Mortgage rates drop to 3.5%
In last week’s Why aren’t mortgage rates even lower? I wrote: “History suggests that either the yield on the (US Treasury 10-year Note) 10T is going to rise or the (30-year Fixed rate Mortgage) FRM rate fall.”
Both occurred this week, with the yield on 10T increasing 7 basis points (0.07%) and the FRM rate dropped another 9 basis points (0.09%) to 3.49%.
In its weekly commentary Freddie Mac wrote: “Mortgage rates continued the summer swoon due to weaker economic data. While economic growth is clearly slowing due to rising manufacturing and trade headwinds, economic fundamentals are still solid for U.S. consumers. The unemployment rate is low, housing affordability is improving, homebuyer demand is rising, and home price growth is stable.”
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 aren’t mortgage rates even lower?
That might sound like a strange question when the latest Freddie Mac 30-year Fixed Rate Mortgage (FRM) rate is 3.58%, down from 4.5% at the beginning of the year and nearly 5% last Thanksgiving. And at the end of last year most pundits were forecasting that the FRM would breach 5% in 2019. (more…)
Do you know why the Chinese like doing business with you?
That was the question put to me by a Chinese businessman in Malaysia many years ago.
“No,” I said, “I haven’t got a clue.” (more…)
Mortgage rates drop again
Mortgage rates dropped again this week, as bond markets continued to reflect the slowing global economy and growing fear of a recession.
It seems scarcely believable that 9 months ago the 30 year Fixed Rate Mortgage (FRM) was almost 5% with widespread forecasts that it would rise further in 2019.
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
Housing Inventory declining again
Following year over year (YOY) increases for 11 consecutive months until June, the inventory of Single Family Homes (SFH) for sale in the 34 cities and towns of Essex County fell in August for the second month in a row.
Condos
The condo market is the focus on much of the new construction that takes place,and inventory at the beginning of August increased YOY for the 15th consecutive month.
Comment
It is summer, a quiet time in real estate markets, but this summer has seen a continuation of the sharp drop in mortgage rates, from almost 5% last November to 3.6% this week.
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
Are mortgage rates headed to 3%?
At mid-year, as the Freddie Mac weekly survey produced a figure of 3.73% for the 30 year Fixed Rate Mortgage(FRM), it is timely to note both that the rate has come down sharply since late 2018 and also that there are some forecasts that it could go even lower.
The first chart shows the FRM weekly since the beginning of 2018.
In late 2018 there were several forecasts that the rate would top 5% in 2019. The Mortgage Bankers Association, for example, in its December 2018 publication, forecast that the rate would reach 5.0% in Q4 2019. And they were not alone.
So what happened?
The most important aspect of mortgage rates to understand is that the FRM is based upon a premium – or spread – demanded by investors over what they can earn from investing in US Government Treasuries. The Federal Reserve sets the Fed Funds Rate – which is the basis for Prime Rate, which determines interest rates on credit cards, auto loans and adjustable rate mortgages – but the market sets the rate for the yield on the 10 year Treasury (10T), which is the main reference for FRM.
The FRM has been at a premium of about 1.7% over the 10T in recent years.
This week’s Freddie Mac FRM was 3.73% and the yield on 10T 2.01% – a difference, or spread, of 1.72%, in line with what one would expect. And that spread has been consistent even while the yield on 10T has varied from a low of under 1.5% to a high over 3.2% as shown in the next chart.
Why have interest rates dropped this year?
I addressed this in a recent post Why are mortgage rates plummeting? and there is a page on the website devoted to Mortgage Rates. Basically, the yield on 10T reflects three things: the outlook for the US economy (a rapidly expanding economy produces a greater demand for borrowing and interest rates tend to rise); geopolitical tensions (the “flight to quality” which sees interest rates drop as a result of the buying of US Treasuries as a “safe haven”); and relative yields compared with other developed countries.
I have been writing consistently since late 2018 that the outlook for the US economy is for a slowing, but still growing economy. At mid-year that still looks a good bet, tariffs notwithstanding.
There is no doubt that the world economy is slowing or that inflation has failed to appear as expected, while the world is awash in cash. Against that background the yield offered by US Treasuries is extremely attractive. The chart below shows the yields on 10 year Government Securities in 10 major countries.
