
As to the future I quote from a recent Wall Street Journal editorial:
“For all the foreboding about the novel coronavirus—foreboding that is justified—it is heartening to see the American people responding in ways reminiscent of the frontier spirit. Most people are doing what they have to do to survive a clear and immediate threat to their lives and communities.”
“The new watchword is “social distancing.” The speed with which the American people and their institutions are executing that sound strategy is breathtaking.”
“Health emergencies in the U.S. mainly and appropriately remain the responsibility of state and local officials.”
“The House package includes free testing for everyone who needs it, and two weeks of paid sick leave to allow people with the virus to stay home from work and avoid infecting co-workers. It also includes enhanced jobless benefits, increased food aid for children, senior citizens and food banks, and higher funding for Medicaid benefits.”
“The pandemic is still in its early stages in the U.S., and the fight will be a long haul. Social distancing by individuals and businesses may have to persist for weeks or even months. The good news on Friday is that the federal government and private economy seem at last to be manning the health barricades.”
China’s example
Perhaps lost in the drama of this week is the news that China seems to be on the path to returning to normal. On Friday Apple reopened all its 42 stores which had been closed since early February.
“It feels to me that China is getting the coronavirus under control,” CEO Tim Cook said in an interview two weeks ago. “I mean you look at the numbers, they’re coming down day by day by day. And so I’m very optimistic there.” Cook went on to point out that Apple’s suppliers were reopening factories.
Starbucks closed about half of its 4,300 stores on January 29. Those closures, combined with already planned closures for Chinese New Year holiday, resulted in some 80% of its stores shuttered in early February. As of early March more than 90% of its stores were open, albeit most were operating on a reduced schedule. By month’s end, assuming no unforeseen reoccurrences of the disease, the company expects 95% of stores in China to be open.
On March 9, Jing Daily reported that China may soon have the disease under control thanks to its proactive public health measures. And some analysts predict government-imposed quarantine measures may begin to lift as early as the end of March.
With the first quarter of 2020 in the tank, JP Morgan research analysts are hopeful for an economic recovery in the second quarter. According to China Daily, Jing Ulrich, the bank’s vice chairman of global banking and Asia-Pacific, predicts that the Chinese economy will grow 15% quarter-on-quarter from April to June, after contracting by 3.9% during the first three months of 2020, compared to the previous year.
Comment
The slow response to the seriousness of COVID-19 may delay the recovery in the US but that recovery should still take place later this year. The timing depends upon the success of the measures to contain the spread of the virus and the scale of the fiscal stimulus which is still to be announced.
As for the housing market, I have for some years used the simple concept of Supply and Demand to describe conditions. For some years Demand has far out-stripped Supply. It seems quite possible that for the next few months Demand may be reduced as buyers adopt a wait and see attitude, while Supply may increase as those sellers who had been thinking of selling decide to do so.
If this works out, we may later in the year see a more balanced housing market between buyers and sellers.
I will end this piece by repeating an earlier quote from the WSJ:L
“For all the foreboding about the novel coronavirus—foreboding that is justified—it is heartening to see the American people responding in ways reminiscent of the frontier spirit. Most people are doing what they have to do to survive a clear and immediate threat to their lives and communities.”
And that spirit will also determine that the recovery will come.
Mortgage rates after the collapse of bond yields
Coronavirus and the Housing Market: Part 2
Andrew Oliver
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Mortgage rates stabilise
As suggested in last week’s Mortgage rates after the collapse of bond yields the 30-year Fixed rate Mortgage (FRM) did not follow the further collapse in the yield on th 10-year Treasury – which itself reversed later in the week.
The Freddie Mac weekly survey actually saw an increase in the FRM from 3.29% to 3.37%.
There would appear to be two main reasons for the stabilising of rates: lenders are overwhelmed by refinancing requests and are keeping rates up to slow demand; and the buyers of mortgage-backed securities – the ultimate determinant of rates – are balking at lower rates.
