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.
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New Home Supply Higher
Yesterday’s news was from the National Association of Realtors and was the weakest Existing Home Sales report in 15 years. Today’s story is a similar release from the U.S. Census Bureau regarding the New Home Sales report.
Americans bought just 276,000 newly-built homes in July. That marks the fewest units sold since the government started keeping records in 1963.
None of this was particularly surprising news as we’d been forecasting a significant drop in sales activity.
Home Supply is a measurement of the total inventory divided by the current rate of sales. So, while the new home inventory dropped in total, the slowing pace of sales pushed the home supply figure up by just over one month, up to about nine months.
The bigger story may be the underlying construction figures. While construction is great for stimulating the economy, when the job is done we end up with another new home entering that supply. Single-family housing starts have dropped every month since April, building permits are down 23% since March, and home builder confidence figures are at 18-month lows. These aren’t the storylines that trigger widespread building to begin.
For now, this is great news for home buyers. With almost no new inventory being added to the supply side, it will be interesting to watch the Home Supply going forward. Even a small increase in sales would trigger a very rapid reduction to the Home Supply stat. That would reverse the current short-term negotiating advantage that is going to buyers.
Coupled with the lowest rates in history, the monthly cost of owning a newly built home is looking very attractive.
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Buyers Gain Leverage on Existing Home Sales Drop
Home buyers today have timed it right.
Yesterday’s post addressed the fact that home loan approvals are getting easier. (Full Article: Home Loan Approvals Getting Easier ) Mortgage rates are at their lowest levels in history. Home prices, while recovering, still sit well below their April 2007 highs.
Now, soft home sales data just strengthened the buyer’s negotiating power a little further. The National Association of Realtors®’ Existing Home Sales report showed that the number of resales plunged by 1.4 million units in July.
The national data is a 27% drop from last month and now puts single-family home resales at their lowest levels since May 1999. Nationally, the drop in sales means that the inventory has increased. At the current pace, it would take 12.5 months for the inventory to be absorbed.
Compare that to just 8.9 months of inventory as of last month.
Of course, real estate is always local. Real estate will vary from Wrigleyville to Andersonville, from Wicker Park to Lincoln Park. Seller sentiment; however, isn’t as hyper-local. It’s more CNN-based than reality-based.
Sellers were happy a few months ago. The first half of this year saw stimulus-driven buyers all trying to identify and close properties at the same time. Sellers had it made the day before the first time home buyer tax credit expired. What we’re seeing now is a natural slow down. So many buyers accelerated their purchases into spring that the tax credit had a short-term effect of increasing home values by the $8,000 tax credit.
In the broad sense, home values will influence how much you pay for your home. In reality, when a buyer and seller are $5,000 apart, the prevailing news determines who blinks first at the negotiating table. It looks like the sellers are under more pressure than the buyers right now.
The main reason to buy today is not home prices, but it is a nice plus. Rates are down .75% since April. Every .125% in mortgage rate has the same financial impact as roughly a 1.5% change in home price. While home prices have risen modestly, rates are lower to the tune of six of those .125%’s—in terms of home affordability, that’s the equivalent of roughly a 9% change in home prices.
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Home Loan Approvals Getting Easier
The credit crunch led to a tightening mortgage-lending world in the past three years.
It’s over. We’ve said it before on this blog: the credit crunch is over IF you and your property represent a good credit risk.
According to the Federal Reserve’s most recent survey of senior bank loan officers, approximately 10% of lenders added mortgage qualification hurdles between April and June. That’s down from when nearly 80% were tightening guidelines just two years ago.
It looks like many mortgage guidelines, especially those that pertain to Chicago home mortgages, have reached their most restrictive levels. There are still some marginal changes that represent that 10% of banks tightening. A few have increased their minimum FICO score on FHA loans, for example.
I personally watch the private mortgage insurance (PMI) companies. On mortgage transactions, they have the most exposure since they are insuring these 85, 90, and 95% loans. A few years ago, they significantly tightened their guidelines in: Arizona/Florida/Nevada, on condominiums, and FICO.
Doesn’t that sound sort of like where the majority of the foreclosures were?
In the past few months, we’ve been seeing their guidelines not only holding steady, but relaxing. Notably, some PMI are back in some parts of those “declining markets,” they’re removing condominium restrictions, and they are heavily discounting rates for exceptional credit scores.
Home loan approvals are getting easier. The one common thread coming out of the credit crunch is FICO. Strong FICO=strong loan options. Anything else may mean no loan options. If you haven’t checked your own free credit report, ignore the TV ads, use the free report at http://www.annualcreditreport.com
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Mortgage Rate Predictions | Week of August 23, 2010
This surge in refinancing activity isn’t likely to end this week. Home loan rates ticked slightly higher last week after interest rates hit another record on Thursday, but then erased those gains and more during Friday’s session.
It was a choppy week of trading as Wall Street struggled with consistently disappointing data. Jobs, builder confidence, and housing data all pushed on a volatile week where mortgage rates changed multiple times per day.
This rate rally is going strong. According to Freddie Mac, here is what has happened to rates over the summer. “Then” was April 8, the most recent high-point. “Now” is last Thursday’s release:
- 30-year fixed : Then, 5.21%; Now, 4.42%
- 15-year fixed : Then, 4.52%; Now, 3.90%
- 5-year ARM : Then, 4.25%; Now, 3.56%
As an example of potential savings, a homeowner in Illinois with a $250,000 30-year fixed rate mortgage would save $96 per month at today’s rates as compared to April’s.
Over the life of a loan, that’s a savings of $34,560.
This Week’s Mortgage Rate Predictions
The economic calendar is pretty light. We have Existing home sales on Tuesday. Expectations are so low that a bad result is already priced into the market and a higher-than-expected number will probably meet disbelief on Wall Street. New home sales hit Wednesday. Thursday has the weekly jobless claims. That will be watched.
Claims jumped to 500k last week. That’s sort of an over/under number that the market watches. It’s also 50k higher than the May/June averages. What this means is that another higher number this week could strongly signal that another round of layoffs is occurring.
The Treasury will be borrowing another $102B this week. If there is anything amazing that has occurred in the past 18 months, it isn’t the all-time low mortgage rates. It is that the Treasury has found a market for US debt at the levels that we are issuing it.
This isn’t the type of week that will send rates up 1.0% overnight. We know that week will eventually come, but this doesn’t look like the week. This week still could be the one that creates that .25% quick hop that we’ve escaped so far.
Mortgage rates are part of a well-rounded financial plan. If today’s savings let you fund retirement or debt reduction better, move forward. The bigger picture outweighs any incremental improvement to mortgage rates.