Mortgage Rates Spike

The bond market went a little crazy last week, and mortgage rates followed. By Monday of this week most lenders were quoting 4.0% for a 30-year fixed-rate mortgage (FRM). The market calmed a bit midweek, and by Thursday Freddie Mac reported a slight easing to 3.94%.

The speed of the increase was close to unprecedented. Rate analyst Matthew Graham said on Monday that the previous three days had seen rates move higher at a pace that was only matched by the three worst consecutive days of the 2013 “taper tantrum.” That was the period when markets reacted to the Federal Reserve’s announcement of a reduction in the quantitative easing program. But Graham added, “If there’s one saving grace apart from the platitude about 4% still being relatively low in the biggest of pictures, it’s that the mortgage payment on a $200,000 loan would only be $14 higher today vs. (last) Thursday.”

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We would add another “saving grace.” One year ago, per Freddie Mac, the 30-year FRM rate was 3 basis points higher than today. And look where we have been since then.

Mortgage activity, both purchase and refi, responded quickly to the upturn in rates, and the Mortgage Bankers Association (MBA) reported that application volume was down across the board, especially for refinancing which dropped 11%. It didn’t help that the business week was shortened by the Veterans Day holiday on Friday.

But there was good news–exceptionally good news–as well. Housing starts, which had fallen unexpectedly in September due to a huge loss in the multi-family sector, came roaring back in October, jumping 25.5% for the month and landing 23.3% ahead of last year. The increase was primarily due to the multi-family construction regaining its footing, but single-family starts were up more than 10% and are now at a seasonally adjusted rate of 1.32 million, 23% ahead of last year.

Permits, which had lagged in late summer, also were up slightly, building on a solid increase in September. They too are at a recent high of 1.23 million.

There won’t be an update next week, but we are guessing you will probably be too busy eating to miss it. The following week will be chock-a-block with housing news so we will catch up then. Have a wonderful Thanksgiving and if you are traveling, do so safely.

Demand for Higher Loan Limits

The Employment Situation report for October was a solid one again, with 161,000 new jobs, less than analysts’ consensus of 178, but in the mid-range of their estimates. The unemployment rate fell 0.1% to 4.9%, which Econoday says some consider full employment. Probably the sweetest data nugget however was average hourly earnings. They rose “an outsized” 0.4% bringing the year-over-year rate to 2.8%, a post-recovery peak.

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Conforming loan limits, the maximum size of a mortgage that can be sold to or guaranteed by Fannie Mae and Freddie Mac, (and used by the VA and FHA as well) are adjusted annually but they have not budged since 2006. The limit was at $417,000 for most of the nation, although 294 “high cost” counties had limits as high as $721,050. Then the housing market crashed and Congress passed emergency legislation preventing any upward adjustment until national home prices returned to pre-crisis levels. Since prices are a hairsbreadth away from that goal, chatter about raising the limits has begun.

Black Knight Financial Services analyzed all loans originated just below and above the limit over the last year, looking at them in $1,000 “buckets” They found a pretty consistent number of originations in 15 of the 16 buckets just under the limit. In the 16th, the $416-$417,000 bucket, there is a 17-fold increase; 100,000 loans in that tiny little pail; 1.5% of all loans originated and 2,5% of the dollar volume. In the very next bucket, the one labeled $417,001, originations plummeted by 70%. This means, Black Knight explains, that many people are bringing money to the closing table or using “piggy-back” mortgages to fit under the limit.

Loans By Suzette - Mortgage Financing and Jumbo Loan Expert in Orange CountyThey also found that “piggy-back,” originations skyrocket right at the cusp of the loan limit. Loans in that final bucket are nine times more likely to have a second than other loans and one quarter of the total have one.

The take-away, Black Knight says, is a strong demand for a higher limit. The company estimates raising it by $10K would result in a 1% increase in lending– 40,000 more loans next year–$20 billion worth. There is a congressionally mandated formula for adjusting loan limits and this is the season. The Federal Housing Finance Agency should be unpacking their slide-rules soon.