The FRM remains very close to all-time lows and we may have seen the actual bottom, but it is unlikely that rates will rise significantly any time soon.
Recession and Recovery
Mortgage rates after the collapse of bond yields
Andrew Oliver
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Mortgage rates after the collapse of bond yields
Somewhat to the surprise of markets, the Federal Reserve (Fed) lowered its Fed Funds Rate (FF) this week by 0.5% to 1.25%, in response to the rapidly developing, coronavirus-induced fear of an economic slump.
What does this mean for mortgage rates? First, I will explain the link – or lack of link – between FF and FRM- and what actually drives mortgage rates. This is easier than predicting what will happen going forward, but for what it is worth I offer some thoughts at the end of this piece.
Five charts explain the factors driving mortgage rates. In all cases the numbers are at the dates that the Fed has changed its FF over the last 4 years: 10 increases, followed by four decreases.
Fed Funds rate (FF)
The Fed Fund rate is the rate at which banks lend to each other overnight.
After increasing from 0% to 2.5% since late 2015, cuts in 2019 and 2020 have lowered the rate to 1.25%.
30-year Fixed Rate Mortgage (FRM)
The FRM reached nearly 5% in late 2018 and dropped to an all-time low this week of 3.29%.
10-year Treasury yield (10T)
The yield on the 10T is influenced by two major factors: the outlook for the economy (expanding businesses invest creating demand for money) and geopolitical events – the US dollar and US Treasuries are seen as a safe haven during times of uncertainty.
The yield reached 3.2% in November, 2018 (which was the time of the peak in the FRM), but in the last two weeks the yield has plummeted from around 1.5% to 0.74% on Friday.
The spread, or difference, between FRM and FF
If there were a link between FF and FRM it would show up in this chart. In fact, the spread dropped from 3.7% in 2015 in 2019 before increasing to 2.0% recently, demonstrating that there is no direct link between FF and FRM
The spread, or difference, between FRM and 10T
We see more consistency between FRM and 10T, where the spread has, until recently, been in a much tighter range of 1.5% to 1.8%.
Indeed, over the last several years the spread has been very stable averaging around 1.7%. But I would point out two things in this table: first, the spread widened significantly in the great recession in 2008; and, secondly, while the median spread for the year has been in a narrow range, within the years there have been quite wide variations – in particular look at 2008/2009.
Comment
The FF rate affects the lending rate for credit cards, auto loans, adjustable rate mortgages, all of which are impacted by banks’ Prime Rate, which moves with the FF rate. Fixed Rate Mortgages – the typical 30-year mortgage – have a longer life and their benchmark is the closest Treasury security, which is the 10T. Conventional mortgages are bundled and sold to investors, who require a risk premium – higher yield – over that offered by 10T.
As can be seen, that premium – spread – has been remarkable constant over recent years. It does fluctuate from time to time – as the yield on 10T tends to move quickly at times, although never before as quickly as in the last two weeks – but in recent years has always comes back to around that 1.7% level.
Here are a few thoughts about the current situation:
1. Nobody knows how severe the coronavirus will prove to be, but there seems to be a good chance that many sectors of the world economy will see an abrupt slump, rather than a gradual slowdown.
2. The hope is that the crisis stage of COVID-19 will pass quite quickly and that this will be followed by a rapid recovery in economic activity.
3. But nobody knows.
4. In times of crisis countries need strong political leadership, reassuring the public that, while serious, all possible action is being taken to confront the situation. The response has varied country to country, but we must hope that there will be a more coordinated effort in the very near future.
Mortgage rates
As the last table showed, whereas over time the spread between FRM and 10T has been consistent in the 1.7% range, there have been wide variations in the short-term. We saw that in 2008 and 2009, a time of great economic duress when widespread buying of US Treasuries as a safe haven drove yields down and spreads widened. Those spreads returned to the norm as economic conditions improved.
The current economic situation is very different from the Great Recession. Indeed, but for COVID-19 the extremely strong employment numbers announced yesterday would lead to expectations that the Fed would be increasing rates; instead, the market is expecting another cut.
