Archive for Mortgage Rates


Mortgage Update May 2013

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Unemployment Rate Falls

During a week packed full of major economic news, the big market mover was Friday’s stronger than expected Employment report, and mortgage rates ended the week higher. This week’s Fed and ECB meeting announcements produced some volatility but had little net impact.

Following a dismal March Employment report and weaker than expected first quarter GDP data, investors were concerned about another spring slowdown for the US economy. The April Employment report helped alleviate those fears, however. Against a consensus forecast of 155K, the economy added 165K jobs in April. The bigger news was that the figures for February and March were revised higher by 114K. With the revisions, the economy added an average of more than 200K jobs per month during the first quarter. The Unemployment Rate unexpectedly declined from 7.6% to 7.5%, the lowest level since December 2008. Without a doubt, the data was significantly stronger than expected, which is good news for the economy. But for mortgage rates, it was bad news for a couple of reasons. It increases future inflation expectations and it moves the Unemployment Rate closer to the 6.5% target which may cause the Fed to scale back its bond purchase program.

The Fed concluded its highly anticipated meeting on Wednesday. Prior to the release of its statement, investors, expecting to see clearer signs of support for an increase in the magnitude or the duration of the bond buying program, pushed up the price of Treasuries and mortgage-backed securities (MBS). The Fed statement was little changed from the last statement, however, causing MBS prices to lose their earlier gains. The Fed will continue asset purchases until the labor market improves “substantially”. The primary change to the statement was the addition of the language that the Fed is “prepared to increase or reduce” the pace of its asset purchases based on changes in its outlook for the labor market and inflation.chart 050313

Also Notable:

  • Pending Home Sales increased to the highest level since April 2010
  • Weekly Jobless Claims fell to the lowest level since January 2008
  • As expected, the European Central Bank (ECB) cut rates by 25 basis points
  • Eurozone unemployment rose to a record high of 12.1%


Graph courtesy New York Times article and newsletter by Fred Ashe from Citi Financial Group.

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Mortgage Market Trends for Month ending February 29, 2012

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Home sales have developed a positive up trend in the past six months, and it appears that trend will be sustained at least into the near future.

The pending home sales index rose 2.0 percent in January to hit 97, the highest reading in nearly two years. New contract signings were particularly strong in the South, which posted an impressive 10.5-percent gain. The good is that the rest of the country isn’t lagging far behind: national year-over-year contracts are up 8.0 percent.

Lower prices are an obvious factor in driving sales volume. While lower prices drive demand, they also reduce supply. Home supply has been dropping nationally for some time now, though concrete numbers are tough to gauge given the uncertainty over the hidden inventory of foreclosed properties. The estimates we’ve seen on these shadow homes range between two million to four million nationally.

Whatever the actual numbers are on distressed properties, it appears many markets have already reached peak saturation, which means levels should begin falling. According to analysts at Clear Capital, Atlanta and Tuscon, Ariz. are two regions likely to see a drop in REO properties during the year. We wouldn’t be surprised to see similar prognostications forthcoming for Las Vegas, Phoenix, and Central California.

The fact markets are reaching an REO saturation point is one sign that housing is reaching a tipping point. Affordability is another. In many parts of the country, affordability is at a multi-decade high.

We’ve been preaching over the past year that residential real estate is the investment for the next decade. We stand by our exhortations. Unfortunately, many potential buyers still feel otherwise. They are weary of catching a falling knife; that is, buying a property that will continue to depreciate.

Falling knives were a very real concern three years ago; that’s not the case today. Yes, home prices nationally could continue to fall, but you always have to look past national numbers to the local market – many of which are rebounding.

Mortgage rates are another reason we like real estate. Rates continue to skim along a 60-year low. But the economy is improving – GDP posted a better-than-expected annual 3.0-percent growth rate for the fourth quarter of 2011. What’s more, job growth has accelerated and unemployment has dropped. In other words, rates are unlikely to go much lower.

Costs associated with mortgages could go higher, though. The buzz on the new HARP 2.0 is growing louder and attracting many underwater borrowers keen to refinance. The buzz will grow even louder over the next month as interest intensifies.

Rising loan demand tilts the table toward lenders, so we think its prudent for potential buyers to not wait and to take advantage of what remains a very low-cost mortgage financing market.

The Foreclosures-to-Rental Solution

We tend to become more cautious when a theme grips the market. Residential rental property is the hottest theme these days. Even the great Warren Buffett is bullish on rentals, declaring that he would buy a couple hundred thousand single-family homes and rent them, if only he had a way to manage them.

Another prominent supporter of rentals, Lewis Ranieri, the co-inventor of the mortgage-backed security, lays out the case in a research paper for using federal entities to support converting foreclosed properties into rentals. According to Ranieri, his foreclosure-to-rental model can be developed in “most every market in the United States,” and thus help clear the distressed-housing overhang.

We see a few unintended consequences, though. When markets don’t develop organically, there tends to be inefficiency – you get too much or too little of something. Just look at housing for the past six years. The market was incentivized for more home ownership, and we got too much of it.

