Homebuyer mortgage demand spikes 33% as rates set another record low
“Mortgage applications to purchase a home rose 5% for the week and were a remarkable 33% higher than a year ago, according to the Mortgage Bankers Association’s index, which was seasonally adjusted, including for the Fourth of July holiday.
Buyer demand has been incredibly strong since mid-May, after the coronavirus shut down most housing activity in April. The only thing standing in the way of more sales is the record low supply of homes for sale.
Home prices gains continue to accelerate, so low mortgage rates are giving buyers much-needed help. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 dropped to 3.26% from 3.29%. Points, including the origination fee, for loans with a 20% down payment decreased to 0.35 from 0.36.”
“Mortgage rates declined to another record low as renewed fears of a coronavirus resurgence offset the impacts from a week of mostly positive economic data, such as June factory orders and payroll employment,” said Joel Kan, an MBA economist. “The average purchase loan size increased to $365,700 — also another high — as borrowers contend with limited supply and higher home prices.” (CNBC).
While this report states the average contract interest rate last week, nationally, was 3.26%, buyers with good credit and a 20% down payment can now find mortgages at or even a little under 3%.
Goodbye Boston, Hello Marblehead
Inventory chronically low; demand booming
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReports.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Sale, Beverly, Lynn and Swampscott.”
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
Mortgage rate head fake
Well, that rally in mortgage rates didn’t last long! After last Friday’s startling jobs report which led to this article Mortgage rates are rising – and that’s good news and caused a jump in mortgage rates of about 1/8/1/4% on the day, this week saw a very different set of economic numbers and tone to markets.
Consequently, while the Freddie Mac national weekly average, announced on Thursday and based on rates on Monday-Wednesday,saw a small increase from 3.15% to 3.18%, by the end of the week the 30-year Fixed Rate Mortgage (FRM) was hovering closer to 3% again – and on Thursday some lucky buyers were able to get mortgages under 3%.
I don’t want to get bogged down in nitty-gritty when the result is a minor fluctuation. I have written many times in recent weeks that I plan to ignore all economic statistics and forecasts because (a) the numbers, especially in April but for the whole second quarter, are going to be awful, but we are not surprised since the economy, domestically and internationally, was largely shut down, and (b) because all forecasts for the future have so many qualifiers (assuming this, assuming that, etc).
What happened this week?
Unless you took a SpaceX trip to another planet, it has been almost impossible to miss all the drama. On the issue of racism in this country, all I want to say in this forum is that I am very, very optimistic that the movement towards equality has a momentum that I hope and pray is unstoppable. Both the NFL and NASCAR have made dramatic moves, while corporation after corporation has been detailing the plans they have in place to put a rocket to their commitment to speed equality. Now it is up to all of us to keep the pressure on.
Economically….the weekly unemployment figures in Thursday seemed in contrast to the jobs number last week. Tempting though it is to revert to my “ignore them all” philosophy, it may be time as the economy starts to reopen to pay more attention. Two numbers stood out in Thursday’s report: continuing unemployment numbers of almost 21 million and nearly 30 million including those filing for Pandemic Unemployment Assistance benefits.
Nobody knows how many furloughed jobs will be lost as – and if – businesses reopen, or how many small business have only kept going because of funding from the Payroll Protection Program.
So I guess I am back to “we don’t know”. And it is important to differentiate between a stock market on a sugar high from all the liquidity being pumped into the economy by the Federal Reserve and the hardship already being suffered by many now and likely in the future.
And did somebody say rising COVID-19 cases? From CNBC: The rise in coronavirus cases seen in about half a dozen states across the U.S. isn’t the feared “second wave” — it’s still the first, scientists and infectious disease specialists say.
Back to mortgage rates. This is the only chart that matters, showing how cheap mortgage rates are by historic standards:
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 are rising – and that’s good news
The difficulty in forecasting in these extraordinary times was demonstrated on Friday when the latest employment report showed an increase of 2.5 million jobs versus the forecast of a decline of 7.5 million – a 10 million difference! As HSH.com said in its weekly report: “Months and years from now, it will probably become very clear that April 2020 was the absolute depth of the COVID-19 pandemic recession. That’s not to say that we’ve moved to a place of recovery, or that nascent “green shoots” are necessarily a harbinger of a swift return to a fully-fledged economy; we haven’t, and they’re not. However, it could be said that we’re starting to move to a less-deep place of recession and that important signals about an eventual return to growth are starting to be seen.”
The vast amount of liquidity the Federal reserve has pumped into the economy continues to fuel a booming stock market and Friday’s report produced another 3% gain. The S&P 500 is now down just 1% for the year (after falling 30% earlier), while the NASDAQ, which fell 25% earlier, is not up 9% for the year.
The Fed has rescued the market again.
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 back down to 0.25%, following the dramatic and proactive cuts in March.
30-year Fixed Rate Mortgage (FRM)
The FRM reached nearly 5% in late 2018 and dropped to an all-time low of 3.15% in late May.
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), eased back under 2% in 2019 and then plummeted from 1.88% in early 2020 to just 0.58% in late April. It stayed in the 0.6-0.7% % range until this week, when the yield increased to Friday’ 0.91% following the employent report.
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 to 1.5% in 2019 before increasing to 3.0% 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 was in a much tighter range of 1.5% to 1.8% until the second half of 2019 and into 2020.
Indeed, over the last several years the spread between FRM and 10T 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 and again in 2020 where the spread has ranged from 1.8% to 2.7% – well above historic levels.
Comment
The FF rate affects the lending rate for credit cards, auto loans, adjustable rate mortgages, all of which are impacted by banks’ Prime Rates, 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 – as we have seen this year – but in recent years it always comes back to around that 1.7% level.