But as many commentators have pointed out, lower interest rates will not overcome health concerns. For example, lower rates will not make people travel.Money is cheap and plentiful – what is lacking right now is demand. It is a time for fiscal measures not monetary ones.
Another factor is the demand for mortgage-backed securities, the bundles of mortgages sold to investors. In the Great Recession, investors were wary about the value of the underlying security – residential mortgages – and so demanded a larger premium. That should not be a concern now with housing markets remaining very strong.
So will mortgage rates get to 3%, a number raised in my Are mortgage rates headed to 3%? article last June.
My best guess – and at this stage it is a guess – is that in time, when we know the extent of the economic slump and the pace of recovery, interest rates will raise again.Could the FRM reach 3%? Yes. Will it? Ask me again in a couple of weeks.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Mortgage rates after the Federal Reserve rate cut
I will publish a report on Saturday when markets have – I hope – settled down somewhat after the gyrations of recent days (which seem like weeks) and the cut in the Federal Reserve Funds rate – the rate at which banks and other depository institutions lend money to each other, usually on an overnight basis – announced on Tuesday.
The Fed Funds rate translates directly into the interest rate charged for credit cards, auto loans, etc. but not for the traditional 30-year fixed rate mortgage (FRM) which usually is based upon the yield on the US Treasury 10-year Note (10T). But as I will explain on Saturday, although the spread – the amount investors want above the yield they can obtain on 10T – has been very consistent around 1.7% in recent years, in times of stress the spread can vary widely. In 2008, for example, it reached 3.1%.
For an article explaining the relationship between FRM, 10T and the Fed Funds rate read Mortgage rates explained and Coronavirus and the Housing Market: Part 2.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Coronavirus and the Housing Market: Part 2
Three weeks ago I published Coronavirus and the housing market concluding with this comment: While it is too early to forecast the impact of the coronavirus, world stock markets this week suggest that investors believe it will be limited beyond the short term. And meanwhile, ultra low mortgage rates only exacerbate the impact of the extreme low level of supply in the housing market.
Well that changed this week!
It is worth remembering that for some time commentators have been observing that the stock market was at extended valuations but that nobody wanted to sell, so maybe coronavirus was the excuse for the “overdue” stock market correction to occur.
Which is not to underestimate the significance of the crisis as it seems likely to impact everything from air travel and tourism to concert attendance; from manufacturing supply lines to decisions about future supply markets. At this stage, we simply do not know.
The most important factor for both the economy and the housing market is consumer confidence. The University of Michigan survey of Consumer Sentiment for February edged up 1.2 points to 101.0, the highest level since March 2018. The accompanying commentary said:”The coronavirus was mentioned by 8% of all consumers in February when describing the reasons for their economic expectations. However, on Monday and Tuesday of this week—the last days of the February survey—20% mentioned the coronavirus due to the steep drop in equity prices as well as the CDC warnings about the potential threat of the virus.”
What we do know is that mortgage rates have dropped even further. The Freddie Mac weekly survey published on Thursday showed the national average 30-year Fired Rate Mortgage at 3.45% and that rate seems likely to drop further next week.
The US economy continues to show steady, if unspectacular grow. Provided coronavirus just delays economic activity, that will continue to be the story. A longer slowdown may well lead the world into a recession but it really is too early to tell.
Meanwhile the story of recent years continues to apply: Record low inventory + record low mortgage rates + strong demand = rising home prices.
Will house prices continue to rise in 2020?
Are You Thinking of Selling in 2020?
Swampscott: now is a GREAT time to sell
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Coronavirus and the housing market
We have all reads reports explaining how coronavirus is likely be more deadly than the SARS out break in 2003, in part because of the migration from country to town in China and increase in travel both to and from China. While coronavirus is still in its early stages, the number of confirmed cases of the current virus already exceeds that for SARS.
The impact of the virus will spread well beyond China and Asia. Fewer Chinese travelers will result in fewer tourism dollars.