Rent Relief

Is the end of seemingly endless rent hikes at hand? Laura Kusisto reports in the Wall Street Journal that apartment rents have actually come down in some of the nation’s priciest cities this quarter, perhaps the first sign that the six-year boom in rents is ending. It is a tiny beginning–rents are down by 3% in San Francisco, 1% in New York and have dipped by fractions in Houston and San Jose–but it marks the first declines in those markets since 2010.

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Furthermore, while rent growth still averages 4.1% nationwide, increases have slowed for four straight quarters and have even turned negative in key regions. This suggests, Kusisto says, that the overall market could be headed lower.

Those cities with the highest rents are likely also those that offer the best job opportunities to Millennials as they enter the work force. High rents have been cited by some studies as being, along with student loan debt, major reasons why Millennials are unable to save up for buying a home.

While it may take a while for any rent relief to be wide-spread, Catey Hill, an editor at MarketWatch suggests an alternative. Get a roommate. Not a terribly original idea but her numbers are compelling.

Many renters already share their space, with a significant other or perhaps with someone they had never met before the moving van showed up, but for those living alone, a roomie can mean significant savings. A person who opts to share a two-bedroom apartment and splits the rent 50/50 can save an average of $470 a month over the cost of occupying a one-bedroom apartment alone. And those pricey cities where millennials flock, the savings could be even greater; $1,106 in San Francisco, $810 in Boston, $564 in San Diego, $546 in Portland.
A few years of squirreling away such savings could substantially speed up acquiring a downpayment.

Actual housing news was in short supply this week, limited to the Census Bureau’s report on August construction spending which continues to be flat. Residential spending was down slightly with single family construction losing 0.9%, the third straight monthly contraction, putting it 1.5% behind August 2015. Multi-family construction remains about the only bright spot in the whole report. It was up 2.4% for the month, and is running almost 14% ahead of last year.

As hurricane Matthew bears down on the east coast, we hope you all stay safe.

A Respectable Report

Given the spectacular showing of new home sales in July–up 12.4% and topping an annual rate of 600,000 for the first time since the crash–no one really expected August sales to continue the breakneck pace. And they didn’t. But last week’s report from the Census Bureau and the Department of Housing and Urban Development was none-the-less respectable.

Sales of newly constructed homes were at a seasonally adjusted annual rate of 609,000 units, a 7.6% decline from the upwardly revised July rate of 659,000 and a 20.6% year-over-year gain. Analysts had expected sales to dive back down under the 600,000 mark.

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Inventories remain tight; there were 235,000 new homes available at the end of August, an estimated 4.6-month supply. Even that estimate is generous as only 132,000 of those homes are completed and ready for occupancy.

Sales of existing homes haven’t been nearly as ebullient as those of new homes in recent months, and are now lagging 2015 numbers. This week’s Pending Home Sale Index doesn’t hold much promise for those sales in the short term. After a very slight uptick in July they resumed their trend down, falling for the third time in four months and are now below last year’s level.

The final two July home price indices showed fairly steady gains. CoreLogic Case-Shiller’s national index had gains of 0.7% and 5.1% for the month and year, about the same as in June. Black Knight’s HPI gained slightly less for the month and slightly more for the year, but the difference is hardly worth mentioning. The new home sales report put the average price of a home sold in August at $363,600.

Fannie Mae (with Freddie Mac sure to follow) has institutionalized their new “trending credit” standard into its automatic underwriting system. First introduced last October, trending credit gives the equivalent of bonus points to borrowers with credit histories showing responsible management of their debt. This means paying off revolving debt or making more than the minimum monthly payment. It is a small change, but may make the difference in approval or denial for some borderline borrowers.

Finally, far be it from us to spread rumors–except for this one. Inside Nonconforming Markets says it is likely that the baseline conforming loan limit for Fannie Mae and Freddie Mac mortgages will rise at the first of the year–the first upward revision in a very long time. It isn’t expected to be a big move–the guess is to $422,000 from the current $417,000, but still helpful for some. No word yet if those areas considered high-priced markets will also have their limits raised.