Single-family rental properties are fine, to be sure, but large swaths of single-family rentals might not be. Rents are rising, but they don’t always rise. Rents impacted capitalization rates. If rents drop, so will capitalization rates and property values. In addition, renters don’t care for properties as well as owners. Could a higher percentage of neglected properties translate into more downward price pressure for owners?

All we’re saying is that before we ask for something we need to be sure we really want it; unintended consequences can be very costly in the long run.

Graph Courtesy from NY Times in an article by Vickie Elmer March 1, 2012.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Shopping for the Best Mortgage Rates

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 Are you enticed by the mortgage interest lowest rates in decades? If so you’re not alone, but they are often out of borrowers’ reach. Lenders base their rates on perceived risk. Only if you can show you’re low-risk would you qualify for a rate that matches those seen in headlines.

If you’re looking for the lowest available rates consider these basic factors:

  • Credit Score: The ideal FICO score is around 740 or higher. This will put you in the best place for pricing.
  • Points: 1% of the loan amount is a point, and by paying points you can reduce your mortgage rate. Be sure to ask for a zero point quote as well to compare the two rates.
  • Property Types: Such property types as duplexes, condominiums in newer buildings or with lower down payments, commercial properties or non-owner occupied properties come with higher rates.
  • Down Payment: Experts say putting down at least 25% could lead to more attractive pricing. Lenders offer different breaks on rates if equity is higher.
  • Loan Length: ARM and 15-year loans are often lower than those on the 30-year loan. Consider how long you plan to live in the property and weigh your options.
  • Other considerations:
    • Lock-in: You may receive a lower rate for a shorter lock period 30-45 days rather than the usual 60 days
    • Additional ownership costs, taxes, insurance and maintenance.

 Inspired by New York Times Article by Vickie Elmer published January 12, 201









Mortgage Market Trends for week ending January 27, 2012

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 The Federal Reserve took center stage last week following through with its commitment to become more transparent.  The Fed has revealed that it intends to keep rates “extraordinarily low” for a longer period than thought, potentially through 2014.  Additionally, the Fed has now officially stated that it will use an inflation target to help control monetary policy.  Following the Fed’s announcement, Fed Chair Bernanke revealed that the Fed is considering a QE3, potentially later this year.  Mortgage rates had been on the rise until this statement which many interpreted as the fed showing signs that it has significant concerns about the overall state of the economic recovery.

This week is jam packed with economic news and data for markets to digest.  We have both ISM Indices due, Consumer confidence, and the monthly employment data.  Should any of these reports reveal signs of economic slowing, mortgage rates are likely to move back toward record lows.  However, a week of positive economic data could nudge rates just slightly higher at the week’s end.


 Graph Courtesy from NY Times in an article by Vickie Elmer January 27, 2012.  Data and Commentary provided by Noori Rafael, from GFI Capital Resources Group, Inc.

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Mortgage Market Trends for week ending August 26, 2011

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The woes of homebuilders and anyone dependent on home building continue. The July report on new home sales shows that the annual sales rate has fallen to 298,000 units, hitting a five-month low. The good news is that supply isn’t expanding. In fact, only 165,000 homes are in inventory. This is a record low and a 6.6-month supply at the going sales pace.

Homebuilders face a cluster of problems: bargain-priced foreclosures; higher lending standards; and skittish buyers, many of whom have been further put off by the recent stock market sell-off. Mounting concerns of a double-dip recession and rising cancellation rates have only exacerbated homebuilder worries. The chief concern now is that builders could be forced to cut prices, something they’ve been fighting tooth-and-nail.

Despite the recent spate of bad news, home prices continue to hold their own, and in many instances are moving higher – at least month-over-month. The FHFA home price index for June increased 0.9 percent after posting 0.4 percent and 0.3 percent increases in May and April respectively.

However, does the slump in new and existing home sales portend falling home prices? We remain optimistic that prices will hold. People are understandably wary about big-ticket purchases, like a home, because of slow job growth and stagnating economic activity. But all have a reservation price (a price they will not sell below). Houses (that is, habitable houses) won’t be given away; they’ll be taken off market if the sales price doesn’t exceed the reservation price.

Reservation prices could fall and the monthly price trend could reverse, of course. That said, we think most of the bad news is baked into the system, so we don’t think there will be any heavy discounting. In short, we still think a home is a worthwhile investment in today’s market.

Mortgages have also been holding a price trend. Bankrate reported that its weekly survey on rates posted another all-time low. It’s worth noting, though, that after the survey was released, yields on the 10-year Treasury note spiked 10 basis points, which points to higher mortgage rates in the next survey.

A surfeit of negative news has kept mortgage rates low. This has lead many analysts to opine that ultra-low mortgage rates are the new norm. We think this is a dangerous way of thinking (which we’ll explain below) and that it is still best to take advantage of rates unseen in over 50 years.

Is This the New Norm?