Startlingly, roughly 50% of all European Government debt carries negative yields, meaning that investors are paying for the privilege of owning the securities.
Will mortgage rates reach 3%?
At a time when the economic outlook can change in the time it takes one man to type 280 characters, it is really hard to make forecasts. Most economists and businessmen would say that uncertainty slows investment and there is plenty of uncertainty at the moment. To get to a 3% FRM, the yield on 10T would have to drop to around 1.25%. In July 2016 it reached 1.37%, so it is not impossible. Is it likely? Hand me my crystal ball – oh it’s gone all cloudy.
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
Two things you learn from this blog
Regular readers of this blog know two things:
the cost of a 30 year Fixed Rate Mortgage (FRM) is based upon the yield on the US Treasury 10 year Note, not the Federal Reserve’s rate announced with great fanfare each month
the list of Sunday’s Open Houses published on Saturday is incomplete: you need to check back at 8 a.m. on Sunday for an updated list.
In tomorrow’s blog I shall publish an article entitled: “Are mortgage rates headed for 3%” – and an updated list of Open Houses.
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 plummeting?
Freddie Mac’s national average 30 year Fixed Rate Mortgage dropped to 3.99% this week, but with interest rate falling sharply later in the week that number is likely to drop further this week, perhaps to 3 7/8%.
Why are rates falling?
Let us look at two charts:FRM and the US Treasury 10 year (10T) yield.
Mortgages are bundled together and sold to investors. Because mortgage are riskier than US Treasuries investors demand a premium to the yield on 10T. This premium is known as the spread. In recent years that spread has averaged around 1.7%. Add that to the 10T yield and you get a pretty good idea of where FRM will be.
This is the what, but now the why. Why are interest rates plummeting?
In broad terms, the yield on 10T reflects two main factors: the outlook for the US economy and the demand by investors for a “safe haven” in a time of uncertainty.
I have written several times in recent months that the outlook for the US is a slowing, but still growing economy, and for a stable housing market. It is clear that the world economy is slowing and also that increased tariffs are contributing to that slowing – and to growing uncertainty.
This blog tries to stick to real estate and economic commentary so I will just quote from an Editorial in yesterday’s Wall Street Journal headed Tariff Man Unchained: “The biggest economic risk of a Donald Trump Presidency has always been that his trade obsessions would swamp the benefits of tax reform and deregulation. For two years he has kept his worst protectionist impulses mostly in check, but as he seeks a second term we are now seeing Tariff Man unchained. Where he stops nobody knows, which is bad for the economy and perhaps his own re-election.”
On the verge of a trade deal with China, the President announced new tariffs. On the day that the new Mexico/Canada/US trade agreement was sent to Congress the President announced new tariffs against Mexico. All these actions, to say the least, create uncertainty. And as the number of countries against whom the President has announced tariffs mounts, so does the possibility that the rest of the world will decide that the US is an unreliable partner and seek alliances amongst themselves.
It may be that the President feels that traditional diplomacy has been to the advantage of other countries (although the US is still the richest country in the world) and that he can use the bully pulpit to change the balance of trade. The danger of using the bully pulpit is that those who are bullied tend not to like being bullied and have long memories. And the Chinese in particular have not only long memories but long time perspectives.
The WSJ article ends: “But then Tariff Man is impulsive and often his own worst enemy. Equities have fallen for six straight weeks and corporate profits are down. The job market is strong, but that isn’t guaranteed if investment starts to lag. Senate Republicans need to get off their sedan chairs and send this President a message on trade, or they may be in the minority in 2021.” And that prospect may well influence the way the rest of the world responds to the latests threats.
The natural tendency and hope is that all these issues will blow over quickly and not have a damaging effect on the economy. But the bond market is sending out warning signals.
The week’s housing market news
Mortgage Rates
The national 30 year Fixed Rate Mortgage (FRM), as reported by Freddie Mac, was 4.06%, down a fraction from 4.07% the previous week. We are in contact with a lender who is offering 30 year FRMs with zero points at just under 4%, with 15 year mortgages at 3.5%. These rates are valid for loans up to $2 million.