New Homes On The Way

Despite a month-long tease by way of comments from various board members, the September meeting of the Federal Open Market Committee (FOMC) came and went this week leaving rates untouched. A hike in the fed funds rate did get three “yes” votes, two more than in August.

Whether in reaction to the FOMC decision or not, Freddie Mac said its 30-year fixed-rate mortgage gave back some of last week’s 6 basis point increase, retreating to 3.48%. Maybe more important than the 2-point dip is the hint that rates may not move inexorably upward.

Existing home sales declined for the second straight month in August, falling 0.9% from July to an annual rate of 5.33 million. Condo sales did reclaim part of their near 13% July nose-dive, rising 10.5%, but single family home sales lost 2.3%.

National Association of Realtors Chief Economist Lawrence Yun blamed the slowing sales on tight inventories and rising prices as evidenced by the Federal Housing Finance Agency Home Price Index. It rose nationally by 0.5% compared to 0.2% in June, a pattern repeated in most of the nine census divisions. The year over year gain also accelerated slightly from June which supports the trend CoreLogic noted earlier this month.

After hovering in a narrow three-point range for the last nine months, the National Association of Homebuilders Housing Market Index finally busted loose, rising six points to tie the post recession high reached last October. The index, which measures home builder confidence in the new home market, shows recovering satisfaction with the current level of sales activity and the prospects that activity will continue strong over the next six months.

Loans By Suzette - Mortgage Financing and Jumbo Loan Expert in Orange CountyUnfortunately, that confidence wasn’t reflected in the following day’s August residential construction stats. Building permits continue to lag behind the numbers authorized a year earlier and were lower month-over month for the third consecutive period, this time by 0.4%. The drag came from multi-family permitting, which declined by more than 8% while single family permits reclaimed the 3.7% lost in July.

Housing starts were down 5.8% from a month earlier, with the change shared fairly equally by the single and multi-family sectors, and up .9% compared to last year. Housing completions also fell compared to July, but are still running way ahead of August 2015.

The good news from the residential construction data is the potential for expanding new home inventories. There are over a million units of housing now under construction with work yet to start on another 100,000+ permitted units.

Another flood of sales and pricing news is on the docket for next week. Given the trend of existing home sales, the pending sales report is the one to watch.

Loans By Suzette - Mortgage Financing and Jumbo Loan Expert in Orange County

Rates Rise – A Great Time To Buy or Re-Fi

Why wait until the last minute? Several members of the Federal Reserve Board of Governors sounded more amenable to higher interest rates late last week so the markets apparently decided to get ahead of the game. While the next decision point on a Fed Funds rate hike won’t be until next week, mortgage and bond rates rose sharply last Friday, then took a couple of what one analyst called “pause days.” Still, mortgage rates moved back to June levels with the 30-year fixed rate at 3.50%.

To keep things in perspective, however, the current rate is only 8 basis points (bps) higher than Freddie Mac’s lowest post-Brexit rate and is 51 bps lower than at the beginning of the year. Buying and refi-ing continue to look awfully good.

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CoreLogic reports that more than a half-million homeowners regained positive equity in the second quarter, leaving 3.6 million still underwater. Homeowners nationally gained $646 billion in equity compared to a year earlier, largely due to rising home values.

In a now near-normal market, over two-thirds of home sales are to individuals buying with mortgages, where five years ago close to half were to investors and/or cash buyers. Chris Bowden, Freddie Mac senior vice president, says this means increased opportunities are there for first-time homebuyers “provided they have the patience and know-how” to make a good offer. He has some tips for doing so.

First, understand how much you can afford–not only your price limit for a house, but how much your budget can afford in monthly expenses for repairs, upkeep, and utilities. Your trusted mortgage professional will help you with this step.

Loans By Suzette - Mortgage Financing and Jumbo Loan Expert in Orange County

Second, with the help of your real estate professional, be prepared to act and react quickly. Tight inventories mean competition in many parts of the country. Get preapproved for a mortgage and otherwise get ready to make an offer when the right house comes along. (Bowden has more tips on how to successfully negotiate the purchase, but we’ve run out of room.) Call to discuss the next steps necessary for you to succeed in today’s vibrant market.