We’ve gone down the higher-inflation, higher-interest rate road many times in the past, only to find ourselves doubling back. There is an interesting trend occurring with banks, though, that could persuade us to go down it once again.

One of the more vocal criticisms of banks is that they haven’t been lending as much as they should. There is some validity to the criticism; banks have been squirreling away a higher amount of reserves with the Federal Reserve, which has attenuated loan supply and, therefore, money supply, thus keeping inflation in check.

Data released by the Federal Reserve show this period of containment appears to be ending. In other words, excess bank reserves are leaking into the economy and money supply is growing. Because we operate in a fraction-reserve banking system, which means one dollar can be sufficiently leveraged to produce nine more; more reserves put to work can quickly raise inflation pressure.

This all might seem abstruse to the layperson unfamiliar with the intricacies of the Federal Reserve and fractional-reserving banking. All we are saying is that it is folly to write off price inflation and the possibility of higher mortgage rates, because there is no “normal” when it comes to financial markets.


Graph Courtesy from NY Times in an article by Vickie Elmer August 26, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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ARMs Making A Comback?

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ARM (Adjustable Rate Mortgage) were very popular during the boom years, but fell out of favor because the rates were very close to those of fixed-rate mortgages.  Recently, because of historically low interest rates for fixed rate mortgages, the difference between fixed and adjustable-rate loans is targeted to bet widest in eight years, according to HSH Associates, which tracks mortgage rates.

 Do they make sense?

 Ask yourself:

  • Are you going to stay in the property 5 years or less?
  • Are you going to be able to refinance within 5 years?
  • If the rate adjusts upward in 5 years, are you going to be able to make increased payments?
  • Will you be able to sell for more than the loan balance when you want?

If you are a gambler, betting that interest rates won’t rise or you can sell before they do, maybe.  If you will only stay for 5 years or less, an ARM possibly makes sense.

Let’s look at some numbers.  One popular ARM loan is a 5/1 ARM.  It has a fixed rate for the first 5 years, then adjusts every year thereafter.  A recent ARM 5/1 was quoted at 3.4%.  The average 30 year fixed rate mortgage is 4.72%.  The difference between the two is called the ‘spread’.  In this example, the spread is 1.32%, big enough to save thousands of dollars during the first five years of a mortgage.

Although there are naysayers, ARMs are becoming more attractive, and may be an option for some borrowers. Weigh the pros and cons, speak to your financial advisor and make sure the ARM is right for you.

Based in part on an article from the Wall Street Journal by AnnaMaria Androitis


Mortgage Market Trends for week ending May 20, 2011

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We suspect that there are a few businesses tougher than the home-building business these days, but we are hard pressed to think of any.  The homebuilders likely agree, given the homebuilder index remains at a depressed 16 reading for May.

Homebuilders continue to report lousy conditions.  They blame competition from distressed sales, which made up 39 percent of the homes sold in the first quarter, as well as unavailability of construction credit for their woes.  What’s more, sales of distressed homes also pressure prices of existing homes, which means new home sales have been crimped further by buyers unsure that they will be able to sell their existing home at a favorable price in order to trade up.

Homebuilders are surely frustrated by the sputtering and the false starts that they’ve had to endure over the past 18 months.  Just when it appears a positive trend in starts will take hold it reverses and falls again.  Starts rebounded 7.2 percent in March but reversed 10.2 percent in April, dropping to an annualized rate of 523,000 units. The drop was led by a 24.1 percent fall in the volatile multifamily-starts component, but the larger and more significant single-family component was off 5.1 percent. Unfortunately, we doubt that homebuilder fortunes will improve much in the coming months.

Pricing – for everyone – remains the front-burner concern.  The NAR reports that the median sales price in the first three months of the year was 4.6 percent lower compared to the first quarter of 2010. Prices have declined in 118 of the 152 metropolitan areas included in the NAR’s report. We are quick to note, though, that year-over-year comparisons are irrelevant when one quarter is advantaged by tax credits and another quarter isn’t. We will be much more interested in data from the second half of this year compared to the second half of 2010.

The good news is that lower prices have helped rejuvenate sales volume. Total home sales increased 8.3 percent to a seasonally adjusted annual rate of 5.14 million units in the first three months of 2011 compared to the last three months of 2010. Our economic textbooks haven’t failed us on this market process: lower prices produce higher demand, and, therefore, help to clear inventory.

Admittedly, our textbooks have been less prescient on mortgage rates. Despite obvious price inflation in consumer, producer, and financial markets; strong job growth; and worries over the United States ‘ fiscal conundrum; mortgage rates (as well as most U.S. Treasury rates) continue to fall. Indeed, we are now looking at 30-year fixed-rate mortgages near a five-month low, well below 5 percent.

Obviously, other factors are at work here, and it could simply be a supply and demand imbalance and surprisingly strong demand for U.S. Treasury securities that are keeping mortgage rates low. Whatever the cause, we still don’t think they will hold. There are simply too many variables favoring higher rates, and none more influential than the Federal Reserve’s eventual need to shift to a tighter monetary policy from an expansionary one.