Another factor is that China is a much larger part of the world economy than it was in 2003.
Already, supply chains are feeling pressure leading to production difficulties for many companies throughout the world.
Economic impact
China has enjoyed economic growth of 6% or more for some 30 years and it is already clear that coronavirus will cause a sharp slowdown in the first quarter of the year, coming as it has at the Chinese New Year. And that slowdown will extend throughout the world to some extent.
If the virus is brought under control quickly, that economic slowdown is likely to reverse quite quickly. Id the impact lasts longer, then obviously so will the effects.It is too early to tell.
Meanwhile, financial markets have seen the usual flight to quality and safety, and that still means the US dollar and US Treasuries. Lower bond yields – and especially the 10-year Treasury, in turn lead to lower mortgage rates. The chart below of Freddie Mac’s weekly survey is a little messy, but the message is clear:30-year mortgage rates are now back within range of their 2013 and 2016 lows.
Comment
While it is too early to forecast the impact of the coronavirus, world stock markets this week suggest that investors believe it will be limited beyond the short term. And meanwhile, ultra low mortgage rates only exacerbate the impact of the extreme low level of supply in the housing market.
Will house prices continue to rise in 2020?
Are You Thinking of Selling in 2020?
Swampscott: now is a GREAT time to sell
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Can a 97-Year-Old Still Get a 30-Year Mortgage?
Older Americans may not realize that they can still qualify for a mortgage, as the Equal Credit Opportunity Act forbids discrimination in the mortgage market on the basis of age. According to this NAR article 97-year-olds older borrowers are eligible to get loans that will expire even up to their 130th birthdays.
According to the Federal Housing Finance Agency, borrowers over the age of 65 comprise about 10% of all mortgages that are originated each year, and
more lenders are trying to promote to retirees that they can still qualify with special lending programs geared to them.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Conforming Mortgage Limits raised for 2020
The Federal Housing Finance Agency (FHFA) has announced the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2020. In most of the U.S., the 2020 maximum conforming loan limit for one-unit properties will be $510,400, an increase from $484,350 in 2019.
Essex County
The first table shows the limit both nationally and in Essex County in recent years, as well as the maximum home price that would qualify for a conforming loan. Since 2012 the limit has increased 22% nationally and 48% in Essex County.
Massachusestts
The second table shows the 2020 limits for each County in Massachusetts for 1,2,3, and 4-unit properties.
How is the limit calculated?
The Housing and Economic Recovery Act (HERA) requires that the baseline conforming loan limit be adjusted each year for Fannie Mae and Freddie Mac to reflect the change in the average U.S. home price. According to FHFA’s seasonally adjusted, expanded-data HPI, house prices increased 5.38 percent, on average, between the third quarters of 2018 and 2019. Therefore, the baseline maximum conforming loan limit in 2020 will increase by the same percentage.
High cost areas
For areas in which 115 percent of the local median home value exceeds the baseline conforming loan limit, the maximum loan limit will be higher than the baseline loan limit. HERA establishes the maximum loan limit in those areas as a multiple of the area median home value, while setting a “ceiling” on that limit of 150 percent of the baseline loan limit. Median home values generally increased in high-cost areas in 2019, driving up the maximum loan limits in many areas. The new ceiling loan limit for one-unit properties in most high-cost areas will be $765,600 — or 150 percent of $510,400.
As shown in the table above in Essex County the ceiling for 2020 is $690,000.
Conventional vs Conforming
A conventional mortgage is any type of home buyer’s loan that is not offered or secured by a government entity, such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), or the USDA Rural Housing Service, but instead is available through or guaranteed by a private lender (banks, credit unions, mortgage companies) or the two government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
A conforming mortgage is one whose underlying terms and conditions meet the funding criteria of Fannie Mae and Freddie Mac. Chief among those is a dollar limit, set annually by the Federal Housing Finance Agency (FHFA)
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
This is Not 2008 All Over Again: The Mortgage Lending Factor
According to this Keeping Current Matters article : Some are afraid the real estate market may be looking a lot like it did prior to the housing crash in 2008. One of the factors they’re pointing at is the availability of mortgage money. Recent articles about the availability of low-down payment loans and down payment assistance programs are causing concern that we’re returning to the bad habits of a decade ago. Let’s alleviate the fears about the current mortgage market.