Next week we will get the scoop on the FOMC meeting along with construction updates and news from FHFA on home price appreciation. Stay tuned.

Jobs Return, Builders Don’t

We know by now that the housing inventory is the root of all evil, blamed for home sales that aren’t quite where they should be, the steady erosion of the homeownership rate, rising home prices, and rising rents.

One factor underlying the current tight supply of homes is the lack of single-family construction, especially in the lower cost tiers. David Randall, writing for Reuters, reported this week that this may be less a housing than an employment issue. An estimated 30% of construction workers left the industry after the housing crash and many apparently have no plans on returning to what has historically been a volatile industry. The National Association of Home Builders (NAHB) estimates there are now 200,000 unfilled construction jobs in the US, up 81% in two years. The dearth of electricians and carpenters is particularly acute.

Because of this shortage, home building is trailing demand and slowing the economy while rising building labor costs are forcing builders to exit the starter home market in order to maintain their profit margins. NAHB says the average construction cost of a single-family home has risen 13.7% while the total cost including land and marketing is up only 2.9%. Builders in many areas are turning away work and lawsuits are beginning to plague builders who fail to meet contractual deadlines.

And speaking of employment, the recent Bureau of Labor Statistics’ August Employment Situation Report while not bad, further dampened expectations that the Fed will move ahead with a rate hike this month. The economy created 151,000 new jobs in August (analysts were expecting 175,000) and unemployment remained at 4.9%.

A recent SurveyMonkey poll found that 19% of people who bought a house in the last year put in an offer without first seeing the place. Buyers of high-end homes were even more likely to take a blind plunge; 39% of those buying homes priced over $750,000 bought first; looked later.
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People who are relocating from afar often have no choice but to offer and even close on the sale before actually walking through the front door, and it is somewhat common for investors and those buying at foreclosure to do so. But offer deadlines and competition from other buyers are driving more and more people to rely on MLS descriptions and pictures, on-line videos and a trusted agent rather than actual showings.

Mortgage rates eased back a bit this week. If you are still thinking about buying or refinancing, this would be a good time to give me a call.

Waiting on the Fed Again

The markets were expecting that the week’s big news would be Federal Reserve Chair Janet Yellin’s speech on Friday, but it came and went without much of a stir. Yellin reiterated that the Fed continues to watch key economic numbers as they come in; and that, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case of an increase in the federal funds rate has strengthened in recent months.” But she didn’t say the magic words many were waiting for: just when such an increase will happen.

Federal Reserve Building, Washington DC, USA

So economists went back to waiting for the next big news–Friday’s report on August jobs.

Pending home sales were better than expected, rising 1.3% from June to make July the second best month, trailing only last April, since 2006. The Pending Home Sale Index had been expected to gain only 0.6% with some analysts even predicted in would fall nearly 2 percentage points month over month.

Black Knight Financial Services and S&P CoreLogic Case-Shiller came in with the last of the four major home price indices for July. While the four had a wide range of estimates of the monthly changes, they were in relatively close agreement on the year-over-year appreciation, ranging from 5.1% to 5.7%.

Fannie Mae and Freddie Mac gave early notice recently about a couple of upcoming changes. First, along with FHA and the VA, they have drafted the first changes in the Uniform Residential Mortgage Application in more than two decades. The new application won’t come on line for more than a year but it is hoped it will be more efficient for both lenders and consumers. It will also allow for additional information such as email addresses and mobile phone numbers. After all it is the 21st Century.
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The second announcement was of a new refinance product designed for borrowers with high loan to value ratios that preclude other loans. Income, asset, and employment verifications are streamlined and there is no minimum FICO score or maximum debt-to-income ratio as long as other eligibility criteria are met. The new loans will be available in October 2017 and are designed to replace the HARP program. Those loans, originally due to disappear at the end of this year, have been extended until September 30, 2017 to provide a bridge. Ask me about the details.

A Tale Of Two Reports

The contrast between the two July home sales reports that came out this week was pretty glaring. New home sales came in with an unexpected 12.4% increase over June and were up 31.3% from a year earlier. And everyone did a happy dance. Then the National Association of Realtors (NAR) released its existing home sales report.