This isn’t to say we couldn’t be wrong, but if we are, then some of our economics textbooks might need a rewrite.

Could Home-Price Insurance be a Contrarian Indicator?

SmartMoney ran an interesting article this past week on insuring against a drop in home prices. In short, the article focused on how underdeveloped the market for hedging and insuring against falling home prices is and how it is starting to develop.

Up until recently, the only way to insure a home against falling prices was to buy futures contracts on home prices in 10 metropolitan areas, including Boston, Miami, and Las Vegas. Of course, if you didn’t live in one of the 10 metropolitan areas, you won’t be perfectly insured. If you lived in Reno and bought futures contracts based on home sales falling in Las Vegas, you could still lose if Las Vegas home prices rose while Reno home prices fell.

Today, firms are beginning to sprout around the country offering direct insurance for local markets. One, Home Headquarters, a nonprofit, sells insurance at a cost of 1.5 percent of the home’s value for homes located in Syracuse , New York . More firms are set to enter the market this year.

This tells us something: new products (and articles about them) tend to proliferate toward the end of a strong trend – either down or up. Perhaps this latest data point on insuring against falling home prices, combined with all the other negative data points on housing, is a sign the end is near in a good way.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 19, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

Categories : Market Reports
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Mortgage Market Trends for week ending May 13, 2011

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MARKET RECAP had many in the media – from the Wall Street Journal, to Bloomberg, to the New York Times – talking this past week, and they were talking mostly about home prices.

Home prices, according to Zillow, posted the largest decline in nearly three years in the first quarter of 2011, with prices falling 3 percent compared to the fourth quarter of 2010. Zillow’s data also show that prices have fallen nationally for 57-consecutive months.

The economists tell us that prices are deteriorating because of the glut of foreclosed properties selling at a discount. Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000 foreclosed homes during the first quarter, a new high that represents a 23-percent increase from the previous quarter. More properties could be on the way: Fannie and Freddie together were holding 218,000 properties at the end of March, a 33-percent increase from a year ago.

This latest dour data on prices prompted many economists to recalibrate their forecasting models, pushing back their estimates on when the housing market will actually bottom. One economist, quoted at, said, “We aren’t even halfway through a 10-year transition in the housing market.” Zillow’s in-house economist believes prices won’t hit bottom before next year and expects that “they will fall by another 7 percent to 9 percent.”

Distressed properties are an issue, to be sure. The NAR reports that d istressed property sales accounted for 39 percent of all transactions in the first quarter, up from 36 percent a year earlier. While good for sales volume, distressed properties are dragging down prices. In the first quarter, the median existing single-family home price was $158,700, down almost 5 percent from $166,400 one year ago, according to the NAR.

The rise in the number of distressed properties means more lower-priced homes, more home owners with negative equity, and, thus, even more distressed properties. It sounds like a vicious circle, except it isn’t. Most sellers have reserve prices. They won’t sell their home at just any price, regardless if they’re underwater or not. That also goes for REO properties. People are rational; they want to maximize their returns, and maximizing returns often means remaining on the sidelines instead of selling.

We still don’t back down from our contention that prices are at or near their lows. Could the price drop a little further after a purchase? Yes, but that can happen with any investment. What’s important is where the investment will be seven-to-10 years from now. We believe that residential real estate will be higher, and possibly a lot higher.

We also believe that the housing market would be in much better shape today if more people capable and willing to buy could. We are speaking of overly tight lending standards. The average credit score on loans backed by Fannie Mae stood at 762 in the first quarter, up from an average of 718 for the 2001-2004 period.

Of course, we are interested in speaking with anyone who wants a mortgage who understands the unique opportunity to get a loan at a low rate and to buy a home at a low price. There is a lot we can still do, but there would be more we could do if the tethers were only reasonably lengthened.

The Great Protector from Inflation

Inflation is on many people’s minds these days, including ours. Investors are expressing the most obvious concern, revealed in their seemingly insatiable demand for gold and silver – two historical antidotes to the ill-effects of inflation. Both metals have nearly doubled in price over the past few years.

Real estate is another great protector. Returns on residential real estate have typically averaged a return that was 1-to-2 percent above the rate of inflation over the past century. That’s easy to forget, given the off-putting news on recent price declines. But the message is worth remembering, especially at a time when investors have been piling into richly priced gold and silver. We think real estate is the better value and the better protector from inflation at current prices.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 12, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending May 6, 2011

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There wasn’t much news on housing sales this past week, so markets focused on prices instead. The chatter centered mostly on fear of the dreaded “double dip.” The fear that home prices will continue to fall and will make new lows.

There is some validity to the fear, if we consider only national numbers. Clear Capital reports that national prices fell 5 percent in April compared to the year-ago period. Over the past nine months, national prices are purported to have declined 11.5 percent.

Distressed properties were to blame. Clear Capital says that REO sales accounted for 34.5 percent of overall sales nationwide after declining to nearly 20 percent in the middle of 2010. This same pattern surfaced in 2008, when REO saturation grew from 20 percent to 32 percent by the end of the year.

