Sunday, May 31, 2015

Mortgage Rates Back Into the 3's to End The Month

Mortgage rates moved lower again today, making this the 7th straight day where rates have either held steady or improved.  Over that time, no single day stands out as clearly better than the others.  Instead, the gains have been slow, steady, and varied by lender to a greater degree than normal.  Despite the slow and steady pace, the improvement has been meaningful.  Not only are today's rates the lowest in more than three weeks, they also bring 3.875% back into the picture as the most prevalently-quoted conventional 30yr fixed rate.  That said, there are still quite a few lenders at 4.0%.
If things continue to improve, 3.75% will come even faster.  This has to do with the structure of the mortgage-backed-securities (MBS) market, upon which lenders' rate sheets are based.  When a loan is written at 4.0% and 3.875% to a lesser extent, there are few funding options for the lender in terms of what they do with the loan when they sell it or service it behind the scenes.  There are more flexibilities once a loan is written at 3.75%.  That means bond markets don't have to improve as much in order for lenders' rates to drop another eighth of a point. 
That's the optimistic scenario though.  Let's discuss the cautious scenario.  This is the one where I remind you that any time financial markets do one thing for several consecutive days, odds increase exponentially that they'll do something different soon.  As such, it's highly likely that we'll see at least a temporary pull-back from the past 7 days of positivity. 
It remains to be seen if that's a storm to be weathered or a turning point that leads back to higher rates.  In all likelihood, the next dose of near-term momentum will be decided by the important calendar events in the upcoming week.  It continues to be the case that the risk of a bigger move higher in rates outweighs the reward that would result from further improvements.  For what it's worth though, that's a much closer call than it was a few weeks ago.

Thursday, May 28, 2015

Sellers' Market Drives Pending Sales to 2006 Levels



April saw the highest number for pending sales in nearly nine years the National Association of Realtors® (NAR) said today. The Pending Home Sales Index (PHSI) increased 3.4 percent compared to a slightly upwardly revised March number, 108.7. The Index was 14.0 percent above its level in the previous April representing the largest annual increase since it rose 15.1 percent year-over-year in September 2012.

NAR notes that it was the fourth straight month the PHSI, which is based on contracts signed for home purchases, had increased compared to the previous month and it has risen year-over-year for eight consecutive months. In April it was at its highest level since May 2006 when it stood at 112.5.

Lawrence Yun, NAR chief economist, says the steady gains in contract activity each month this year highlight the fact that buyer demand is strong. "Realtors® are saying foot traffic remains elevated this spring despite limited - and in some cases severe - inventory shortages in many metro areas," he said. "Homeowners looking to sell this spring appear to be in the driver's seat, as there are more buyers competing for a limited number of homes available for sale."

Adds Yun, "As a result, home prices are up and accelerating in many markets."

Sales of existing homes fell in April but Yun says he expects a rebound heading into the summer. The likelihood of meaningful gains however will depend on an increase in inventory and evidence of moderating price growth to offset rising interest rates. "The housing market can handle interest rates well above 4 percent as long as inventory improves to slow price growth and underwriting standards ease to normal levels so that qualified buyers - especially first-time buyers - are able to obtain a mortgage."

The PHSI was up in all four regions with the Northeast and Midwest especially strong. The Northeastbounced back after four straight months of decline with a 10.1 percent gain in April to 88.3, 9.4 percent higher than in April 2014.

In the Midwest the index increased 5.0 percent to 113.0 in April, and is 13.3 percent above the previous year. Pending home sales in the South rose 2.3 percent to 129.4 and are up 14.8 percent year-over-year. The index in the West inched up 0.1 percent in April to 103.8, and is 16.4 percent above a year ago.

Total existing-home sales in 2015 are forecast to be around 5.24 million, an increase of 6.1 percent from 2014. The national median existing-home price for all of this year is expected to increase around 6.7 percent. In 2014, existing-home sales declined 2.9 percent and prices rose 5.7 percent.

