Is Four in Store?

Is Four in Store?

The yield on the 10-year U.S. Treasury note hovers just above 3% as we write. It hasn’t hovered this high since December 2013. Rate quotes on a prime 30-year fixed-rate conventional mortgage hover between 4.625% and 4.75%. They haven’t hovered this high in four years.

Jamie Dimon, chairman and CEO of JPMorgan Chase, believes that we’re not done yet. He sees a 4% yield on the 10-year note. Dimon didn’t say when the 4% yield will materialize. We assume (usually not a good thing to do) he means within the next year to 18 months.

Interestingly enough, the 3% yield on the 10-year note that prevailed in 2013 didn’t ratchet up to 4%. It ratcheted down to 2%. In late January 2015, the yield even briefly dropped to 1.7%. A well-timed call to a mortgage lender could have elicited a 3.625% rate quote on a prime 30-year fixed-rate mortgage.

No two epochs are alike, of course. Consumer-price inflation was dormant back then. It would remain dormant over the subsequent four years. The Federal Reserve also had the range on the federal funds rate set at 0%-to-0.25%. The effective rate was only 10 basis points.

Today, consumer-price inflation has emerged. It runs slightly above the Fed’s 2% annualized goal. The range on the fed funds rate has risen, through a series of 25-basis-point increases, to 1.5%-to-1.75%. The effective rate is 1.7%. The range will likely be increased another 25 basis points next month. It will likely be increased another 25 basis points after that.

Given the market dynamics today, Dimon is likely more right than wrong. A 3% yield giving way to a sub-2% yield on the 10-year U.S. Treasury note is highly unlikely. That being the case, a return to sub-4% rate quotes on a 30-year conventional mortgage is equally unlikely.

The good news is a growing economy can handle it. Like Dimon, we believe the economy, including housing, can absorb rising interest rates. A 4% yield on the 10-year note is nothing to worry about, with one caveat. The yield curve must remain normal. It’s normal when each successive yield on U.S. Treasury securities is higher than the previous yield.

If we see yields on short-term Treasury securities rise above yields on long-term Treasury securities, we might worry. At the least, we’ll contemplate the possibilities. When the yield curve inverts, short-term yields rise above long-term yields, a recession usually appears within the next 24 months.

The yield on the 10-year note is 44 basis points higher than the yield on the two-year note. The spread was 54 basis points at the start of the year. It was 100 basis points a year ago. We’re not worried, but we would like to see a little more distance separate the two securities.

Hooray for Falling Prices!
Recent data from Trulia show that home prices really don’t rise all the time.

Indeed, the data show that the median price of a home listing in six of the 100 largest markets remains unchanged or has dropped year over year. The median list price is up less than a percentage point in four other markets.

San Antonio reported the largest decline in the median list price, with a 5.4% decline. Denver, one of the hottest markets post-bubble burst, has seen only a 0.9% increase in the median list price.

The median number is a dividing number: half the listings are above and half are below the median price. It doesn’t mean every listed home in San Antonio has dropped 5.4% or that every listed home in Denver has risen 0.9%.

Trulia correctly notes that the drop in the median list price can be the result of a healthy event, such as more home builders building lower-priced homes. The normalization of a market would be another healthy event. For instance, the median list price for a home in Honolulu is down 1.4% year over year, but it is up 18% over the past two years.

Many market watchers reflexively believe that higher is better: Rising prices are a sign of a healthy market. That’s not always the case, particularly when prices relentlessly rise above historical norms. When that occurs, demand is eventually exhausted. A market correct, frequently unpleasant, will follow exhausted demand.

Posted in Uncategorized | Leave a comment

More of the Same for Mortgage Rates

More of the Same for Mortgage Rates

The latest meeting of Federal Reserve officials came and went on Wednesday. The meeting came and went as anticipated. Fed officials held the range on the federal funds rate – an influential overnight lending rate – at 1.5%-to-1.75%.

Credit-market participants reacted with the expected yawn. Yields on U.S. Treasury securities (and other quality debt instruments) barely budged.

No one should be surprised the market response was universal indifference. That which is anticipated rarely elicits action. Everyone anticipated the Fed to maintain the range on the fed funds rate. The Fed followed the script.

Everyone also anticipates the Fed to lift the range on the fed funds rate when officials convene again in June. Everyone expects the range to rise to 1.75%-to-2%. So when the Fed lifts the range next month, expect the market response to be similarly muted.

Words can speak louder than actions, though. The event itself, the holding or raising of the fed funds rate, will elicit indifference. The press conference following the event can move markets. A Fed official, being human, can say something that was off script and unanticipated.