The chart below shows the FRM since the beginning of 2018 and demonstrates that mortgage rates have declined from almost 5% in late 2018 to the same level as at the start of 2018.
Existing home sales
Total existing-home sales – completed transactions that include single-family homes, townhomes, condominiums and co-ops – fell 0.4% from March to a seasonally adjusted annual rate (SAAR) of 5.19 million in April. Total sales are down 4.4% from a year ago (5.43 million in April 2018). The SAAR has been mostly in the range of 5 – 5.5 million for the last few years.
The median existing single-family home price was $269,300 in April, up 3.7% from April 2018.
Total housing inventory at the end of April increased to 1.83 million, up from 1.67 million existing homes available for sale in March and a 1.7% increase from 1.80 million a year ago. Unsold inventory is at a 4.2-month supply at the current sales pace, up from 3.8 months in March and up from 4.0 months in April 2018.
Here is a set of 8 slides with highlights from this month’s report: Existing home sales in April.
New Home Sales
New home sales for April were reported at 673,000 on a seasonally adjusted annual rate basis (SAAR). Sales for March were revised up to 723,000, a new high for this cycle. Sales in January and February were also revised up.
Sales of new homes are notoriously volatile and subject to significant revisions but according to Bill McBride of Calculated Risk “New Home Sales appears to be an excellent leading indicator, and currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight.”
The supply of new homes was 5.9 months, close to the 6 months which is regarded as being a market in equilibrium between buyers and sellers.
Here is the full New residential Sales April 2019 report.
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 rise as yield curve reverts to normal shape
The spread between the 3 month (3M) and 10 Year (10T) Treasury yields, which gained so much attention two weeks ago when it inverted (meaning the yield on the 3 month Treasury was greater than on the 10 Year; read Treasury yield curve inverts: what it means for the housing market ), actually lasted just 5 days before reversing, as the yield on 10T increased to 2.5%, largely on evidence that the US economy continued on the path of steady, albeit slow, growth. Meanwhile, inflation remains subdued.
The result is that the cost of a 30 year Fixed rate Mortgage (FRM) edged up a little last week to 4.08%. One might have expected the rate to be higher; remember the rule of thumb is the yield on 10T plus 1.7%, which would imply a FRM of 4.2%.
It appears that mortgage lenders may have held rates down to encourage borrowing. If so, they were successful as Freddie Mac reported: “Purchase mortgage application demand saw the second highest weekly increase over the last year and thanks to a spike in refinancing activity, overall mortgage demand rose to the highest level since the fall of 2016.”
At a time when the rest of the world is suffering from a significant slow down in economic activity, the US economy continues to grow steadily. Chains has already started to stimulate its economy and others may need to. The big potential positive is a trade deal with China. Depending upon what was accomplished, such a deal could remove the self-inflicted damage that tariffs have imposed on the US economy.
Forgive me if this gets boring, but for the third time in recent months (after the stock market’s sharp sell off in December and following the rally in the first quarter this year) I repeat that: “the likelihood for 2019 is a slowing, but still growing, economy and a stable housing market.”
And it is still possible to get a mortgage for around 4% (call me for an introduction to a lender offering a 30 year mortgage with no points for 3.99% up to $2 million).
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 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
Opportunity to refinance your mortgage
If you bought a house in 2018 the chances are that your mortgage rate is in the range of 4.5 – 5%. For most of 2018 it looked as though rates were headed on an upwards path and buyers had no alternative but to pay the higher rate.
And then rates collapsed, as per the chart below:
Thus, it is possible to refinance now to a rate of around 4%.
Why have rates dropped?
The background to the link between expectations for the economy and mortgage rates is explained in these recent articles:
Is a recession coming soon?
Why have Mortgage Rates dropped?
Treasury Yield Curve Inverts: what it means for the housing market
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 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
Conforming mortgage limit jumps 14% for Essex County
Late last year, in the midst of the annual turkey celebration, the Federal Housing and Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, announced the new conforming loan mortgage limits for 2019. The conforming loan limit is the maximum mortgage size that Fannie and Freddie are allowed to purchase. Freddie and Fannie are the two government-sponsored enterprises (GSEs) that purchase mortgages, bundle and securitize them, and then sell them to investors through Wall Street and other channels.
