Happy Talk – Employment and Housing Optimism

And the word of the week is…. Optimism! The Employment Situation report and a second less well known jobs index both came up roses while a consumer survey revealed an unexpected burst of confidence about housing, the economy, and consumers’ personal finances.

The employment numbers showed that the June recovery from a staggeringly bad May held in July with 255,000 non-farm jobs created, 75,000 more than analysts had expected. The June number was also revised up to 292,000 from 287,000 and the report’s other metrics were also positive. The participation rate ticked up a tenth of a point, as did the workweek, its first move in seven months. Hourly wages rose by 0.3%.
Optimistic Job Market - Employment and Housing Optimism
The JOLTs (Job Openings and Labor Turnover) report for June posted a 2.0% increase in job openings to 5.624 million. The layoff rate dipped 10 basis points to 1.1%.

Econoday said of the employment report, “Slack is diminishing in the labor market and the pop higher in earnings could be a sign of things to come.” There is always a downside of course, and Econoday continued, “The hawks will come out of hiding following this report which definitely brings alive expectations for a rate hike at the September FOMC.”

Some of the labor market happy talk seems to be rubbing off on consumers. Fannie Mae’s Home Purchase Sentiment Index (HPSI) jumped to the highest level in the five-year history of the National Housing Survey on which it is based, rising 3.3 points in July to 86.5. Responses to six of the more than 100 survey questions are used to construct the index and all were higher in July. The greatest gains were the numbers of respondents who expect home prices to rise (up 8 points) and those thinking mortgages rates will fall (a 5-point gain.)

More consumers think it is both a good time to buy a home and a good time to sell; the latter was up 18 points since last year. Also rising was confidence in job stability; and while the number is still small, those reporting increases in household income.
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One survey question that doesn’t weigh into the HPSI calculation is whether respondents (both buyers and renters) plan to buy or rent their next home. Buying moved up 4 points to 67% while rent was down 5 points to a survey low. Fannie Mae VP Doug Duncan said they could mean that younger households may finally be shifting toward buying rather than renting in greater numbers.

Mining for News – A Slow Week on the Housing Front

It was an exceptionally slow week on the housing front but there were a few news nuggets scattered around. The Census Bureau’s report on construction spending shows an overall slowdown for what had previously been a real star of the recovery. Overall spending, which includes both public and privately funded building of schools, office buildings, hotels, roads, and everything else was down 0.6% from the previous month and remains only a sliver (0.3%) higher than in June of 2015.
Slow Week In The Housing Market
Housing however is holding its own. Spending on residential construction–which is almost entirely a private sector activity–was unchanged from May but, so far in 2016, it is running 7.7% ahead of the first six months last year. Single-family construction is up 10.6% year-to-date compared to 2015.
While all of the major home price indices for June appear to show home price appreciation is cooling nationwide, some areas with high demand and thin inventories are seeing a surge in prices due to bidding wars. Principal CoreLogic Economist Bin He writes in the company’s blog that multiple offers giving are driving sales prices well above the listing price in several cities, especially in California and Washington. In Santa Clara, for example, eight of ten properties recent sold for more than the listing price; in both Milpitas and Fremont it was seven in ten.Loans By Suzette - Mortgage Financing and Jumbo Loan Expert in Orange Couny
Of the sales analyzed by CoreLogic the boost in prices ranged from an average of 3.3% above list in Maple Valley, Washington to 12.2% in San Francisco. Bin He points out that inventories nationwide average a 3.75-month supply while in Washington it is 2.04 months and in California 2.6 months.
The post-Brexit decline in interest rates moved Black Knight Financial Services to examine changes in the refinanceable pool only two months after its last such analysis. The company said the 15 basis point drop in the first weeks after Brexit gave another 1.2 million homeowners an incentive to refinance, bringing the pool to 8.7 million homeowners, the largest since late 2012.
Black Knight points out that even where the monthly mortgage payment reduction is small, refinancing may result in substantial savings for those who can rid themselves of FHA or private mortgage insurance requirements.
Finally, despite low interest rates and a lot of other headwinds, Freddie Mac posted a $1 billion profit in the second quarter. This is bigger news than it may seem. The company lost nearly a billion in the first quarter of 2016 and it was expected it would need to borrow once again from the U.S. Treasury. Instead it will pay taxpayers a huge dividend.