No such luck this time. Fed officials held to form. Here again, everything was anticipated.

Fed chairman Jerome Powell was broadly optimistic about the U.S. economy, but he noted a few risks. (There are always a few risks.) The trade dispute China was highest among the risks. Powell mentioned that consumer-price inflation was finally running at the Fed’s designated 2% annualized rate. Wage-price inflation was a concern given low employment. Employers might need to funnel more dollars into wages to entice scarce employees. More wage-price inflation can lead to more consumer-price inflation.

As for us, it was business as usual. Quotes on mortgage rates were equally muted compared to yields on most debt instruments. Quotes on prime 30-year fixed-rate conventional mortgages continue to hold the 4.625%-to-4.75% range established last month.

Given that U.S. GDP growth was underwhelming in the first quarter, mortgage quotes should hold the range for at least the near future.

A pre-summer lull appears to have descended upon us. With what we know and with what credit-market participants anticipate, mortgage-rate volatility should remain dormant. Borrowers might be able to pick up a few basis points on a short-term float. But is the reward worth the risk? We can’t say. It’s a coin flip.

We mentioned last week why it’s worthwhile to monitor the yield curve, which has flattened over the past month. The spread between the two-year note and the 10-year note has narrowed to 50 basis points. The spread between the 10-year note and 30-year bond has narrowed to 20 basis points.

A flattening yield curve is no big deal; an inverting yield curve is. If short-term yields rise above long-term yields, take note. Inverted yield curves have preceded nine of the past 10 recessions.

Still Stuck in Purgatory

The NAR’s Pending Home Sales Index showed only marginal improvement in March. The latest reading suggests that we shouldn’t see much change in existing-home sales over the next month or two. No surprise here: low inventory driving relentless price appreciation continues to constrain sales growth in many markets.

Home inventory is unlikely to receive a boost from new construction. Bureau of Economic Analysis data show single-family-home investment running at $280 billion on an annualized rate. The number sounds big in isolation. Relatively speaking, it’s not so big. It’s roughly 1.4% of GDP, at the low end of historical percentages.

Single-family-investment is low. It’s low enough to be below the bottom of previous recessions as a percent of GDP. Home builders have had troubled getting into gear. They have been plagued with accelerating land, labor, material, and regulatory costs. That’s unlikely to change any time soon.

Many market watchers are concerned rising interest rates, including rising mortgage rates, will eventually trip up housing. We’re not one of them. The consumer market is healthy enough to absorb higher mortgage rates. The issue is more fundamental: More inventory for sale and more housing supply, in general, are needed. Until that occurs, little will change on the sales front for the foreseeable future.

Posted in Uncategorized | Leave a comment

More of the Same for Mortgage Rates

More of the Same for Mortgage Rates

The latest meeting of Federal Reserve officials came and went on Wednesday. The meeting came and went as anticipated. Fed officials held the range on the federal funds rate – an influential overnight lending rate – at 1.5%-to-1.75%.

Credit-market participants reacted with the expected yawn. Yields on U.S. Treasury securities (and other quality debt instruments) barely budged.

No one should be surprised the market response was universal indifference. That which is anticipated rarely elicits action. Everyone anticipated the Fed to maintain the range on the fed funds rate. The Fed followed the script.

Everyone also anticipates the Fed to lift the range on the fed funds rate when officials convene again in June. Everyone expects the range to rise to 1.75%-to-2%. So when the Fed lifts the range next month, expect the market response to be similarly muted.

Words can speak louder than actions, though. The event itself, the holding or raising of the fed funds rate, will elicit indifference. The press conference following the event can move markets. A Fed official, being human, can say something that was off script and unanticipated.

No such luck this time. Fed officials held to form. Here again, everything was anticipated.

Fed chairman Jerome Powell was broadly optimistic about the U.S. economy, but he noted a few risks. (There are always a few risks.) The trade dispute China was highest among the risks. Powell mentioned that consumer-price inflation was finally running at the Fed’s designated 2% annualized rate. Wage-price inflation was a concern given low employment. Employers might need to funnel more dollars into wages to entice scarce employees. More wage-price inflation can lead to more consumer-price inflation.

As for us, it was business as usual. Quotes on mortgage rates were equally muted compared to yields on most debt instruments. Quotes on prime 30-year fixed-rate conventional mortgages continue to hold the 4.625%-to-4.75% range established last month.

Given that U.S. GDP growth was underwhelming in the first quarter, mortgage quotes should hold the range for at least the near future.