The Pending Home Sales Index is a leading indicator based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined.

Monday, May 25, 2015

Memorial Day Tribute to All U.S. Veterans



Memorial day is to Honor those who paid the ultimate sacrifice for our country, and Honor those still with us..May they never be forgotten.

Friday, May 22, 2015

Not Your Typical Spring

Spring is typically when sales for existing homes take off.  The current spring market is not living up to expectations as much as we would like.  Sales of existing homes are down 3.3 percent for the month of April compared to March.  Three of the nation’s four regions showed declines with the steepest decline in the usually strong South.  The Southern region, which is by far the largest region, declined 6.8 percent.  The good news is that despite the decline, year-on-year sales remain up 6.1 percent from the 2014.

A positive in the report is that supply increased up to 2.21 million homes versus 2.01 million in March. This rise in inventory, combined with the drop in sales, raises supply relative to sales to 5.3 months from 4.6 months. One more positive in the report is the 4.1 percent increase in the median price to $219,400 which is up 8.9 percent from the same time last year.  It is unusual to see prices rise when inventory rises but the increase is a positive indication.

It may be a little premature to determine know for certain, but strength in housing might be shifting from existing homes to new homes based upon the most recent new homes sales data.  Home sales data can be volatile from month to month so all we can do is look for patterns as the months pass.

The housing starts report released on Tuesday showed one of the strongest months on record for housing starts & permits.  Starts soared 20.2 percent in April to a much higher-than-expected annual rate of 1.135 million.  Permits jumped 10.1 percent to a much higher-than-expected 1.143 million. Both readings came in far above the Econoday high-end forecasts.  The gain for housing starts is the best we have seen in 7-1/2 years.  The jump in permits is the best in 7 years.

Next week there are three significant housing reports to be released, FHFA House Price Index, Case-Shiller Home Value Index, and the New Home Sales Report will complete the picture for the current state of housing when added to the data from this week’s reports.

As many investors expected, the release of the FOMC Minutes on Wednesday confirmed that the Fed is not yet ready to raise interest rates.  The Fed has documented that there continues to be signs of some weakness in the economy and there may be a possibility that the economy could be slowing down.  It is too early to make the determination but the Fed is keeping a close watch on what is happening.  The Fed is committed to not doing anything with rates that could hasten or facilitate an economic slowdown.

Next week’s potential market moving reports:

·        Monday May 25th – All Markets Closed
·        Tuesday May 26th – Durable Goods Order, FHFA House Price Index, S&P Case Shiller Home Price Index, New Home Sales and Consumer Confidence
·        Wednesday May 27th - MBA Applications
·        Thursday May 28th - First Time Jobless Claims
·        Friday May 29th - GDP

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate trends.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at (707) 455-7070.

Monday, May 18, 2015

Would a Fed Rate Hike Surprise Really Matter?



Any change in interest rates will be sprung on the markets if John Williams, Federal Reserve Bank of San Francisco president, gets his way. While we suspect that any shock value surrounding this particular event would be moot, Williams told CNBC this week that "My personal preference is that we don't have the most telegraphed policy decisions in history, as we did in 2004." He added "You don't want to make a decision two months or three months in advance."

While it appeared unrelated to William's remark, Wells Fargo Bank just released the first in a series of articles which seek to quantify the expected reaction of a fed funds rate shock on several different markets. The bank cites the example of then Fed chairman Ben Bernanke's comments in the summer of 2013 which caused investors to revise their expectations about the Feds monetary policy and rates and led to the so-called "taper tantrum".

The first article looks at the concept of a surprise and develops a theory as to why surprises are employed rather than simply making changes, outlines different measures for measuring surprises, and looks at the sensitivity of the first of several markets, the dollar exchange rate

A surprise component can offset the effect of market expectations. In theory, as all publicly available information should be discounted into prices, if macroeconomic news perfectly matched advanced expectations asset prices would not move. In practice this may not always be the case as uncertainty plays a role and because individual market participants may have acted counter to expectations. As a control for its study Wells uses the surprise component (the difference of the actual release from expectations) rather than actual release value.