A Fluke And a Bounce – 287k New Jobs Reported

The economic picture brightened considerably last week with the release of the June Employment Situation by the Bureau of Labor Statistics. The news that 287,000 jobs had been created that month placed the previous report for May in the category of a fluke, albeit a big one. That only 38,000 jobs had been created was more than disquieting; playing a big role in the Federal Reserve’s decision to forego a rate increase at its June meeting. The May report was downgraded even further last week, to 11,000, but the focus was all on the big June bounce.unemployed.jpg

How low can rates go? Even if they have reached rock bottom–most experts are hedging their bets–Freddie Mac is guessing they won’t exactly zoom back up. The company’s economists, weighing in with estimates of the impact of the UK exit from the European Union, have knocked down projections for average 2016 and 2017 30-year mortgage rates by 30 and 50 basis points respectively to 3.6% and 4.0%.

These low rates are expected to continue breathing life into refinancing. Freddie Mac has raised its forecast for that share of mortgage originations by 8 percentage points this year, to an average of 49%, a $100 billion increase in volume. So far they seem on point; the Mortgage Bankers Association reported that refinancing increased by 11% last week despite the holiday shortened workweek and on top of a 21% gain the week before.

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Many of those currently refinancing may have previously been locked into their existing loans by a lack of equity. It wasn’t that long ago–the end of 2010 to be precise–when nearly 29% of mortgages in the U.S. were “underwater;” 15.2 million homeowners who owed more than their homes were worth. Black Knight Financial Services reported in its current Mortgage Monitor that a 2% increase in home prices in the first quarter of this year has lifted another 425,000 of those borrowers into positive territory, reducing the negative total to 2.8 million borrowers or 5.6% of those with a mortgage.

The company estimates that U.S. homeowners now have $4.4 trillion in “tappable” equity, an average of $116,000 per borrower. That is cash that could be pulled out through refinancing or a home equity loan or used toward purchase of a more expensive home.

Still, Black Knight notes that the number of underwater homeowners remains more than five times the 750,000 pre-crisis average. At the current rate of improvement that normal level should be reached in late 2018.

The existing home sales report next week should hint at whether low rates are translating into purchasing as well as refinancing. Stay tuned.

Refi Mania – A Great Time To Refinance Your Home

The Brexit vote continues to reverberate nearly two weeks after it stunned financial markets. Joe Weisenthal reported for Bloomberg Markets that investors are seeking sovereign notes all over the world and on Wednesday both the Japanese 20-year bond and the Danish 10-year saw their yields sink into negative territory. Yields on longer term U.S. notes continue to spiral down as well.

Here at home, after an initial stock market crash wiped out billions of investment dollars in a few days, the blowback from the UK vote has been largely positive, although that could certainly change. The Dow rebounded nicely, giving back what it had taken and the run on bonds has had the usual effect on mortgage rates. Freddie Mac puts the current 30-year fixed rate at 3.41%. This is down 15 basis points over the last two weeks and only 10 basis points higher than the lowest-ever rate reached in November 2012.

The record and near-record low rates have revived refinancing–again. The Mortgage Bankers Association said its Refinancing Index surged by 21% from the week before and the refinancing share of loan applications topped 60% for the first time since last February.
Great Time To Refinance Home

Refinancing has proven to have more lives than the average cat and it may not be over yet. Back in March, after rates had dropped back significantly from the late 2015 spike that pushed them into the 4% range, Black Knight Financial Services did an analysis of the “refinanceable” population of homeowners. The company estimated the 30 basis point decline to that date in 2016 (the 30-year fixed rate was 3.65%) had increased the numbers of those who could potentially benefit from refinancing by about 1.5 million or 30% to a total pool of about 6.7 million homeowners. The analysis was based on borrowers with existing rates in the 4.5% range.

The company also set forth a scenario under which another 15 basis point decline, taking the 30-year rate to 3.50%, would provide a refinance opportunity for another 2.1 million borrowers. Given where the Freddie Mac rate is today, refinancing appears to be a long way from dead.

The first of the May price indexes is in, this one from CoreLogic, and it appears that the long-prophesized deceleration in price increases may finally be occurring. Prices gained 1.3% from April in the wake of the two previous months which had average increases of 1.95%. Year-over-year increases in the company’s Home Price Index have diminished every month since the beginning of the year, from 6.9% in January to 5.9% in May.

Quite a good week for those looking to buy or refinance.

