Home Values: Case-Shiller or Home Price Index?
Standard & Poor’s Case-Shiller Index reported home values up 5 percent for the month of June. The government has its own index, the Home Price Index, and it revealed a net loss of home values in June.
So, what are home values doing? Read more
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Current Mortgage Rates & Closing Costs
Just a quick post reviewing the data from the Mortgage Bankers Association.
There has been a lot of talk in the media about the rapid rise in closing costs lately. We covered it under Closing Costs Higher a few months back.
In the most recent Weekly Mortgage Applications Survey from the MBA, there are a few interesting items occurring. The report itself is pretty good. They do a good job covering volume, the ARM v. Fixed shares of mortgages, and the current mortgage rates being issued by their surveyed lenders.
Volume: Forget the weekly tracker. Use their four-week moving average that smooths out holiday weeks, etc. That index is up 4.4%, but bigger, the Purchase Index is up 1.3%. Today we just posted the Pending Home Sales results…from July!!! Pending Home Sales does a great job forecasting the New Home Sales and Existing Home Sales reports on about a 60 day lag. The mortgage Purchase Index would seem to indicate that August’s Pending Home Sales report should nudge up slightly.
ARM v. Fixed: This is an interesting split. The share of adjustable rate mortgages remains at only 6.1% in spite of an almost 0.80% spread between the 30 Year and the 5/1 ARM. We simultaneously have the lowest 30 Year Fixed rates of all-time, but we also have a historically wide gap between the 30 Year and the 5/1 ARM. With the 30 Year so low, it’s difficult to justify an ARM even though the lenders are all but giving these mortgages away.
Closing Costs: This is the most interesting part to me. The average contract interest rate for the 30 Year dropped from 4.50% to 4.43%. BUT, the points dropped from 1.34 to .96 (.38%, or almost $950 on a $250,000 loan). All rates and fees measured by the survey are for 80% loans and therefore avoid Loan Level Price Adjustments
These fees still strike me as shockingly high, but the good news is that we’re starting to see the mortgage industry throttle back on these fees.
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Home Sales Stabilize
Following up last week’s reports that both New and Existing Home Sales had dropped after the expiration of the first time home buyer tax credit, Pending Home Sales jumped 5% in July.
This data is from the July Pending Home Sales Index, published by the National Association of Realtors®.
A “pending home sale” is a home under contract, but not yet closed. Historically, 80% of such homes close within 60 days which makes the report an excellent, forward-looking indicator for the real estate market.
We see this connection in May Pending Home Sales report (dismal) and the July New and Existing Home Sales reports. How close? The Pending Home Sales report dropped 30% in May. Existing Home Sales dropped 29% in July.
That’s a strong correlation.
In fairness, the numbers are still low. The Pending Home Sales Index is still the second-lowest on record and is not a good number. Again, this market is not about whether things are absolutely great, it is a matter of whether things are strong relative to the worst-case scenario.
For at least the next month or two, the single-driving factor to mortgage rates is whether things are absolutely worst-case or anything better. If the economy, housing, and everything else falls apart, mortgage rates are priced for that and will remain steady. An iota of recovery could mean many iotas of rate increases.
Given this month’s results on the Pending Home Sales report, September’s Existing Home Sales report should show a similar tick up.
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Interest Rate Predictions | Week of September 7, 2010
Last week’s interest rate predictions proved to be spot on–we expected absolute chaos in a pre-holiday weekend and that was accurate.
The coin flip that we predicted occurred, ultimately with the coin landing on its side. Unlikely, but so are historically low rates holding in a 19-week rally.
Monday and Tuesday saw the markets set yet another all-time, historical low. Wednesday and Thursday saw a three-headed monster of better-than-expected data in manufacturing, housing, and foreign economic projections. Friday’s jobs report sent rates jumping on an already low-volume, high-volatility trading session.
Since late-April, we hadn’t seen a sell-off last three days. We did Wednesday through Friday. In spite of all of this, mortgage backed securities ended up nearly flat on the week.
This Week’s Interest Rate Predictions
We again forecast unpredictability. There is very little data due for release, especially compared to last week. Traders seek external inputs to help their trades. On week’s with full economic calendars, those reports dominate the action and reaction in the market.
On week’s with little data, mortgage rates ebb and flow on the basis of momentum in the stock market and outside influence. From news out of the White House to reports on foreign economies to watching the radar for the next tropical storm, this week’s rates will likely be influenced by at least one outside report.
