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Yellen and the Future of the Housing Market

The United States Federal ReserveLast week was a quiet week for reported economic data due to the government shutdown.  Leaders on Capitol Hill are still in negations to hopefully pass a bill both sides can agree to before the looming date of October 17th (the date the U.S. would default on some of its obligations).  President Barak Obama announced last Wednesday his nomination of Janet Yellen as the next chairman of the Federal Reserve.  If confirmed by the Senate, she will replace Bernanke on February 1st of next year.  Bernanke has been known for his low interest rates and easy money policies.  How will the housing market respond to Yellen as the next chairman?

A Yellen-led Fed would remain very dovish on monetary policy. Dovish advisors, like Bernanke, prefer low interest rates in hopes of spurring consumer spending and borrowing; thus, leading to economic growth (in theory).  The effects of inflation resulting from this type of policy are believed to have very little impact in theory (in theory).  Increased borrowing in terms of home loans would help to boost the housing market as homebuyers could lock in lower rates.

The housing market has responded very positively to the low interest rates which began when QE1 was initiated.  Yellen would likely keep rates low for some time.  She has articulated the case for upholding a highly accommodative monetary policy, as far out as late 2015.  “She’s even more of a dove than Bernanke is, but there’s nobody who can say she’s not credentialed because of the range of experience she’s got,” said J. Alfred Broaddus, a former president of the Federal Reserve Bank of Richmond.

While many people don’t support the dovish philosophy, in the short term housing and housing stocks are in a position to benefit from it.  According to recent housing statistics, it appears the growth in housing has been slowing and Yellen might be able to get it moving in the right direction again if she utilizes a robust QE-program.  Having this foresight about the future of the Fed has helped stocks to bounce back as they assume status-quo will continue during the transition of chairmen and beyond.

Several economists believe the long term effects of this policy will not go unnoticed, but housing and the stock markets aren’t concerned with long term repercussions at the moment.  Instead they continue to drink the Kool-Aid and enjoy the gains.  If tapering is far out in the future under Yellen’s direction, demand for housing would likely increase due to prolonged low rates.  An increased supply of construction jobs and building supplies would be necessary to meet demand for home building.  If the market’s supply can’t keep pace with demand as recently experienced, home prices could continue to climb.

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Home Sales Starting to Level Out

Recent housing data show that the market might be cooling off.  Weak housing figures reported in July gave the Fed one reason to continue its asset purchases without tapering.  August reports from the Commerce Department last week showed a 7.9 percent increase from July in new single-family home sales.  This equates to 421,000 annualized sales vs. 390,000 annualized sales reported in July.  While this news in isolation seems to be hopeful, this figure fell marginally below economists’ expectations and is still near the lowest levels reported this year.  After some have labeled this market a bubble, it seems it might have lost its hot air.  Economist Patrick Newport from HIS Global Insight commented, “New home sales were up in August, but this market has lost momentum.”

existing home sales


Pending Home Sales slowed in August according to The National Association of Realtors (NAR).  The Pending Home Sales Index declined 1.6 percent to 107.7 from 109.4 in July.    Lawrence Yun, NAR chief economist said, “Sharply rising mortgage interest rates in the spring motivated buyers to make purchase decisions, culminating in a six-and-a-half-year peak for sales that were finalized last month.  Moving forward, we expect lower levels of existing-home sales, but tight inventory in many markets will continue to push up home prices in the months ahead.”  Some economists expect 2014 to see less than a 1 percent jump in sales.

While new home sales data appears to be decelerating, so do home prices.  The median new home price in August dropped to $254,600.  According to reports, the median price has been in decline since the month of May.  Data on existing home sales prices released from NAR mirrored that of new home sale price numbers.  The median price range is at $212,000 in August which is down from a median sales price of $213,500 in July.  This is good news for homebuyers who have been looking for declining house prices, whether new or existing.  Some industry leaders are predicting only a 5-6 percent rise in median existing home sales in 2014 with some improvement in inventory levels.

Mortgage rates are starting to fall again.  The 30-year fixed mortgage rate was 4.5% and last week’s 30-year rate was 4.32 percent, according to Freddie Mac.  The Fed’s decision to delay tapering could help mortgage rates to continue on the decline if the Fed unwinds its balance sheet slowly.  Then homes sales might start to pick back up.