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BRRR-Exit – A Surprising Turn For UK and the Stock Market

It wasn’t expected, which made it that much more of a shock. We closed out this report last week noting that the stock market was way up in anticipation that voters in the UK would choose to remain in the European Union. Then of course they voted to leave, surprising almost everyone and sending an immediate chill over world economies.

brexitstocksThe Dow Jones lost more than three times as much on Friday as it had gained on Thursday, closing down 611, and mortgage rates plummeted. Matt Graham, COO of Mortgage News Daily said post-Brexit Day One “joins ranks as one of the few days in history where rates have moved a full eighth of a point in a single day.” There have been only nine such days in the last decade, he added. “Lenders who were quoting a conventional 30-year fixed rate of 3.625% on Thursday were easily down to 3.5% the day after the vote.”

By Tuesday’s open, the stock market was putting concerns about Europe aside and the Dow has now regained much of what it lost but CNBC says “the global bond market is signaling that there’s plenty to fear.” On Wednesday, the 10-year Treasury Note was up slightly but the 30-year continued to head lower, to 2.26%. Its all-time low yield is 2.223%.

Best executions (the lowest rates for the most desirable borrowers) were quoted at close of business on Wednesday at 3.375 to 3.5% for conventional 30-year mortgages.

There was other news. Homebuyers continue to be confounded by shrinking inventories and sales are beginning to reflect it. The National Association of Realtors May Pending Home Sales Index (PHSI) which tracks new sales contracts was down 3.7% from April and that month’s index, which had originally posted a 5.1% gain, was revised down by more than a point. The index also fell below year-ago levels for the first time in 20 months, declining 0.2%.

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Both Case-Shiller and Black Knight Financial Services came out with April home price figures and both said national prices were up by around 1.0%. Case-Shiller reported a more modest increase than Black Knight, 5.1% versus 5.4%, but both numbers would indicate that price increases are slowly lessening. Prices in several West Coast cities are rising much faster than national numbers–nearly twice as fast in fact. Among them are Seattle, Portland, and Walla Walla which are being followed closely by such other western locations as Cheyenne, Salt Lake, and Denver.

A long weekend and short workweek ahead. Enjoy America’s big birthday bash but celebrate safely.

Twin Peaks – The Highs and Lows of This Week’s Housing News

It was a busy week for housing news and it covered the gamut; positive, negative, and fair-to-middling.

The National Association of Realtors (NAR) said existing home sales reached not one but two new peaks in May; the fastest rate of sales since before the crash and the highest median price ever. Sales of all types of existing units were up 1.8% from April to an annual rate of 5.53 million units, 4.5% higher than a year earlier. It was the fastest clip since sales posted an annual rate of 5.79 million in February 2007.

NAR said this rising demand along with lagging inventory pushed existing home prices up 4.7% to a median of $239,700, a 51st straight month of annual gains. The May median was the highest on record, surpassing the previous peak of $236,300 set last June.

The report also noted that distressed properties have dropped to a near inconsequential share of sales. Five percent of May sales were of owned real estate while short sales were down to 1%. A far cry from 2009 and 2010 when short sales sometimes constituted a third of the market.

New home sales weren’t nearly so upbeat. The May number wasn’t all that bad; analysts had anticipated a 9.6% retreat from the huge surge in sales the previous month and the May sales fell by only 6%. The kicker however was that a chunk of the reported 16.6% April increase evaporated as sales were revised down from 619,000 to 586,000. May sales were at a seasonally adjusted annual rate of 551,000, up 8.7% from May 2015.

The fair-to-middling part was the residential sales report. Both building permits and housing starts moved less than 1% from their April levels; permits went up and starts were down, however they diverged significantly in their year-over-year performance. Residential construction starts were 10.1% above those a year earlier while permitting lagged 9.5% behind.

As we go to press, voters in the UK are deciding whether their country will remain in the European Union. The so-called Brexit election has roiled markets all week and opinions vary on how the U.S. might be affected. When it comes to housing, a vote to leave is expected to spur investment in U.S. securities, driving interest rates down. But foreign money might also pour into real estate, increasing competition and home prices.

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National Association of Realtors’ Chief Economist Lawrence Yun said real estate in New York, Washington, Miami, Los Angeles and San Francisco are most likely to benefit from foreign buying, also possibly the Tampa Bay area in Florida, Chicago and Dallas.