A pre-summer lull appears to have descended upon us. With what we know and with what credit-market participants anticipate, mortgage-rate volatility should remain dormant. Borrowers might be able to pick up a few basis points on a short-term float. But is the reward worth the risk? We can’t say. It’s a coin flip.

We mentioned last week why it’s worthwhile to monitor the yield curve, which has flattened over the past month. The spread between the two-year note and the 10-year note has narrowed to 50 basis points. The spread between the 10-year note and 30-year bond has narrowed to 20 basis points.

A flattening yield curve is no big deal; an inverting yield curve is. If short-term yields rise above long-term yields, take note. Inverted yield curves have preceded nine of the past 10 recessions.

Still Stuck in Purgatory

The NAR’s Pending Home Sales Index showed only marginal improvement in March. The latest reading suggests that we shouldn’t see much change in existing-home sales over the next month or two. No surprise here: low inventory driving relentless price appreciation continues to constrain sales growth in many markets.

Home inventory is unlikely to receive a boost from new construction. Bureau of Economic Analysis data show single-family-home investment running at $280 billion on an annualized rate. The number sounds big in isolation. Relatively speaking, it’s not so big. It’s roughly 1.4% of GDP, at the low end of historical percentages.

Single-family-investment is low. It’s low enough to be below the bottom of previous recessions as a percent of GDP. Home builders have had troubled getting into gear. They have been plagued with accelerating land, labor, material, and regulatory costs. That’s unlikely to change any time soon.

Many market watchers are concerned rising interest rates, including rising mortgage rates, will eventually trip up housing. We’re not one of them. The consumer market is healthy enough to absorb higher mortgage rates. The issue is more fundamental: More inventory for sale and more housing supply, in general, are needed. Until that occurs, little will change on the sales front for the foreseeable future.

Posted in Uncategorized | Leave a comment

Low Inventory Continues to Influence Housing Market

Low Inventory Continues to Influence Housing Market

As more data and insight into the housing market comes out, it’s clear that 2017 was an earth-shattering year for residential real estate. According to a report from Zillow based on home sales data from the prior year, there has not been a year on record in which homes sold faster. Based on Zillow’s data from its proprietary listing service, the average home was on the market for just 81 days, including closing. During June 2017, the hottest month of the year for home sales, median listing times were as low as 73 days nationally. In certain markets, that number went even lower: Los Angeles clocked a median sales time of 59 days in May, while San Francisco homes tended to sell in just 41 days around the same time.

Housing inventory is not only selling faster – it has tended to fetch higher prices, too. Another Zillow report found that around 25 percent of homes sold for more than their list price in 2017. For comparison, only 18 percent of home sales in 2012 went for more than the initial asking price. On average, Zillow found that listings that sold for above their sticker prices garnered an additional 3 percent – a sizeable takeaway for sellers and a hefty additional expense for buyers.

More Americans continue to enter the housing market, but inventory remains a concern. According to Lawrence Yun, Chief Economist of the National Association of Realtors, the market continues to favor sellers as low inventory pushes prices higher, and reduces the time required to sell.

“Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar,” Yun said in the latest report on existing home sales data. Research from the NAR indicates that in March, the U.S. market for existing homes had only 3.4 months worth of inventory available. That would be almost half of the six months of stock that economists generally consider equally beneficial for buyers and sellers.

Inventory Squeezes First-Time Buyers
The NAR’s report also warns that such market conditions may be wearing down first-time homebuyers in particular. This share of buyers comprised 34 percent of the homebuying market in 2017, but that proportion has slipped in the first months of the New Year.

“[Real estate agents] in several markets note that entry-level homes for first-timers are hard to come by, which is contributing to their underperforming share of overall sales to start the year,” according to NAR President Elizabeth Mendenhall. “Even with the expected uptick in new listings in coming months, buyers in most markets will likely have to act fast on any available listing that checks all their boxes.”

Home sales continue to post strong results in many local markets, proving that buyers in many places are not being totally priced out of homeownership. As prices are expected to moderate through 2018, it stands to reason that affordability will improve slightly and first-time buyers will see an opportunity to make a move.

Posted in Uncategorized | Leave a comment

Low Inventory Continues to Influence Housing Market

Low Inventory Continues to Influence Housing Market

As more data and insight into the housing market comes out, it’s clear that 2017 was an earth-shattering year for residential real estate. According to a report from Zillow based on home sales data from the prior year, there has not been a year on record in which homes sold faster. Based on Zillow’s data from its proprietary listing service, the average home was on the market for just 81 days, including closing. During June 2017, the hottest month of the year for home sales, median listing times were as low as 73 days nationally. In certain markets, that number went even lower: Los Angeles clocked a median sales time of 59 days in May, while San Francisco homes tended to sell in just 41 days around the same time.