One way of determining the surprise component of a fed funds rate announcement is to determine expectations and compare the actual release to it. The second method is to look at financial assets themselves to see how their prices, which should already incorporate expectations, change following the announcement then calculate the surprise component from the movement. A third method, a statistical proxy for expectations was discounted completely.

Wells' economists decided that the most appropriate instrument for determining expectations regarding a Federal Open Market Committee (FOMC) policy announcement was the fed funds future contracts which they said were superior at predicting the funds rate for short time horizons. They plotted the surprise component extracted from those contracts for the time period 1994 to 2014, eventually truncating the data set at the end of 2008.

They partitioned their dataset to study how fed funds rate surprises affect different markets before and during the crisis, defining the beginning of the crisis as the first time the FOMC reduced interest rates for the cycle, at its September 2007 meeting. They then studied the sensitivity of the trade weighted dollar to surprises in the rate.

The interest rate differential between two countries is a large driver of the exchange rate and they anticipated that unexpected moves in the federal funds rate would also drive moves in the dollar around these announcements. These changes would, on average be associated with a strengthening of the dollar.

Using an event-study approach they regressed the percent change in the dollar index around surprises on the unexpected component of announcements in the fed funds target rate. An earlier Chicago Fed study had found that the dollar/mark and dollar/yen exchange rates were affected by the unexpected component of a fed funds announcement but the effect was not evident until a large amount of time had passed, something Wells Fargo's analysis could not capture from the daily returns it was using. "Clearly the relationship," they say, "is more complicated than we initially thought."

Wells Fargo's findings support the Chicago Fed's immediate results, that is that fed funds surprises have an insignificant effect on the dollar initially. This was at odds with its starting hypothesis that the dollar would strengthen immediately following a surprise. An alternative explanation could be the signaling effect that is contained in the unexpected component cancels out, on average, the effect caused by interest rate differentials.

It is plausible that news contained in a surprise could cause investors to revise their expectations regarding the domestic economy and, given the size of the U.S. economy, could have large implications on the global economy, which could change investors' risk preferences. The economists use the example of an unexpected rate cut sending a signal the economy is weaker than many thought, causing a flight to the safety of the dollar. Investigating the subsamples before and during the crisis and checking for asymmetric responses to see if the dollar responded differently to positive versus negative surprises all resulted in finding that the sensitivity of the dollar was insignificant.

In subsequent articles Wells Fargo will look at the effect of surprises on other financial assets including Treasury securities and broad equity indices in order to gain insight on the behavior of financial markets surrounding theimpending rate announcement and will attempt to quantify the reaction to surprises, both positive and negative.

Incidentally, Williams acknowledged that keeping fed moves close to the chest could lead to some market swings. "In a normal economy there is some volatility in markets, that is just a healthy functioning of markets trying to understand and filter what the data means for policy," he said. "It's healthy for the future actions to be uncertain because economic conditions can change."

Friday, May 15, 2015

Moving Higher

Mortgage rates have been moving higher in recent weeks and the effect on mortgage applications for refinances is quite clear.  For the week ending May 8th refinance apps dropped 6.0 percent according to the Mortgage Bankers Association of America.  This drop follows the prior week’s 8.0 percent decline.  Purchase applications remained essentially flat.

The purchase market has been stymied by the lack of inventory in almost every market in the country.  There are plenty of buyers, however locating the elusive “right home” has been a challenge as potential sellers continue to keep their properties off the market.

For the week there was very little in the way of significant economic data that might impact the markets.  The stock market, after having been down for the first three days of the week, rallied 192 points on Thursday.  The driver of the rally was based primarily on a 3 factors.

As strange as this point may sound…the stock market was boosted by the fact that recent economic data is showing that the U.S. economy is struggling to gather strength.  This bolstered the case for the Fed to keep interest rates lower for a longer period of time.  We won’t know much of anything about the next step for the Fed until after the June FOMC meeting but investors are hopeful that the weak economic data will have them keep economic policy where it is.