At midday Thursday, the stock market was up strongly in what appeared to be a conviction that Brexit would fail at the polls.

UPDATE: What the success of Brexit means for America.

Proving The Point – Student loan debt slowing home buying

There is now some evidence for putting at least part of the blame for the enduring dearth of first-time homebuyers on student loan debt. The National Association of Realtors (NAR) recently conducted a survey, in conjunction with SALT, a consumer literacy program, on the topic. Respondents were student loan borrowers, none were homeowners and all were current on their student loans. The survey found that 43% owed between $10,000 and $40,000 while 38% had more than $50,000 in debt.

The National Association of Realtors and SALT show evidence putting blame for the enduring dearth of first-time homebuyers on student loan debt.
Nearly three-quarters of those responding said that their education related debt has delayed them from buying a home. The highest such responses (79%) came from those aged 26 to 35 who had between $70,000 and $100,000 in debt. Regardless of age and level of indebtedness more than half said they expect to be held back from homeownership by more than five years. The survey also found that this debt had delayed four of 10 respondents from moving out on their own after finishing college.

And speaking of debt, paying it off rapidly might soon bring an added benefit. Fannie Mae is about to start using “trended data” to determine payment patterns on credit card debt. A pattern of making larger than minimum required monthly payments will be factored into underwriting decisions and could help borrowers on the cusp of approval to make the cut.

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The company, with the assistance of TransUnion and Equifax, two of the major credit reporting agencies, will begin looking back at applicants’ minimum payments, actual payments, and account balances for up to 24 months to determine patterns. This underwriting change, which begins on June 25, will only apply to revolving credit accounts, not auto loans, student, or other types of debt. The company noted that borrowers who pay off their credit cards at the end of every month are 60% less likely to be delinquent on their mortgage than borrowers who only make their minimum payments, even if those minimum payments are made on time.

As expected, the May Employment Situation report put the kibosh on any plans the Federal Open Market Committee (FOMC) had to raise rates. Members had indicated that a hike at the meeting this week was likely, but that was before the Labor Department reported the worst job gains since 2010. FOMC’s press release following the June meeting restated that increases would be “gradual” but gave no indication of any timing that might be involved.

Meanwhile, the rates that really count for consumers continue to fall. Freddie Mac said the 30-year fixed-rate mortgage dropped by 6 basis points for the second consecutive week, now averaging 3.54%. This is 46 basis points lower than that rate at this time last year.

Fed Eyes Job Report – Jobs Down, Wages Up

The highlight – or maybe lowlight is more appropriate – of the economic week was last Friday’s job report for May. It was, to use a not so technical term, awful.

Instead of the 110,000 to 219,000 new jobs the experts were predicting, the Bureau of Labor Statistics reported that 38,000 non-farm jobs were created during the month. And that wasn’t all. The April jobs number, originally reported at 160,000 was revised down to 123,000 new jobs and a second round of revisions to March made for total downgrades of 59,000.

Of course there were a few semi-bright spots in the report. Wages were up month-over-month by 0.2 percentage points and the unemployment rate dropped from 5.0% to 4.7% but that was largely due to a drop in the participation rate.

As in the past, reaction to the report contained some good news. Goldman Sachs and others called any increase in the fed funds rate at the next week’s meeting of the Fed’s Open Market Committee (FOMC) dead on arrival and that consensus in turn brought an immediate reversal in mortgage interest rates that had been trending up for the previous three weeks. Within hours of the Employment Situation report one analyst said, “If a lender was quoting 3.75% yesterday, they’re likely quoting 3.625% today” on the same loan.

The declines continued into this week and as of Thursday morning the 10-year T-bill was down 17 basis points from a week earlier and Freddie Mac’s 30-year fixed rate reversed its climb and fell to 3.60%.

While rates are down, home prices continue to rise. Two of the five major home price indices are out for April and demonstrate nearly total agreement. The National Association of Realtors said they increased 6.3% year over year and CoreLogic put the change at 6.2%. CoreLogic also quoted a rather stunning March to April increase of 1.8%.

Average Interest Rate, 30-year Fixed-Rate Mortgages

Average Interest Rate, 30-year Fixed-Rate Mortgages

Finally, a new survey by Freddie Mac on homeowners over the age of 55 found that most are confident they will be able to enjoy a financially comfortable retirement. A majority also said homeownership makes financial sense at almost every stage of adult life, whether or not one is married or has children. They also said they were very satisfied with their homes, their communities, and their quality of life.