That’s what makes this a dangerous time for rate shopping. This is all unpredictable.
Right now two things appear certain:
- The market is priced for absolute worst-case expectations of a double-dip recession and four horsemen riding down Wall Street in 2012
- Mortgage bonds appear overbought by every traditional metric
What this means is that, when the market changes directions, it should change dramatically. A minor upgrade to economic forecasts would drive money into the stock market and out of mortgage bonds, pushing mortgage rates up very quickly.
Flipped coins don’t land on their side very often. It could be an indicator that this 19-week interest rate rally is losing steam.
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Jobs Gain, Mortgage Rates Lose
It’s the first Friday of the month and therefore the release of the Non-Farm Payrolls data from the month prior.
Often referenced as the “jobs report,” it is one of the strongest factors in setting mortgage rates.
Bottom line: The 2009 recession is over. That’s a fact. Wikipedia says so. The concern is whether there is a new recession starting.
The support is mixed:
- Job growth has been slow, but planned layoffs touch a 10-year low
- Consumer confidence is down, but beating expectations
- Consumer spending is weak, but not declining
For every stat that says we’re not moving into another recession, there are 10 talking heads on CNN driving up ratings chirping about a “double-dip recession.”
The economy is driven more by employment than any other factor. More workers means more paychecks, more taxes paid, more consumer spending, and that big one…consumer confidence. Consumer confidences drives big ticket items which in turn creates more jobs and pushes the entire cycle forward.
Today’s jobs report shows that 54k jobs were lost, but 114k were the temporary Census workers being laid off. Private-sector, the important sector, added 67k jobs. Additionally, June and July were revised upwards by a total of 123k. In total, this is good news.
The results were fair, nowhere near as much growth as we need just to keep up with new workers entering the workforce, but nowhere near the dismal numbers that we’ve seen for quite some time.
Jobs power economies. Strong economies mean businesses borrow money. When businesses borrow, they are fighting for the same dollars that have been powering these historically low mortgage rates. Wall Street is happy today that things weren’t worse, that’s caused mortgage rates to push higher today. If the broader economic picture turns towards anything other than the worst-case projections, home values and mortgage rates should continue to rise.
Home affordability is in the cross-hairs. A slight tick in home values and just a 0.25% jump in mortgage rates can dramatically change your monthly housing payment.
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Fed Minutes Pressure Mortgage Rates
Mortgage rates ticked higher yesterday on the release of the Federal Reserve’s minutes from the August 10 meeting.
Released three weeks after the Federal Open Market Committee meeting, this is the lengthy recap of what exactly transpired during the last FOMC meeting that didn’t make it into the brief post-meeting press release. Weighing in a just under 6,200 words, the minutes are a pretty direct look into the Fed’s internal conversations that shape our nation’s monetary policy.
Yesterday’s look didn’t reveal an optimistic Fed by any stretch, but Wall Street rejoiced that the Fed wasn’t more pessimistic.
The observations aren’t news by any stretch:
- Deep thoughts on the Economy: The recession was deeper than previously thought
- Deep thoughts on Jobs: Private employment is expanding slowly
- Deep thoughts on Housing: The market was “quite soft” in June
There is absolutely nothing that the Fed highlighted that resembled new news, let alone “good” news. Still mortgage rates jumped higher because the Fed wasn’t as harsh as Wall Street was expecting.
So, largely based on the adjectives chosen by the Fed, mortgage rates moved higher.
Our weekly interest rate predictions forecast volatility and all signs are that we are in for a choppy few days between now and the holiday weekend. If up’s and down’s aren’t your style, consider locking in. There is no pressing threat to make mortgage rates jump 2% overnight, but it looks like we’re moving into a phase in the rate rally that might go back to regular 0.125-0.250% daily loan rate fluctuations.
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Home Values Up for 16th Straight Month
According to the most recent Case-Shiller Index from S&P, home values rose 5 percent in June versus the prior month. This also puts us up 4% from a year ago. This now marks 16 months in a row in which the index has shown an increase in home values and marks a third consecutive month of very strong results.
There are drawbacks to any of these “national home value” figures and Case-Shiller is no exception. For starters, the “news” is about June’s results and the last 60 days have been lukewarm at best. We’ve seen a dip in Existing Home Sales, New Home Sales, and builder confidence is extremely low.