The Mortgage Bankers’ Association releases an index several times a year titled: The Mortgage Credit Availability Index (MCAI). According to their website:
“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is…a summary measure which indicates the availability of mortgage credit at a point in time.”
Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available the mortgage credit.
Here is a graph of the MCAI dating back to 2004, when the data first became available:
As we can see, the index stood at about 400 in 2004. Mortgage credit became more available as the housing market heated up, and then the index passed 850 in 2006. When the real estate market crashed, so did the MCAI (to below 100), as mortgage money became almost impossible to secure.
Thankfully, lending standards have eased since. The index, however, is still below 200, which is half of what it was before things got out of control.
Bottom Line
It is easier to get a mortgage today than it was immediately after the market crash, but it is still difficult. The difference in 2006? At that time, it was difficult not to get a mortgage.
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Keeping Current Matters, Inc. does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Recession: what Recession?
It is only a short 3 months ago (well I guess in political terms that’s almost a lifetime) that all the pundits were cautioning – not of course forecasting – that a recession was possible.
Since the yield on the 10-year Treasury is the most sensitive to the economic outlook, and since mortgage rates are based on the 10T yield, mortgage rates followed the drop in the yield on 10T, but only to a limited extent.
Basically, the 30-year fixed Rate Mortgage rate went from 4.5% at the beginning of the year to 4% in June and 3.5% around Labor Day, when R talk was all the rage amongst commentators.
So what has happened recently? (more…)
Forget the Price of the Home. The Cost is What Matters.
The article points out the impact on affordability of, amongst other things, this year’s drop in mortgage rates from 4.5% to around 3.7% currently. In the same period last year, of course, mortgage rates went up by almost 1%.
Comments about “affordability” – like those experts who say that 82% of the cost of such and such a renovation will be reclaimed on sale – are fine in theory and may, like all statistics, be accurate over very large numbers.
But most people are buying just one house at the time that is appropriate for them, based upon what they can afford at the time – and what is available.
Puzzled by why mortgage rates have been so volatile over the last couple of years? Read
https://oliverreportsma.com/mortgag…/mortgage-rates-forecasts/ for informed commentary about North Shore real estate markets, mortgage rates, property taxes and anything else that influences real estate markets.
Forget the Price of the Home. The Cost is What Matters.
Home buying activity (demand) is up, and the number of available listings (supply) is down. When demand outpaces supply, prices appreciate. That’s why firms are beginning to increase their projections for home price appreciation going forward. As an example, CoreLogic increased their 12-month projection for home values from 4.5% to 5.6% over the last few months.
The reacceleration of home values will cause some to again voice concerns about affordability. Just last week, however, First American came out with a data analysis that explains how price is not the only market factor that impacts affordability. They studied prices, mortgage rates, and wages from January through August of this year. Here are their findings:
Home Prices
“In January 2019, a family with the median household income in the U.S. could afford to buy a $373,900 house. By August, that home had appreciated to $395,000, an increase of $21,100.”
Mortgage Interest Rates
“The 0.85 percentage point drop in mortgage rates from January 2019 through August 2019 increased affordability by 9.7%. That translates to a $40,200 improvement in house-buying power in just eight months.”
Wage Growth
“As rates have fallen in 2019, the economy has continued to perform well also, resulting in a tight labor market and wage growth. Wage growth pushes household incomes upward, which were 1.5% higher in August compared with January. The growth in household income increased consumer house-buying power by 1.5%, pushing house-buying power up an additional $5,600.”