Here are a few thoughts about the current situation:
1. As HSH has pointed out, April 2020 will likely be seen as the nadir of the COVID-19 recession and the depth and speed of the plunge mean that comparing numbers from the absolute lows will show big percentage increases – but the absolute levels will look bad for some time to come. For example, the employment numbers showed 10 million more jobs than forecast – but the unemployment rate was still over 13% and was nearly 17% for African American workers.
2. It will not be known for some time how many business will not reopen or how many furloughed workers will face unemployment when their employers go out of business.
3. The country faces a consistent demand that it is time to do more than talk about the racism that still exists in so many ways. It is encouraging that so many major corporations have spoken our in recent weeks about the plans they are making to contribute to – and lead the way to – a more just society, And major groups in non-business areas are also speaking up and out – witness the NFL this week.
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 strength of the economy earlier in the year would have lead to expectations that the Fed would be increasing rates, rather than the dramatic cuts we saw.
Another factor is the demand for mortgage-backed securities (MBS), 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.
Part of the reason that mortgage rates spiked initially in March was that investors stopped buying MBS as they were uncertain about the impact forbearance plans would have on mortgage interest payments. The MBS market recovered when the Fed stepped in as a buyer, but the uncertainties remain, leaving the Fed as the largest buyer of MBS.
In normal times I tell people to add 1.7% to the 10T yield to get an idea of where the FRM should be. But in 2008/09 and again in 2020 that formula is thrown off by extraordinary events whether it be the Great Recession or COVID-19.
The reason that the rise in interest rates this week is good news is that it is an indication that markets are at least starting to return to normal. We are not going to see mortgage rates fall into line with the 10T + 1.7% formula (implying a FRM of 2.6%) because in times of economic stress the formula changes slightly to 10T +1.7% + a risk premium.
What we have seen is the start of a move, which may well be a longer-term trend, of people moving out of cities into the suburbs into larger houses with more open space around them (see artilce below). This is adding demand (from people selling higher-priced properties so more willing possibly to pay up) to a market suffering – in Essex County – from a 40% reduction in inventory compared with a year ago – when inventory was low anyway.
In summary, I would say that FRM rates in the 3 1/4% range may well be the low point in this cycle. And that is an extrmeley attractive rate.
Goodbye Boston, Hello Marblehead
Accepted Offers held back by shortage of inventory
Are mortgage rates headed to 3%?
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReports.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Sale, Beverly, Lynn and Swampscott.”
Andrew Oliver
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 hit all-time low – again
“The 30-year fixed-rate mortgage has again hit the lowest level in our survey’s nearly 50-year history, breaking the record for the third time in just the last few months. These unprecedented rates have certainly made an impact as purchase demand rebounded from a 35 percent year-over-year decline in mid-April to an 8 percent increase as of last week—a remarkable turnaround given the sharp contraction in economic activity.
Additionally, refinance activity remains elevated and low mortgage rates have been accompanied by a $70,000 decline in the average loan size of refinance borrowers this year. This means a broader base of borrowers are taking advantage of the record low rate environment, which will benefit the economy.” (Freddie Mac weekly survey.)
Comment
Remember late March when the 30-year Fixed Rate Mortgage jumped more than 1% in one day when the financial markets were in disarray? The multiple actions taken by the Federal Reserve have created both liquidity and confidence and the impact has been dramatic in both the stock market and the conventional mortgage market.
Mortgage applications spike
Mortgage applications almost back to 2019 levels
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
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReports.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Sale, Beverly, Lynn and Swampscott.”
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
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
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
Mortgage Rates are about to rise
While the 30-year Fixed Rate Mortgage rate increased this week from 3.49% to 3.56%, the yield on the 10-year Treasury (10T), which tends to drive the rate on the 30-year Fixed Rate Mortgage (FRM), jumped sharply later in the week and this will likely lead to a sharper increase in the FRM reported by Freddie Mac next Thursday.
The FRM rate is a premium – or spread – to the yield on the US Government’s 10- year Treasury Note. That in turn 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.
In general terms, the yield on 10T moves more quickly than does the FRM rate, so that when interest rates move sharply lower- often driven by geopolitical events – it takes a while before the spread returns to its normal level. But it always does.
Two weeks ago, I wrote: “Currently, the spread is 2.08%, or some 0.35% above the average of 1.73% since 2005. History suggests that either the yield on the 10T is going to rise or the FRM rate fall.” At that time the 10T yielded 1.50% and the FRM was 3.58%. By this Thursday’s date, the yield on 10T had jumped to 1.79% while the FRM was just slightly lower at 3.56% compared with 3.58%. The spread has dropped from 2.08% to 1.77%.
Why have interest rates jumped?
In the words of HSH.com’s Market Trends, an excellent summary of the week’s economic and mortgage activity: “Reasonable economic date here in the U.S., rising optimism that some sort of trade deal between the U.S. and China will get at least worked on (if not necessarily worked out) and new or (or new and) expanded stimulus by central banks around the world are having predictable effect. While rates set by fiat (defined as a formal authorization, proposition or decree) are being cut by central banks (and the US Federal Funds rate will very probably be cut this week – AO) market interest rates are moving in the other direction.”
“Why would this be the case? Several reasons. First, perhaps the largest cause of the global economic slowdown has been the continued escalation of tariffs between the U.S. and China, which has disrupted supply chains and slowed economies that heavily depend on such trade for growth. If any sort of deal may get done, or even simply instituting delays and using softer rancor (as is the case at the moment) has seen investors shift some funds out of the safe haven of bonds and back into riskier (but potentially more profitable) equities. As such, these moves put upward pressure on yields.
Recently 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.
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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