It’s an apples-to-oranges comparison (2008 to 2011) in our opinion. Back in 2008 and early 2009, the entire nation was a mess: markets converged and they all dropped in tandem. Today is different; housing markets and economies are more localized. We think Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, put it best when he described today’s market as a “tale of two cities.” Home prices are stabilizing and rising in economically viable parts of the country, while other areas remain paralyzed by high unemployment and shadow inventories.

Every region of the country has shadow inventory, but it is proportionally high in parts of California , Michigan , Nevada , Florida , and Arizona . These states still have a lot of work to do to rid themselves of distressed properties. The difference between 2008 and today is that what happens in Vegas really does stay in Vegas. In other words, don’t let national price trends keep you awake, particularly if the comparisons are year-over-year.

It remains a buyer’s market, though, and we’d like to see buyers take advantage of a stable lending environment. In fact, rates actually eased lower this past week. Some credit-market commentators pointed to the death of Osama bin Laden for the lower rates, the rationale being that investors were fearful of a market-churning retaliation, so they flocked to U.S. Treasury securities.

It’s difficult to say for sure why rates dropped; there are simply too many factors that move markets over the short term to say which one is most influential. We prefer to keep our eye on the long term, which is being driven by soaring consumer prices, rising gold prices, and falling value of the dollar. To us, they add up to rising mortgage rates. And we’re not alone in that assessment: the MBA forecasts a 30-year, fixed-rate mortgage rate of 6.2 percent next year.

Hot versus Cold Markets

It’s an age-old dichotomy: some people prefer to buy into the latest trend; some people prefer to go against the crowd and buy what few people appear to want.

In the past couple issues, we’ve noted that the residential rental real estate market is turning, which means more people are buying rental properties. Does that mean that the rental market is now a hot market? We don’t think so. We think it is more of a developing market. That is, it is garnering more interest among more people, but it is still not hot. A hot market to us is the commodities market, gold in particular, and the stock market. Both have nearly doubled over the past two years.

Residential real estate, if not a cold market is a cool market, and we think these types of markets offer more reward for less risk. We have to look no further then the past two hot markets – the stock market of 1999 and the real estate market of 2006 – to realize how dangerous it can be to buy into the hot market.

Of course, it is impossible to accurately predict how hot or cold markets can get, but if we were to bet on which would be the hot market two or three years from now, our money would be on the real estate market.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 6, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending April 22, 2011

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We stated previously that an upturn in sales would mark the start of the spring buying season. We are happy to report that signs are appearing to support our premonition. RE/MAX reported that home sales increased by double-digits in March from February in all but one of the 54 U.S. metropolitan areas it covers. This represents a complete reversal from January, when none of the 54 cities saw even single-digit monthly sales increases.

The National Association of Realtors corroborated Re/Max’s bullish report with one of its own. The NAR’s data show that March was a decent month for existing home sales, with sales up 3.7 percent to an annualized rate of 5.1 million units. Prices also firmed slightly, up 2.2 percent, to a median reading of $159,600. More homes were on the market, 3.55 million, but the solid rise in sales dropped the supply to 8.4 months.

The beleaguered homebuilders could also see an improved selling market as we head into the late spring/early summer months. Housing starts in March rebounded 7.2 percent following a monthly 18.5-percent drop in February. The March annualized pace of 549,000 units came in significantly higher than analysts’ estimate for 510,000 units. The improvement was led by a monthly 7.7 percent boost in single-family starts. More encouraging, housing permits gained 11.2 percent after decreasing 5.2 percent in February.

Over the past six months, the monthly housing data have shown improvements, or at least stabilization, in pricing and sales. Of course, real estate is seasonal and year-over-year comparisons are usually the focus. On that front, the data are generally lower. However, it is not an apples-to-apples comparison. This time last year, we were still operating in a more subsided market, thanks to the federal tax credits, so it’s really meaningless to compare the normalized market of today to the tax-credit-supported market of yesterday.

We could also argue that we are still not operating in a normalized mortgage market. Mortgage rates remain low, and have remained low longer than we had thought. The Federal Reserve has added unprecedented liquidity and held rates low through its open-market operations of buying Treasury and government agency securities. That said, we still believe that mortgage rates will play catch up with rising prices in the coming months.

Credit standards, which we see as the biggest impediment in the housing recovery at this point, are also not normalized. March posted a record all-cash sales rate of 35 percent. That tells us that too many people are being excluded from the market. Our biggest wish for the coming months is for more lenient standards and more private mortgage investors. Right now, the mortgage market is having a sale on size-10 shoes only, which is great if that’s your size, but not so great if it isn’t.

The Great American Downgrade

It seems unfathomable, but it happened nonetheless: Standard & Poor’s changed its outlook on U.S. Treasury bonds from “stable” to “negative” and warned it might downgrade the U.S. debt from its top AAA rating if government officials don’t get the country’s budget deficit under control.

