The Fed & Mortgage Rates
written by Tom Witzel
Last Updated: Monday, May 05, 2008
I received the following information from one of the lenders I work closely with and would like to share it with you. Contact me if you have any questions about the information.
Will the recent cut in the fed funds rate translate into lower mortgage rates? The answer is an equivocal yes and no. It's possible we'll see lower rates on some adjustable rate mortgages, but it's no slam-dunk. ARMs are more closely linked to the fed funds rate than fixed-rate mortgages, to be sure, but have only fallen about half a percentage point since September. ARMs played a leading role in the recent foreclosure fiasco, which has kept their rates higher than what would normally be expected.
Fixed-rate mortgages, on the other hand, are driven by rates on 10-year treasury notes. Rates on a 30-year fixed mortgage are typically 1.5 percentage points higher than the rate on the 10-year Treasury note, but because of increased risk perception – brought on by higher foreclosure rates and a stagnating housing market – that premium has expanded to 2.3 percentage points.
The 10-year Treasury note rate, in turn, is driven by inflation expectations. On that front, rising inflation concerns are pushing 10-year treasury rates higher.
So what's the outlook for mortgage rates? The focus is shifting back to inflation, which means rates are unlikely to go much lower. But while inflation could pressure 10-year treasury rates, a narrowing risk premium could offset the impact on fixed-rate mortgages. In other words, odds favor rates moving higher, but not much higher, so anyone sitting on the sidelines waiting for a drastic improvement is likely waiting in vain
Market Recap
written by Tom Witzel
Last Updated: Tuesday, April 29, 2008
One of the lenders that I work with sent me the following information and I think it bears reading. Let me know your thoughts.
There were few surprises to speak of last week, especially on the housing front, where home sales continued along their well-established downward trajectory.
Existing-home sales fell 2% to a seasonally adjusted annual rate of 4.93 million, the National Association of Realtors said. Meanwhile, the inventory glut persists in the new-home market, where sales dropped 8.5% to an annual pace of 526,000, the fewest since October 1991.
Surprisingly, there are glimmers of hope. The median price of existing homes rose to $200,700 last month from a revised $195,600 in February, the Realtors' report showed. What's more, the Office of Federal Housing Enterprise Oversight's home-price index showed prices rising a seasonally adjusted 0.6% in February from January, the first monthly gain since June. While it's too early to call a bottom, one could argue that home sales could stabilize (at lower levels) by midyear.
One could also argue that the subprime and Alt-A segments of the mortgage market are also stabilizing. Although delinquencies continued to rise during March, roll rates – the percentage of troubled mortgages that move from one delinquency state to another (i.e., 30- to 60-day delinquencies) – decreased across all vintages, while cure rates – troubled loans that were successfully worked out – increased slightly across all but the 2002 vintage, according to Clayton Holdings.
We've mentioned before that efficient markets are synonymous with confidence and liquidity – the result of investors' appetite to underwrite risk and savers' appetite to provide leverage to investors who want to underwrite risk. As risk appetite increases, liquidity follows, producing an increase in overall confidence.
Perhaps higher interest rates could increase both liquidity and confidence. Higher rates would strengthen the U.S. dollar – which has been in a free fall the past two years – and, therefore, strengthen foreign confidence in the U.S. economy. Walter Bagehot, a 19th century British economist, noted as much 140 years ago when he called a seizing of internal markets "a domestic drain” and the flight of capital abroad "an external drain." Bagehot argued that raising interest rates restores foreign confidence and makes domestic banks more willing to lend.
But would higher rates further ravish the housing market? Interest rates exert influence on home prices, to be sure, but the relationship is surprisingly tenuous. In 1980, the prime 30-year fix-rate mortgage averaged 13.7%, rising to 16.1% in 1982. Home prices during that period tumbled over 20%. From 1984 through the present, mortgage rates have steadily trended lower, but in 1989 the housing market endured a major 15% correction. Of course, it's enduring another correction today on relatively low rates.
At this stage in the game, more willing lenders are more important to reviving the housing market than marginally lower interest rates. After all, what good is cheap money if no one is willing to lend it?
More Positive News!
written by Tom Witzel
Last Updated: Monday, April 28, 2008
I read this article over the weekend and when you combine with my posting from Friday it looks like we may be at the bottom and starting to recover in the housing market. I hope you find it as interesting as I did.
Real Estate Outlook: Index Says Positive Growth Underway
by Kenneth R. Harney
You might not hear much about them on TV or in the papers, but there are some economic signs popping up right now that are -- at the VERY least -- encouraging for housing and real estate.
Take the gold standard of all forward indicators for the U.S. economy -- the Conference Board's "Index of Leading Indicators," which is based on a broad survey of industry data and predicts economic activity three to six months down the road.
The latest Conference Board index registered its first increase in six months. Now I know that all we hear about these days is recession: it's either already here or it's about to happen.
But the index suggests that there should be positive growth underway in the second half of the year, if not sooner.
Buttressing that forecast is a new report from the National Bureau of Economic Research which found that industrial production in the U.S. showed an unexpected uptick in March.
Here are some other noteworthy developments this past week:
z Applications for mortgages to buy houses were up again, it was the second straight week, according to the Mortgage Bankers Association of America's national survey. Applications for FHA loans to buy houses jumped by three and a half percent -- and conventional purchase applications rose 2.1 percent.
z The federal government reported that house prices nationwide stopped their slide between January and February -- and actually increased by six tenths of one percent.
z Interest rates remain well under 6 percent, according to the Mortgage Bankers, with 30-year fixed rate loans last week averaging 5.74 percent and 15-year loans at 5.27 percent. The Federal Reserve is likely to knock another quarter percent off short term rates next week.
z Freddie Mac announced plans to pump up to 15 billion dollars into the "jumbo conforming" loan market -- those are for high cost areas that really need some stimulus right now, like California.
Now, we're the first to admit that these positive-sounding economic developments are not ballgamechangers for real estate.
We've still got lots of housing inventory to sell before calling an end to the down cycle -- and total sales dipped 2 percent in March, according to the National Association of Realtors.
We're still dealing with a lack of confidence on the part of some consumers who are afraid that maybe prices still have a ways to fall.
But here's the point: It's undeniable that there are some glimmers out there that the underlying economy
and financing marketplace, which after all are what support real estate activity, finally may be headed
in a positive direction.
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