Loans above the conforming limit are jumbo mortgages.
For 2019 the conforming limit for most of the country increases 6.9% (the amount the FHFA index of home prices increased from Q3 2017 to Q3 2018), raising the new ceiling to $484,350.
But in Essex County, one of the “higher-cost areas”, the limit jumped a whopping 14% to $688,850.
While most articles about mortgage affordability focus on how little one can put down – e.g. 3% – I would like to suggest a different approach. With the new limit of $688,850 a buyer could buy a $1 million house with 31% down and still have a conventional mortgage.
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 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 have Mortgage Rates dropped?
The Freddie Mac weekly index of the 30 year Fixed Rate Mortgage (FRM) has dropped from 4.94% to 4.63%, a fall of 0.31%, over the last month. Regular readers of this blog are aware that the FRM closely tracks the yield on the Government 10 year Treasury Note (10T) and so will not be surprised to learn that in the same period the yield on 10T has dropped from 3.24% to 2.91%, a fall of 0.33%. And note that the Fed Funds rate, which is controlled by the Federal Reserve, has been unchanged during this period. While it is widely expected that the Fed Funds rate will be increased by another 1/4% this coming Wednesday, this increase will have no direct impact on the FRM, although it may well have on Adjustable Rate Mortgages.
For an explanation of the link between the FRM and 10T read Mortgage rates head for 5% .
The question of why mortgage rates have dropped becomes, therefore, why the yield on 10T has dropped.
What drives the yield on the 10 year Treasury?
In general terms, the yield on the 10T is seen as a reflection of the outlook for the US economy and inflation, but it is also influenced by the demand for Treasuries from domestic and international investors seeking a “safe haven” in times of uncertainty.
Outlook for the US economy
The argument for the huge tax cuts earlier this year was that they would encourage investment which would lead to much higher economic growth than we have seen in recent years. The Administration talked of 4% growth, a figure it was claimed would lead to a reduction in the budget deficit, rather than the increase which would materialize if growth remained at the 2- 2.5% level. For my views last February and how this would influence real estate prices read What will happen to Home Prices in the Experimental Economy?
As 2018 draws to a close, it is clear that growth is slowing in many parts of the world. The US economy is performing strongly, although there are concerns about the impact a protracted tariff war with China could have on growth.
The chairman of the Federal Reserve has made two statements about interest rates in recent weeks. The market interpreted the first as suggesting that there could be several more rate increases in 2019, and the second as suggesting there may be only one more. Mr. Powell’s remarks this coming Wednesday will be analyzed very carefully, especially to see if the Fed makes reference to a slowing in the economy.
Inflation
This is perhaps where there is the greatest divide amongst pundits. Despite all the reasons that inflation should be rising faster than it is, it isn’t. In recent months, the oil price has dropped sharply and that has been a restraining factor on the overall price level. Those who see no signs of inflation picking up steam argue that interest rates do not need to be increased further. The arguments for continuing to increase interest rates include concerns that the full employment level in the US must lead to wage pressures, while unless interest rates are allowed to return to the sorts of levels we have seen over the last 30 years or so, the Federal Reserve will not be in a position to lower rates to stimulate the economy if we are to enter the recession some economists are forecasting for as early as 2020.
Treasuries as a safe haven
Here is an article from The Balance explaining Who owns the National Debt. It makes interesting reading.
Regardless of all the theories about, for example, whether China will stop buying Treasuries as part of its tariff war with the US, the fact remains that yields on US Government securities are far higher than those offering in other developed and stable counties.
Note that the yield on the US 10T has increased this year, as the Treasury has had to sell more Notes and Bonds to finance the growing budget deficit.
The only other country showing a significant increase in yields is Italy which is embroiled in a dispute with the EU over its budget.
The biggest factor in safe haven buying is concern about geopolitical developments. In times of uncertainty, investors buy Treasuries. Assuming that the reader of this blog is not immune to the daily bombardment of developments domestically and internationally, I shall not list them here. Suffice it to say, we are going through a period of great uncertainty.
Summary
There are many uncertainties facing all markets at a time when the supply of homes for sale has been increasing for several months. While the economy remains strong and employment high, there is no obvious reason to expect home prices to fall significantly. It is likely that some buyers were over- optimistic (or desperate) earlier in the year and that we are now seeing greater equilibrium emerging in many markets between buyers and sellers.