Does that mean that we are on the road to Zimbabwe? No, but a potential downgrade does have some implications for credit markets. It could pull nervous money from the bond market and place it in the stock or commodities markets. (Gold is above $1,500/ounce for a reason.) More than anything, the downgrade threat is a wake-up call to start getting the United States’ fiscal and monetary house in order. That means ending our low-interest rate and easy-money ways.

The world is focused on us to see if our government can take this deficit seriously and address it coherently. In short, seriousness and coherence are precursors to rising interest rates, and that includes mortgage rates.

Graph Courtesy from NY Times in an article by Maryann Haggerty April 21, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending December 17, 2010

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Much ado was made about a CoreLogic report on foreclosures this past week. The headline went something like this: “The number of U.S. homes worth less than the debt owed on them dropped in the third quarter.” That would seem to get the spirits rising, until you read past the first paragraph and discover the improvement was largely due to mounting foreclosures rather than rising property values.

Still, the report offered some hope, noting that 22.5 percent of homes with mortgages, or roughly 10.8 million units, were underwater at the end of the third quarter, which is better than the 23 percent, or 11 million homes, reported to be underwater at the end of the second quarter.

We’ll offer our usual caveat with national numbers: they rarely pertain to any particular local market. Indeed, the usual suspects – Nevada , Arizona , Florida , Michigan and California – heavily skew the numbers on negative equity. CoreLogic reports that 67 percent of Nevada homes with mortgages are underwater – an incomprehensible amount to those who reside in cooler, damper environs.

We have two options for reducing negative equity: price appreciation or disposition. The aforementioned five states will likely rely more on the latter. However, that doesn’t mean that everyone is doomed to the same fate. At the least, price inflation – one of the Federal Reserve’s stated economic goals – will eventually seep into the housing market to stabilize prices.

Homebuilders will continue to suffer with foreclosures and negative equity, which is why sentiment among this group continues to dwell in the basement, and will likely continue to dwell there for the foreseeable future. This despite the Commerce Department reporting that housing starts rose 3.9 percent, to a seasonally adjusted annual rate of 555,000 units, in November. Unfortunately, permits decreased by 4 percent.

Homebuilders are also less than thrilled with mortgages rates. reported that rates on the 30-year fixed-rate loan hit 5 percent nationally – the highest in seven months. With all due respect to homebuilders, we don’t view rate increases as being all bad. Yes, it has increased teeth gnashing by those borrowers waiting for 3.5 percent mortgages, but rate increases are a sign of economic improvement. A stronger economy makes business investment more attractive, thus drawing funds away from bond markets. The result is lower demand for bonds, which translates to a drop in bond prices and a rise in yields and interest rates (which is good for savers, by the way).

The best advice we can offer at this point is to lock in today’s rate. Admittedly, we could see a pullback, but we wouldn’t anticipate it being much of one. Too many indicators point to a higher-rate environment.


Staying Ahead of the Trend

People are naturally attracted to trends: the longer a trend has been sustained, the more likely they believe that trend will be sustained into the future. It can be a misleading way of perceiving markets, for often it is the exact opposite: the longer a trend has been sustained, the more likely it will reverse.

The problem is that impending change is often imperceptible, though it is there. Simply vet the data over the past few months, and you can sense a change. Retail sales are rising; economic activity continues to build, evinced by Federal Express’ bullish outlook; and more businesses are planning to hire, evinced by a Business Round Table survey that finds that 45 percent of CEOs plan to hire within six months — the highest percentage for that group in eight years.

That said, this remains a favorable environment for homebuyers, investors, and borrowers. We all prefer to buy low and sell high, but we can buy low only when things are on sale; things are on sale when pessimism rules, as is still the case today. However, when economic indicators have trended higher and optimism rules, nothing is on sale. Sure, it feels better to buy when everyone is optimistically inclined, but doing so is rarely profitable over the long run.

Graph Courtesy from NY Times in an article by Lynnley Browning  December 19, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending November 5, 2010

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The Federal Reserve was front and center this past week. Everyone knew that would be the case, but the Fed ruled the financial pages anyway. First, Fed officials did the obvious: they announced that the federal funds rate – the lending rate between banks – would be held at 0 percent to 0.25 percent. Later, Fed officials did something else obvious: they announced that the Federal Reserve was going to pump even more money into our sluggish economy. 

On the latter, the Fed will purchase an additional $600 billion in long-term Treasury bonds over the next eight months. It will also reinvest up to $300 billion in Treasury bonds, using proceeds from earlier investments. This is the famous “quantitative easing” that has so preoccupied economists and the commentators for the past month. The purpose of quantitative easing is twofold: (1) to increase the money supply, and thus stave off deflation; and (2) to keep interest rates low and increase the amount of loanable funds. 

So what does this mean to us? The Fed is counting on more lending at lower interest rates. However, we wouldn’t necessarily count on it. As we’ve noted in past editions, increasing the money supply is inflationary. To date, most of the inflation has been in financial investments, namely stocks and commodities. Though the official consumer price measures say there is no inflation, most of us know otherwise – especially after a trip to the grocery store or gas station. In short, lower mortgage rates are not a given. 