The 2nd driver behind the rally is that the dollar has been weakening against foreign currency.  Because of the recent strength of the dollar overseas, this has been hurting corporate profits for U.S. companies that operate internationally.  Of course lower profits hurt stock prices, which is what we have been seeing recently for companies.  Now that the dollar has been weakening the prognosis for improved corporate profits in the current quarter is higher.

Finally, the bond market has seemed to settle down from the rapid rise of interest rates over the last few weeks.  Virtually no one is expecting rates to decline and most experts are predicting a continued slow rise to rates but not jumps like we have been seeing as of late.

The retail sales report caught many by surprise when the data showed only a slight increase of 0.2 percent.  Consumer confidence has been rising recently which typically would translate into more money being spent by consumers.  It appears that consumers are electing to pay down debt or bolster their savings rather than taking their money to their local malls and stores.

Next week’s potential market moving reports:

·        Tuesday May 19th – Housing Starts
·        Wednesday May 20th - MBA Applications and FOMC Minutes
·        Thursday May 21st - First Time Jobless Claims and Existing Home Sales
·        Friday May 22nd -  Consumer Price Index

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate trends.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at (707) 455-7070.

Tuesday, May 12, 2015

Foreclosure Shift Increasingly Evident

While the decline in foreclosure activity is still ragged on a month-to-month basis significant changes are increasingly evident year-over-year. CoreLogic said today that the number of properties in some state of foreclosure was down by a quarter in March compared to a year earlier and completed foreclosures declined by 15.5 percent.

The company said there were 41,000 completed foreclosures in March, down from 48,000 in March 2014 but 7 percent more homes were lost to foreclosure during the month than in February when 38,000 foreclosures were reported. Completed foreclosures are now down 65.2 percent from the peak in September 2010. Since September 2008 when the financial crisis is said to have begun approximately 5.6 million homes have been foreclosed.

Read more HERE

Saturday, May 9, 2015

Despite Rising Mortgage Rates...

Despite the fact that mortgage rates have been rising, purchase applications for mortgage loans increased 1.0 percent in the week ending May 1st according to the Mortgage Bankers Association.  As much as the increase in rates impacted applications for refinances, which dropped by 8.0 percent, housing experts do not feel that the recent  rate rise will have any significant effect on the housing purchase market.  Mortgage rates remain very low and there continues to be significant demand for housing.  The biggest challenge facing the market at this time is the lack of inventory available for sale in most areas of the country.

Many people have been wondering why interest rates have been increasing as of late even though the Fed has not made any moves in monetary policy.  The main reason for the interest rate increase in recent weeks is that in Europe they have been instituting their own form of quantitative easing similar to what the Fed had done for the United States after the 2008 meltdown.  This is keeping bond prices very attractive in Europe and investors worldwide are investing in European bonds versus the U.S.  In order to attract investors back to the U.S. bond market invariably yields must rise which is being reflected in the bond market and subsequently impacts mortgage rates.

The big news for the week outside of rising rates is what is happening in the employment sector.  The labor market continues to improve and first time jobless claims are declining.  For the week ending May 1st claims were down to 265,000.  This is the lowest reading in almost 15 years.

The ADP Employment Report released on Wednesday painted a little bit of a different picture.  This report indicated that there was a less than expected increase in private payrolls for the month of April.  ADP reported that only 169,000 jobs were added to the labor force whereas most analysts were expecting the figure to read in the 200,000 range.  Additionally, the prior months reading was revised downward by 14,000 to 175,000.  Typically investors do not pay much attention to the ADP Report since it has been shown to be far from accurate more often than not.

The Department of Labor April Employment Report came in pretty close to expectations of an adding 223,000 non-farm payroll jobs.  The national unemployment rate is 5.4% which is the lowest rate since May of 2008.  A huge plus in the report is the increase in construction jobs of 45,000.  Early indications on the stock market in reaction to the report is positive.