When all three market factors are combined, purchasing power increased by $24,500, thus making home buying more affordable, not less affordable. Here is a table that simply shows the data:
Bottom Line
In the article, Mark Fleming, Chief Economist at First American, explained it best:
“Focusing on nominal house price changes alone as an indication of changing affordability, or even the relationship between nominal house price growth and income growth, overlooks what matters more to potential buyers – surging house-buying power driven by the dynamic duo of mortgage rates and income growth. And, we all know from experience, you buy what you can afford to pay per month.”
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Why are mortgage rates rising?
As expected, the Federal Reserve (Fed) lowered its Fed Funds Rate (FF) this week by 0.25% to 2.0%.
What does this mean for mortgage rates and why are they rising?
Five charts explain the factors driving mortgage rates. In all cases the numbers are at the dates that the Fed has changed its FF over the last 4 years: 10 increases and more recently two decreases.
Fed Funds rate (FF)
The Fed Fund rate is the rate at which banks lend to each other overnight.
After increasing from 0% to 2.5% since late 2015, two recent cuts have lowered the rate to 2%.
30-year Fixed Rate Mortgage (FRM)
The FRM reached nearly 5% in late 2018 and declined to a low of 3.49% in early September, since when it has increased to 3.73%.
10-year Treasury yield (10T)
The yield on the 10T is influenced by two major factors: the outlook for the economy (expanding businesses invest creating demand for money) and geopolitical events – the US dollar and US Treasuries are seen as a safe haven during times of uncertainty.
After reaching 3.2% last November (which was the time of the peak in the FRM), the yield dropped under 1.5% in early September before recovering to 1.79%.
The spread, or difference, between FRM and FF
If there were a link between FF and FRM it would show up in this chart. In fact, the spread has dropped from 3.5% to 1.5%, demonstrating that there is no direct link between FF and FRM
The spread, or difference, between FRM and 10T
We see more consistency between FRM and 10T, where the spread has been in a much tighter range of 1.5% to 1.8%. Indeed, over the last several years the spread has been very stable averaging around 1.7%
Comment
The FF rate affects the lending rate for credit cards, auto loans, adjustable rate mortgages, all of which are impacted by banks’ Prime Rate, which moves with the FF rate. Fixed Rate Mortgages – the typical 30-year mortgage, have a longer life and their benchmark is the closest Treasury security, which is the 10T. Conventional mortgages are bundled and sold to investors, who require a risk premium – higher yield – over that offered by 10T.
As can be seen, that premium – spread – has been remarkable constant over recent years. It does fluctuate from time to time – the yield on 10T tends to move quickly at times – but in recent years has always comes back to that 1.7% level.
The reason that mortgage rates have been rising of late, therefore, is that the yield on 10T has been rising.
A simple guide to the FRM rate, therefore, is to follow the yield on 10T and add 1.7%.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Mortgage applications jump as rates rise
As so often happens, mortgage applications have jumped in the past week as rates have risen after falling for so long.
Freddie Mac’s weekly survey will be published tomorrow and the 30-year Fixed rate Mortgage will show an increase from last week. But the rates have already increased in the market and this has prompted buyers to move.
This CNBC article Mortgage demand jumps shows that demand for new purchases – as against refis – jumped 5% from the previous week and was 15% ahead of the same time last year, when rates were much higher.
In last week’s article Mortgage rates about to rise I wrote:
“The best outcome for both the US and the rest of the world would be an end to the tariff war, which would lead to renewed confidence, increased capital spending and continued economic growth. This, in turn, would increase the demand for money and lead to higher interest rates and higher mortgage rates. Higher rates would, in fact, be a positive sign for both the economy and the housing market.”
“Last week was a positive one and interest rates responded accordingly. As the 70th anniversary of the founding of the People’s Republic of China will be celebrated on October 1, it would be reasonable to expect only positive news between now and then. But the longer term issues remain to be resolved.”
The Federal Reserve is expected to cut interest rates today and I will write about that this weekend. But do remember that the Fed’s decision affects short-terms rates – credit cards, auto loans, adjustable rate mortgages, etc. – while fixed-rate mortgage rates are set by the market and priced in relation to the yield on the Us 10-year Treasury.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
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