Nor is it a given that lending volume will increase. Most of us have experienced the trials and tribulations of adhering to Fannie Mae’s and Freddie Mac’s underwriting standards, which are frustratingly (and we think unnecessarily) stringent. On the one hand, the Fed is encouraging homeowners to refinance; on the other hand, the Federal Housing Finance Agency – which oversees Fannie Mae and Freddie Mac – is making it difficult to refinance. Talk about a catch-22. 

The good news is that we could see a break in the logjam. A survey from the structured finance technology firm Principia Partners found that three out of five asset-backed and mortgage-backed securities investors plan to increase their activity in the securitization space over the next 12 months. That means more diversity in the mortgage market, which should increase mortgage offerings, and, just as important, increase offerings that are conflated with less stringent, more market-oriented underwriting standards.
In the meantime, mortgage rates continue to hold historical lows, but we think the risk that they won’t continue to hold these lows is increasing. Yes, more money can mean cheaper money, but it can also mean more expensive money if inflation takes hold in a serious way. At the least, we think interest-rate volatility will increase, making the waiting game more perilous. We see little upside in delaying refinancing or purchasing a home; there are simply too many unknowns lurking about that could spoil even the best-laid plans.

Base Building

The Census Bureau reported last week that the percentage of households that owned their homes has fallen to an 11-year low, at 66.9 percent. Homeownership had peaked at 69 percent in 2004. The historical norm, dating back to 1970, is around 65 percent. The drop in homeownership is actually good news, in that we are taking yet another step toward a more normalized market. With new home construction at a multi-year low, we could be forming a sturdy base from which growth can arise over the next decade. 

Of course, foreclosures remain the Damocles sword that could imperil any growth prospects by swamping the market with inventory. Some of the predictions are onerous (especially those from RealtyTrac), but we think we see a permanent reprieve nonetheless. Fannie Mae and Freddie Mac reported that the percentage of delinquent mortgages they hold continues to fall, with Fannie reporting a sixth-straight monthly decline and Freddie reporting a fourth-straight monthly decline. This news suggests that more mortgage holders have the financial wherewithal and the desire to service their loans and stay in their homes. 

We might be in the minority, but we think the positive data trend that has developed over the past couple months will produce a steady, if not significantly improved, housing market for 2011.

Graph Courtesy from NY Times in an article by Lynnley Browning  November 5, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending October 29, 2010

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Were we smart or lucky? We’d like to think smart, but we won’t discount luck either. We are speaking of the housing sales trend that unfolded after the tax credits expired at the end of April. We noted back in May that we expected sales to dip post-tax credits, and they did. We also noted that we expected sales to rebound once the market became acclimated to standing on its own feet, and that appears to be occurring.

Indeed, sales of existing-homes strengthened across all categories to jump 10 percent in September to 4.53 million annualized units, while sales of new homes rose 6.6 percent to a 307,000 annualized rate. The surge in sales helped push supply down to 10.7 months for existing homes and down to eight months for new homes.

The obvious question is how much discounting was required to stimulate sales? It appears some discounting occurred, when holding sales composition firm. The national median price for existing homes fell 3.3 percent to $171,700, with the average price falling 3.5 percent to $218,200. Meanwhile, the median price for new homes rose 1.5 percent to $223,800, with the average price dropping 1.2 percent to $257,500.

We’ve been vocal in our belief that home prices have stabilized. We stand by that sentiment, even though we wouldn’t be surprised to see some price volatility over the next month or two, thanks to the brouhaha over the foreclosure processes of the large banks and the expectation that foreclosures could swell into 2011.

That said, it’s important to remember that the housing market is much more orderly and stable than it was a year ago. All the malinvestment and all the excesses of yesteryear have percolated to the surface. We know what we are dealing with, which means foreclosures will certainly be handled in manner that won’t be too disruptive to the market. After all, the people selling foreclosed houses still want to sell at the highest price possible; the highest price possible isn’t achieved by flooding the market with inventory.

As for the foreclosure-servicing issues, the NAR warned that a single related court order could take 20 percent of the homes off the market. We’re somewhat circumspect. To be sure, an unfavorable court order could happen, but the pressure is great for it not to. If we were to balance the odds on a scale, we think the scale favors it not occurring.

As for balancing lower or higher mortgage rates, we side with higher. That’s not just our opinion. Bill Gross, a highly respected bond manager at PIMCO, noted this past week that a Fed announcement on additional monetary easing “will likely signify the end of a great 30-year bull market in bonds.” In other words, Gross expects bond prices to fall and interest rates to rise, which would translate into higher mortgage rates.


Let’s Get On With It

The time for waiting has ended. Confidence will return; that is, if it hasn’t already returned. Merrill Lynch reported on Bloomberg this past week that Americans – at least those with a few dollars to invest – are feeling more financially secure today than they were a year ago. Merrill surveyed 1,000 people with investable assets of at least $250,000 and found that 78 percent of those surveyed are confident their economic circumstances will improve in 2011.