Whether you are over the age of 55 or nowhere near it, we hope you are satisfied with where you find yourself as well. Cheers!

Homebuyer Concerns – Too Hot, Too Fast

Two reports this week underline concerns that the housing market may be heating up too fast. Freddie Mac’s economists asked how high is too high when it comes to home prices and a survey found buyers are increasingly afraid of competition as they hunt for a home.

Conducted by a national real estate company, the survey asked homebuyers what worries them most as they seek to buy. Twenty-six percent cited affordability, but competition is rising as a concern, up 8 percentage points in six months to 19%. As the third major response, tight inventory is the major driver of competition.

The survey also found that high rents are driving people toward homeownership; it was the major reason cited for entering the market by 25% of respondents and 50% of first time buyers, nearly double that answer given by first-timers in a survey last summer. Life events, such as the birth of a baby, were given as the number one impetus for buying, but life events and high rents were the only reasons given by more than 10% of respondents.

The second report noted the difficulty of identifying price bubbles because of the sheer numbers of U.S. housing markets. Freddie Mac’s economists suggested a two-stage approach, first by “thinning the herd.” They identified ten markets where the median home price to median income (PTI) ratio was higher than each areas’ historic norms. They then applied the second stage analysis, looking at whether there was a geographic specific industry behind the price surge, if credit conditions (mortgage performance, employment) were stable, and finally if owners were using home equity to finance consumption.

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By all of these standards Freddie Mac found little evidence of prices that are approaching a risk level among the ten (two cities in North Carolina, three each in Florida and Texas plus San Jose and Portland)–but they warned that leveraging–i.e. cash-out refinancing and growth of HELOCs–would be the “canary in the coal mine” in areas with fast-rising home values.

And speaking of home values, they do continue to rise. The S&P Case-Shiller National Home Price Index rose 5.2% on an annual basis in March, a slightly lower increase than in February. The widely cited 20-City Composite posted a 5.4% gain, identical to the previous month. And speaking of bubbly, Case-Shiller notes that prices in three western cities, Seattle, Portland, and Denver, continue to rise by double digits.

Off and Running – Strong Spring Market

The spring market, which had pretty much staggered out of the gate, suddenly seems to have hit its stride. The three major sales indexes, existing homes, new homes, and pending sales, were all released this week and while all were strong, new home sales and pending sales were pretty spectacular.

New home sales, which had disappointed in March by dropping 1.5% came roaring back, rising by 16.6% from March (and those sales were also revised upward by 20,000 units). April sales were also 23.8% higher on a year-over-year basis.

The experts were as surprised as anyone by the new home numbers. They had been looking for sales in the neighborhood of 523,000, not the annual rate of 619,000 actually reported.

While they represent a small share of the nation’s home sales, the recovery in the Northeast region was especially impressive. New home sales were up in April by 52.8% from March and were a surprising 323.1% higher than in April 2015. The West also performed well, up 18.8% and 23.6%, respectively.

Pending home sales also surged, rising 5.1% against expectations of an 0.8% increase. The Pending Home Sales Index gained 4.6% from a year earlier to hit the highest level in a decade.

Existing home sales were solid if not stunning, up 1.7% from March and 6.0% on an annual basis. Condo sales were particularly encouraging, jumping up 10.3% from March and running almost 5% ahead of the 2015 pace.

The first of the home price reports for March from the Federal Housing Finance Agency (FHFA) indicates that, so far at least, home price acceleration is continuing–with prices up 6.1% year-over-year. With inflation barely there, home prices represent real growth in household wealth.

An article in the CoreLogic blog asks, if mortgage credit standards are so high, and average FICO scores have risen dramatically (50 points in the last ten years), why are loan denial rates so low? The author, CoreLogic economist Archana Pradhan, concludes that borrowers are “self-sidelining.”

What does that mean? Potential borrowers with credit scores in the mid-600 range are deciding on their own they can’t qualify and are simply not applying for mortgages. This, Pradhan says, has different policy implications than does too tight credit. Perhaps more awareness of the broader scope of loan opportunities needs to be communicated to the consumer. Call for the latest information.

We hope you enjoy the long holiday weekend while remembering the true meaning of Memorial Day.

Happy Memorial Day