Andrew Oliver
www.OliverReports.com
Sagan Harborside Sotheby’s International Realty
Mortgage rates head for 5%
The yield on the US 10 year Treasury Note (10T) jumped sharply in the later part of the past week, a move which will cause the 30 year Fixed Rate Mortgage to move up again in the coming week, approaching 5%.
What drives mortgage rates?
The Federal Reserve (Fed) raised the Fed Funds (FF) rate again recently, the 8th increase since December, 2015
While changes in the FF rate (the rate at which banks lend overnight money to each other) claim the headlines, the 30 year Fixed Rate Mortgage (FRM) rate is set by the market and is a based on the yield investors in mortgage- backed securities demand over what they can earn from the US 10 year Treasury Note (10T).
Let’s look at some numbers. In the chart below, the first column shows the FF rate on the date of the increases. The second and third columns show the yield at that time on the 10T and FRM.
The second chart shows the spread (difference in yield) between FRM and FF on the left, and between FRM and 10T on the right. The consistency of the second column illustrates the link between the 30 year mortgage rate and the yield on the US 10 year Treasury Note.
What rates are influenced by the FF rate?
Banks respond to increases in the FF rate by raising their Prime Rates. This in turn influences the rates on such things as credit cards and auto loans, as well as home equity lines of credit. Adjustable rate mortgages (ARM) also move up with increases in short-term rates, especially the 1 year Treasury bill.
Where are rates heading?
Part of the reason for the increase in bond yields last week was the statement from the Chairman of the Federal Reserve that the current FF rate was “a long way from neutral”, a statement interpreted by the bond market as confirming that the FF rate may increase by another 1% over the next year. With the economy currently growing strongly and very low levels of unemployment, the bond market fears that inflation will pick up. With higher inflation levels, investors will demand higher yields from Treasuries. And this comes at a time when the Budget Deficit is jumping, a deficit that needs to be funded by selling more Treasuries.
Background Reading
Here are two articles I have written. The first is from October 2018:
Why mortgage rates may be headed upwards – finally
And this one from February 2018:
What will happen to Home Prices in the Experimental Economy?
Sagan Harborside Sotheby’s International Realty
www.SaganHarborside.com
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
No, rising mortgage rates do not mean home prices will fall
The Federal Reserve raised short-term interest rates again this week, a week when the Freddie Mac weekly survey showed the 30 year fixed rate Mortgage to be 4.45%, up 0.5% since the beginning of the year.
Almost inevitably, the spectre of rising mortgage rates has brought concern that the impact will be felt in home prices – as in they might stop rising or even fall.
Thus, a recent report by Freddie Mac Nowhere to go but up? is very timely.
The report looks at the impact of rising mortgage rates on the six occasions since 1990 that mortgage rates have moved up by more than 1%.
Freddie Mac finds that the greatest impact is felt by home builders, mortgage brokers and real estate agents. As for home prices, Freddie Mac writes:
“While there is a drop in the demand for homes, there is an associated drop in the supply of homes from the link between the selling and buying decisions. As both supply and demand move together in this way they have offsetting effects on price—lower demand decreases price and lower supply increases price. Exhibit 6 shows the Freddie Mac National House Price Index from 1990 to June 2017. It is unresponsive to movements in interest rates. In the current housing market, the driving force behind the increase in prices is a low supply of both new and existing homes combined with historically low rates. As mortgage rates increase, the demand for home purchases will likely remain strong relative to the constrained supply and continue to put upward pressure on home prices. However, the combination of increasing rates and increasing house prices would be a double hit to affordability for first-time home buyers.”
The table below shows the detailed movements in the various categories relating to home sales during the 6 periods of rising mortgage rates.
And finally, I repeat the chart below showing the direct correlation between the 30 year FRM and the yield on the10-year Treasury.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact Andrew Oliver on 617.834.8205 or Kathleen Murphy on 603.498.6817.
If you are looking to buy, we 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.
Are you thinking about selling? Read Which broker should I choose to sell my house?
Andrew Oliver and Kathleen Murphy are Realtors with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
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