Housing inventory is not only selling faster – it has tended to fetch higher prices, too. Another Zillow report found that around 25 percent of homes sold for more than their list price in 2017. For comparison, only 18 percent of home sales in 2012 went for more than the initial asking price. On average, Zillow found that listings that sold for above their sticker prices garnered an additional 3 percent – a sizeable takeaway for sellers and a hefty additional expense for buyers.

More Americans continue to enter the housing market, but inventory remains a concern. According to Lawrence Yun, Chief Economist of the National Association of Realtors, the market continues to favor sellers as low inventory pushes prices higher, and reduces the time required to sell.

“Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar,” Yun said in the latest report on existing home sales data. Research from the NAR indicates that in March, the U.S. market for existing homes had only 3.4 months worth of inventory available. That would be almost half of the six months of stock that economists generally consider equally beneficial for buyers and sellers.

Inventory Squeezes First-Time Buyers
The NAR’s report also warns that such market conditions may be wearing down first-time homebuyers in particular. This share of buyers comprised 34 percent of the homebuying market in 2017, but that proportion has slipped in the first months of the New Year.

“[Real estate agents] in several markets note that entry-level homes for first-timers are hard to come by, which is contributing to their underperforming share of overall sales to start the year,” according to NAR President Elizabeth Mendenhall. “Even with the expected uptick in new listings in coming months, buyers in most markets will likely have to act fast on any available listing that checks all their boxes.”

Home sales continue to post strong results in many local markets, proving that buyers in many places are not being totally priced out of homeownership. As prices are expected to moderate through 2018, it stands to reason that affordability will improve slightly and first-time buyers will see an opportunity to make a move.

Posted in Uncategorized | Leave a comment

A New Home on The Range

A New Home on The Range

The Long-term has arrived sooner than expected.

We have said repeatedly this year that the trend in mortgage rates will be higher over the long term. We offered this opinion last week: “Odds are that mortgage rates will rise longer term. Predicting with accuracy when the short term will give way to the ‘longer term’ is never a sure bet.”

Indeed, it’s never a sure bet. It turns out the short-term was shorter than we expected.

Mortgage rates have moved meaningfully higher over the past few days. They’ve moved high enough to establish a new range. The old range of a 4.5%-to-4.625% rate on a prime 30-year fixed-rate mortgage (at the national level) has given way to a 4.625%-to-4.75% range. No one should be surprised above the move north, though.

The yield on the 10-year U.S. Treasury note made for the heavens over the past week. The yield jumped nearly 20 basis points over just a few trading days. The yield hovers around 3% as we write. The 10-year note hasn’t offered so high a yield since the waning days of December 2013.

It’s all circular, really: Yields on mortgage-backed securities (MBS) take their cue from the yield on the 10-year Treasury note. Long-term mortgage rates take their cue from yields on MBS. Mortgage rates had no choice but to establish a higher range.

A combination of factors has served as fuel for the interest-rate rise.

Another Federal Reserve interest-rate hike is one. More market participants are gaming for four increases before the year is over. Most were gaming for three at the start of the year. The next increase will likely occur in June.

Consumer-price inflation shows increasing signs of moving to a higher range. According to the Federal Reserve’s Underlying Inflation Gauge (UIG), the 12-month inflation growth was 3.13% in March. That’s the highest rate recorded in nearly 12 years. The last time the UIG was this high was in July 2006, when it was at 3.2%

Wage inflation, which has remained mostly subdued since the last recession, also has market participants on edge. The unemployment rate at 4.1% is low; demand for labor (qualified labor, to be specific) is high. Something has to give on either the wage or demand fronts. Most market watchers expect it to give on the wage front.

Companies continue to make money at an elevated rate. FactSet reports that 17% of S&P 500 companies have reported first-quarter financial results. Eighty percent of the reporting companies reported a positive earnings surprise (above the consensus estimate). S&P 500 earnings are expected to grow 18.3% year-over-year for the quarter. That’s the highest annual increase since 2011.

It’s all good for the U.S. economy, which means it’s mostly bad for the interest-rate trend. With the information we have today, we see little reason not to expect quotes of 5% or higher on a 30-year conventional mortgage by the end of the year.

Sales Up, But for How Long?
Both existing and new homes posted monthly sales gains for March.

Existing-home sales rose 1.1% to post at 5.6 million on an annualized rate for the month. This was the second-consecutive increase, but it still leaves sales down compared to a year ago. Sales are down 1.2% compared with the year-ago period.