Still, the index does have its place. It is the most widely-followed, widely-used, private-sector housing tracker. It influences policy decisions and gives Wall Street insight on the economy. Things aren’t perfect, but they’re better. That’s a really good start.
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Mortgage Rates Will Remain Low, Then High, Then Low
Mortgage rates are always a little jumpy near the holidays and this week doesn’t look to be any exception.
With the Labor Day approaching, many traders will get a head-start on the holiday weekend and leave early. As trading volume gets lower, volatility tends to increase.
The relationship between these holiday weekends and mortgage rate volatility is an interesting one; based more in scarcity than market fundamentals.
Rates tend to get volatile near holidays because of two inter-related facts:
- Mortgage rates are based on the price of a specific mortgage-backed bond
- Mortgage-backed bond prices are established when a buyer and seller agree to a price
Traders are these buyers and sellers. Less traders, less buyers and sellers. As the potential partners in a trade become scarce, there are faster, larger changes in rates.
Another item that causes faster, larger changes in rates is an economic calendar as loaded as this week’s. We get the Fed minutes, inflation data and then the August jobs report hits on Friday when Wall Street is a near ghost town.
Mortgage rates would have been volatile this week no matter what. Add the Labor Day travel and you have a perfect storm brewing.
Mortgage rates may rise this week, or they may fall. Realistically, they’ll probably do both at least once.
If you have the opportunity to lock in your rate and it meets your budget, it might or might not be a bad week to do so. You might miss out on saving an extra 0.125-0.25%, but protect against a more significant loss if rates go up.
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Interest Rate Predictions | Week of August 30, 2010
Interest rates had an interesting week last week.
They were absolutely crushed by almost 0.25% on Friday, yet mortgage rates improved on the week and traced all-time lows on Thursday afternoon.
The news that pushed rates lower and higher through the week was the same–consistent revisions to economic projections.
Early in the week, the news was bad. We saw Existing Home Sales plummet 27%, New Home Sales drop 12%, and big ticket consumer purchases were also lower.
Then Friday, we had a dose of good news. While Q2 was revised lower, it wasn’t revised as low as the pundits had thought. Fed Chairman Ben Bernanke’s talk also pushed stocks higher while he spoke about a continued expansion in GDP through the end of this year and into 2011.
My nod for best quip of the week was from John Mauldin, who was talking about our “three-handed economist” repeating our Fed Chairman’s “on the one hand, but on the other hand, and then on the other!”
The bottom line is that when Bernanke speaks, the market listens. What they were listening to appears to be the odd part of last week’s recap. It was more Greenspan-ish than Bernanke-ish in its word patterns. If you read it multiple times, you’ll interpret it differently each time.
This Week’s Mortgage Rate Predictions
It is a coin flip. There is a lot of data hitting the market this week. It touches key inflation figures, home value data from Case-Shiller, the Fed Minutes, and Friday’s jobs report.
Since April, mortgage rates have been following a trendline that is as unprecedented as it was unexpected. That may well continue this week, but it might not. There has been activity on Wall Street, but it is just churning. While the fundamental question is the direction of the US economy’s direction, Wall Street doesn’t appear to be making bets that last more than a few hours. What we have not seen in the past few months is conviction.
Last June, rates jumped 1.125% in 10 days. That is staggering. We’re still in a spot where perhaps rates do dip another 0.125% or 0.25%, but that still leaves five, maybe even ten, times as much risk in rates going higher than value in them going lower.
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Home Affordability by Metro Area
Home affordability continues to hit new records. Home prices have stabilized, but have not surged higher and yet we’re still seeing record lows for mortgage rates.
According to the quarterly Home Opportunity Index as published by the National Association of Home Builders, more than 72 percent of all new and existing homes sold between April-June 2010 were affordable to families earning the national median income.
Like any home statistic, real estate is local. For example, the Q2 winner as most affordable was Syracuse, NY. This is sort of staggering, but 97.2% of homes sold in Syracuse were affordable for families making the median income. Indianapolis won the first quarter of this year.
On the opposite end of the spectrum, the least affordable major city went to the “New York-White Plains, NY-Wayne, NJ” metropolitan statistical area for the 9th consecutive quarter. Just 19.9% of homes are affordable to families earning the local median income, down 1 percent from last quarter.
The rankings for all 225 metro areas are viewable on the NAHB website but regardless of where you live, buying a home is as affordable as it’s ever been in history.
All things equal, buying a home may never be this inexpensive again. If you were planning to purchase later this year, you may want to move up your time frame.