For everyone else, confidence is within reach. Claims for jobless benefits unexpectedly dropped last week to a three-month low, an optimistic indicator that the U.S. labor market is on the mend. What’s more, the total number of people receiving unemployment insurance dropped to a two-year low. Meanwhile, consumer spending – a direct measure of consumer confidence – continues to move higher, and could give employers reason to add workers ahead of the holiday shopping season.

We think this latest slate of good news portends a robust economy for the New Year, which is why we think the opportunity to take advantage of historically low mortgage rates and low housing prices is dwindling for this year.

Graph Courtesy from NY Times in an article by Lynnley Browning  October 29, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending June 11, 2010

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The week was light on housing and mortgage data, which was a good thing; most of what was released offered little cheer. For instance, Capital Economics reported that 2.5 million households are going through the foreclosure process, while 5.4 million households have missed at least one mortgage payment. Capital Economics also expects another three million homes to be added to the foreclosure rolls by the end of 2011. In short, Capital Economics is calling for a housing-market double-dip.

Problems persist aside from the above mentioned, to be sure. According to more than a few sources, housing prices are under pressure., for one, has noted that more than 43 percent of home sellers cut their home’s list price in May, dropping the national median “for sale” price 2 percent to $265,000.

Of course, we can always question the usefulness of national data. But if we are going to talk nationally, it’s worth broaching the positive as well. On that front, Integrated Asset Services (IAS) reported that its house price index rose 0.9 percent in April from March. IAS also reported that three of the four US census regions showed home-pricing gains for the month.

The expiration of the federal homebuyer tax credits remains the elephant in the room, according to the commentaries, though it appears to be less of a concern for people who actually earn a living in the housing sector. Publicly traded homebuilders are seeing sales recover after an initial drop-off following April 30. A recent analyst’s report from JMP Securities noted that sales at several homebuilder communities in California, Texas, and Phoenix – those notoriously hard-hit regions – have begun to improve and are approaching pre-April numbers. JMP’s report also noted that many builders are raising prices and that higher-priced homes are moving briskly.

We noted in last week’s edition that the housing market could easily follow the automobile market’s lead, where sales initially drop after tax-credit expiration but then regain momentum. We’ve also noted – quite frequently in many past editions – that employment is the real cure to what ails us. Even though last week’s employment report was tepidly received, we remain encouraged. Job openings jumped to the highest level in 16 months in April, with the number of jobs advertised rising to 3.1 million from 2.8 million. The fact that private employers accounted for the entire gain was a particularly encouraging sign.

An improving jobs outlook is good news for the economy, but less so for mortgage rates. Yes, rates continue to hold at historical lows (with improvements being marginal at best), but Federal Reserve rumblings on raising rates continue to build, which is why we continue to counsel against procrastination on a refinance or a home purchase. We also counsel that money is available: little- or negative-equity does not exclude a favorable refinance.

Another Round of Reasonable Perspective

There is no question that we face formidable, long-term structural problems – problems that have made US markets less attractive in recent years. But these problems are surmountable. We have no qualms saying that the spirit of innovation and entrepreneurship that has defined America in past crises will prevail today.

Though housing remains tepid and debt and deficit levels are rising, compared to the rest of the world the United States is in good shape. Our economic fundamentals are sound: manufacturing levels are up and interest rates and inflation are low. What’s more, the broader economic recovery is translating into meaningful employment improvements and corporate-profit growth that could potentially reach a record high in this year’s third quarter.

Risks clearly remain, but markets are always fraught with risks: there are no perfect markets. To the contrary, when markets seem the most perfect, that’s when they are the most risky, as the housing and mortgage markets post-2006 have so painfully revealed. Things still aren’t so rosy today, but that’s okay, because we’re sure that better days lay ahead.

Graph Courtesy from NY Times in an article by Bob Tedeschi June 9, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending May 28, 2010

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Mortgage rates again moved downward as European debt concerns continued to mount. In addition to Greece’s issues, Spain saw its debt downgraded last week. All of this continues to drive a major international “flight-to-quality” with US treasuries seen ns one of the safest places to stash money. Economically, our recovery does appear to be gaining some traction. While GDP was adjusted down slightly, we still have significant strength in manufacturing. Additionally, government stimulus has kicked home sales higher, with hopes that it can continue to hold its own without more intervention. While consumer moods have a long way to go to recovery, we’re seeing better readings.

Mortgage rates could easily move either way this week, or not at all. Analysts are expecting to see both ISM indices remain strong, and consensus estimates are calling for 500.000 new jobs to have been created last month. However, even with great domestic economic news, we could have continued concerns over Europe’s debt situation holding mortgage rates low.

Graph Courtesy from NY Times in an article by Bob Tedeschi May 25, 2010.  Data provided by Jeff Carpenter, Director of Finance, GFI Mortgage Bankers, Inc.

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