It’s common knowledge why sales-grow lags – lack of inventory. The number of existing homes increased slightly in March, but it’s still down 7.2% compared with a year ago. At the current sales pace, only 3.6-months supply is on the market.

Sales of new homes were surprisingly spry in March. Sales were up 4% to post at 694,000 on an annualized rate. Through the first quarter of 2018, new-home sales are running 10.3% higher than a year ago.

The surge is less impressive, though, when the composition of the trend is considered. The increase was overwhelmingly driven by sales in the red-hot West, which were up 28.3%. Sales were also concentrated at a higher price point. Sixty percent of sales were for homes priced $300,000 or above. Two years ago, these homes accounted for 53% of sales. Affordable entry-market new homes remain a rare commodity.

And prices, they continue to rise.

The latest reading of the S&P CoreLogic Case-Shiller Home Price Index shows home prices rose 6.3% year over year in February. The West again led the index. Seattle, Las Vegas, and San Francisco all posted double-digit year-over-year price gains.

It’s all mostly good. Nevertheless, the trends in home prices, mortgage rates, and inventory could cool sales in the coming months, even in the red-hot West.

Posted in Uncategorized | Leave a comment

What is Mortgage Preapproval and Why is it Important?

Image

Mortgage preapproval is often one of the first steps you will take in the complex process of buying a home. Like many other aspects of homebuying, it’s one that’s shrouded in mystery and its fair share of misconceptions. Particularly if you’re a first-time buyer, it’s essential to understand what mortgage preapproval is, why it’s important and how to complete the process.

A mortgage preapproval serves two important purposes:

  1. It allows a mortgage lender to check an applicant’s basic financial background to determine how much it is are willing to lend the would-be buyer for a home loan.
  2. It gives homebuyers a good estimate of how much they can expect to spend on the purchase.

After the rigorous vetting process required for most preapprovals, successful applicants will receive a preapproval letter that can serve like a bargaining chip during negotiations with a home seller. In fact, most sellers today have come to expect preapproval letters from any serious buyers before considering an offer.

While preapproval letters are taken seriously by sellers and their agents, it’s important to know that they don’t constitute a total guarantee from a lender. There are often contingencies and conditions written into the contract that give the lender the right to revise some terms of the loan before giving the final seal of approval. While rare, it’s possible that a lender could back out of preapproval altogether if any of these contractual obligations are not met. If it happens at all, this will usually occur during the closing process.

It’s also good to know that mortgage prequalification is not the same as preapproval, despite the similar terminology. Essentially, prequalification is the light version of preapproval, since it usually means a lender will perform only a cursory credit check and return with a very general estimate of the kind of home loan it could offer you. Prequalification can help buyers survey their options before committing to one lender, but it won’t count for anything once they start entering serious negotiations with a seller.

In short, preapproval will give lenders a vote of confidence in you as a homebuyer, which provides you with the confidence to make a serious, competitive offer on a home you love. Of course, there is a good deal of work that needs to go into the process first.

What you need for preapproval

Mortgage preapproval is just a few steps away from the real deal, so getting ready for one requires work from you and your lender. First, you’ll need to fill out a lengthy application containing as much information as possible about your personal and financial background. Then you need to provide your lender with documents that prove everything you’ve stated in that application is correct.

Start by collecting all the necessary records and copies you will need, which typically include:

  • Identification like your driver’s license, Social Security number, proof of residence and records of your marital status.
  • Recent statements from any bank accounts in your name.
  • Income tax returns and recent pay stubs to confirm employment and income.
  • If you own a business or are self-employed, provide a recent profit and loss statement along with relevant business tax forms.
  • A comprehensive list of all financial assets you own (including property and investments) as well as all liabilities you owe (like a previous mortgage, credit card debt or outstanding student loans).
  • For first-time buyers who were renting, provide recent canceled rent checks or include records of rent payment in your bank statements.
  • If you are using gift money from family or a charitable donation to pay for the down payment, you need to provide written proof from the source of that payment that it is a gift and not a loan.

In the process of reviewing your application, a lender will also pull your credit report to verify the information you provided, as well as to glean additional insight into your financial history. It may be helpful to check your credit report in advance of submitting your application to make sure everything is accurate. If you have any derogatory marks on your report, like bankruptcy or late payments, you may need to provide the lender with proof that those issues are officially resolved.

Mortgage preapproval is a great way to gain a clear view of how much home you can expect to afford, but it’s not something that should be rushed into. Perform as much research on your own as possible into where exactly you want to live and the housing prices in that area to come prepared to the mortgage lender’s office.

Posted in Uncategorized | Leave a comment