But let’s look first at the good news. New homes sold at a seasonally adjusted annual rate of 654,000 units, up from 582,000 in June and the highest rate in nine years. Often the actual sales count for the month isn’t as strong as the annualized and adjusted estimate but that wasn’t the case this time. There were an estimated 57,000 homes sold during the month compared to 54,000 in June and 43,000 a year earlier.

Sales were strong in three of the four regions, especially in the Northeast, up 40.0% from June and 25% from the previous July, but were flat in the West, completely unchanged from the previous month. Even so, the region’s sales remained more than 11% higher than a year ago.

On the other hand existing home sales were relatively dismal and NAR placed much of the blame on inventories, which were shrunk on an annual basis for the 14th consecutive month. A 4.7-month supply is well below the six months considered a balanced market. NAR said these inventory pressures are beginning to affect not only choice, but affordability as well.


NAR Chief Economist Lawrence Yun said “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month. Realtors are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows.”

Sales were down 3.2% from June and were 1.2% lower than in July 2015. It was only the second time in 21 months that sales failed to exceed those a year earlier.

Condo sales were hit even worse, a 12.3% sales drop, and Yun said that was also a reflection of tight inventories. “With new condo construction barely budging,” he said, “and currently making up only a small sliver of multi-family construction, sales suffered last month as condo buyers faced even stiffer supply constraints than those looking to purchase a single-family home.”

There was good news from a market recovery standpoint. Distressed homes had the lowest share of sales since NAR started tracking them in 2009 and investors bought only 11% of all homes sold, back to pre-crash levels.

All in all, a mixed bag this week.

Loans By Suzette - Mortgage Financing and Jumbo Loan Expert in Orange County

On The Other Hand – Mixed Messages from Freddie Mac

Talk about mixed messages. Freddie Mac’s economists have lowered interest rate projections for the second month in a row, cutting 10 basis points (bps) off of their 10-year Treasury note projections for this year and 30 bps for next year bringing the averages to 1.8% and 2.1% respectively. This was on top of a 40 bps cut in each last month. They left this year’s average for 30-year fixed-rate mortgages at 3.6% (following a downgrade from 3.9% last month) but knocked another 30 bps off of the 2017 estimate, bringing it to 3.7%.

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But then William Dudley, President of the Federal Reserve Bank of New York told Fox News it might be time for a rate hike. Dudley, who serves as vice chairman of the Federal Open Market Committee (FOMC), said investors are underestimating the odds of this happening, perhaps as early as FOMC’s September meeting. Further, while investors also anticipate no more than one increase this year, he called that too low; stronger growth in the second half of the year would support higher borrowing costs, he said.

Granted, Freddie Mac’s economists are talking long-term and the Federal Reserve’s Dudley about very short term rates, but neither operates in a vacuum.

New home construction continues to continue, but that’s about it. The July numbers were lack-luster but slightly better than those in June when both housing permits and housing starts were below their year-earlier pace. Permits were down fractionally from June but managed to eke out a 0.9% increase year-over-year after falling behind on that measure by double digits in both May and June. Housing starts gained 2.1% from June and were up 5.6% from the previous July after a June-to-June deficit of 2.0%.

The housing construction numbers are confounding. They remain well below pre-crash levels and builder sentiment as measured by the National Association of Home Builders Housing Market Index this week remained stuck in the narrow three-point range (58-61) it has occupied since late last year. Realtors and economists alike are bemoaning the tight inventories of available homes, while potential buyers are discouraged by the effect of tight inventories on prices, yet builders appear to retain some discomfort with the sales outlook.
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Or maybe they are all too busy renovating. NPR reports skyrocketing spending on kitchen and bath remodels and other home fix-ups. They estimate about $324 billion will be spent on remodeling this year, about $40 billion more than was spent during the boom year of 2006. The price tag would be even higher, they report, except there aren’t enough tradespeople to meet the demand.

NPR says the remodeling boom is being stoked by rising home values and the low interest rates on home equity loans. Homeowners are also feeling better about spending money.