The question almost immediately being asked by investors and analysts is does this positive employment report put the Fed back on schedule to raise rates in June?

The answer will be known for certain on Wednesday June 17th after the next FOMC Meeting.

Next week’s potential market moving reports:

·        Wednesday 13th - MBA Applications and Retail Sales
·        Thursday May14th - First Time Jobless Claims and Producer Price Index
·        Friday May 15th – Industrial Production

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate trends.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at (707) 455-7070.

Wednesday, May 6, 2015

Mortgage Rates Dangerously Close to 2015 Highs



Mortgage rates haven't been able to catch a break recently. Case in point, over the past 3 weeks, there have only been two days where rates managed to improve even a little bit. Four out of the past six days have seen uncommonly big moves higher. These are the sorts of moves that we'd normally only see 2-3 times per month, so to see 4 of them in just over a week is alarming. In terms of conventional 30yr fixed rate quotes, several major lenders are now up to 4.0%, even for top tier scenarios, though many remain at 3.875%. Just one short week ago, 3.625% was widely available.

In the broader context, there has only been one day in 2015 where rates were any higher. Before that, you'd need to go back to November to see higher rates. It has been and continues to be the case the recent weakness should be taken seriously. That means that it makes more sense to favor a defensive strategy with respect to locking and floating. While history suggests rates will catch at least a temporary break soon, it also shows that there are occasions where such a break never comes (or comes too late to matter). In other words, there's no need to abandon hope just yet, but neither is there a reason to take risks this week.

Sunday, May 3, 2015

Some Positive News

Positive news continues to hit the housing market.  All indications are that home prices are firming up and even beginning to trend significantly higher. This seems even more apparent especially in markets where there is a significant shortage of homes for sale.

On Tuesday the S&P Case-Shiller Home Price Index delivered better than expected news on home prices.  For the month of February prices rose 0.9 percent which is two tenths higher than analyst’s expectations.  This increase continues the momentum that we have been experiencing since late 2013. 

An additional positive aspect to the report is that the momentum of home price growth appears to be trending upward.  This is most likely due to the aforementioned inventory shortages in many markets.  The index is 5.0 percent higher than it was at the same time last year.  Additionally, the spread between prices on the year on year averages is growing as well.

Further bolstering the positive housing trend was the pending home sales report released on Wednesday.  For the 3rd straight month pending homes rose.  The increase of 1.0 percent was right in line with expectations.  This increase piggy backs on February’s surge of 6.1 percent.

The greatest increase was reported in the South which showed an increase of 4.0 percent which represents a 12.4 percent increase from the same time last year.  The second strongest market is the West which rose 1.7 percent.  A strong factor in this report is that the West is now 15.6 percent higher than last year.  Overall the year on year improvement for all regions combined is 11.1 percent higher.

The anticipated announcement from the Fed’s FOMC meeting was met with some sour reaction as the Fed continues to move closer and closer to an interest rate increase.  The focus of the Fed’s announcement appeared to be centered around recent weaker than expected economic data.  Although typically weakness in the economy could indicate a possible delay in an interest increase, the Fed used language that they feel the weakness is temporary and not indicative of the direction of the economy.

The first quarter of 2015 by all measures was slower than expected.  The Fed indicated their displeasure with the data however they stopped short of saying they would prolong the anticipated rate hike for June.  Everything is subject to change, however Wall Street was hoping that the Fed would make a more definitive statement on delaying a move on rates.  For now everyone must take a wait and see attitude on how the Fed delivers their message at next month’s meeting.

Next week’s potential market moving reports:

·        Monday May 4th – Factory Orders
·        Tuesday May5th – ISM Non-Manufacturing Index
·        Wednesday 6th - MBA Applications and ADP Employment Report
·        Thursday May7th - First Time Jobless Claims
·        Friday May 8th – National Employment Report

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate trends.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at (707) 455-7070.