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Federal Reserve Decision Benefits Homebuyers

After the much anticipated announcement of the Federal Reserve’s decision and lots of market speculation that tapering would finally begin, Bernanke announced the continuation of its easy money policies (QE).  The markets had already baked in the expectation of tapering along with several traders making bets on the Fed’s play, only they found out the punch bowl was still flowing and wouldn’t be taken away in the near term.  Bernanke hasn’t yet seen the recovery in the economic data that he has been watching for.

Existing home sales reported a 6-1/2 year high in August showing strength in the housing market and strong demand.  According to The National Association of Realtors (NAR), existing home sales increased 1.7 percent last month which was more than economists expected.  This increase puts sales at an annual rate of 5.48 million units.  Much of this recent rush to buy can be attributed to the expectation of rising mortgage rates and the increases in home prices.  Homebuyers want in on the action before interest rates and home prices over heat.  Bernanke’s latest announcement, however, should help to ease the 30-year fixed mortgage rate until the next Fed meeting.

TDemand for houses on property market, business metaphorhe median home sales price last month rose to $212,100; a 14.7 percent year-over-year jump.  Although inventories are still tight and as a result, prices continue to inch upward, homebuyers can still lock in a historically low mortgage rate giving them more purchasing power.  While this scenario seems great for prospective homebuyers, at some point the punch will run out and the party will end.  “Clearly the Fed has been spooked by the extent of the surge in long-term interest rates over the past couple of months and the impact that now appears to be having on the housing market.  But there is a dangerous circularity here because the initial rise in long-term rates was largely a response to the Fed hinting that it would begin to reduce its asset purchases sometime in the second half of the year,” Paul Ashworth at Capital Economics commented.

Mortgage rates fell after the Fed made its announcement.  They are still above the low of 3.35 percent seen in May but with the Fed continuing to print money, mortgage interest rates could stay around this range for a while longer, giving those who haven’t purchased yet, the opportunity to get in the game.  If interest rates withdrawal to the lower rates seen earlier in the year, it’s quite possible that more mortgage refinancing would occur.

It will be interesting to see what the next few months of housing data bring from this recent news announcement.  The housing market should experience some more positive gains if all plays out like the Fed has planned.  Growth and demand can remain strong with low interest rates and this gives homebuyers time to still purchase as rates rescind, but the underlying cost of artificially inflating the housing market remains to be determined.

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Jumbo Mortgage Rates, Not So Jumbo

JumboRateNotOnce in a blue moon economic theories and trends break from conventional rationale.  Over the past two weeks this “blue moon” appeared in the mortgage loan market concerning conventional and jumbo mortgage rates.  For the first time that lending executives can remember, the interest rate on the jumbo 30-year fixed-rate mortgage (4.71%) dropped slightly below the conventional 30-year fixed rate of 4.73%, according to the Mortgage Bankers Association.  “In my 30-year career, I’ve never seen non-conforming loans priced below conforming loans,” said Brad Blackwell, executive vice president of Wells Fargo Home Mortgage.  Typically jumbo mortgage rates are at least .25% above conventional mortgage rates.

Jumbo mortgages exceed the $417,000 limit set on conventional loans (in most areas) and are not backed by government-sponsored enterprises (GSEs).  Conventional mortgage loans fall below $417,000 and are backed by GSEs (Freddie and Fannie). So what is causing this anomaly?

Conventional mortgage loans have become more expensive due to higher guarantee fees charged by GSEs to the companies that sell their loans.  These fees have increased by more than .25% over the last three years.  The higher guarantee fees result in higher mortgage interest rates.  Conventional mortgage rates are also closely tied to how mortgage backed securities (backed by GSEs) trade; and therefore, follow the increase in mortgage backed interest rates.

Jumbo mortgage loans are a bit different in nature.  They are not as securitized as conventional mortgage loans, tend to be carried on the bank’s balance sheet, and are tied to the bank’s cost of capital, which has not increased in this environment.  Lou Barnes, a mortgage banker in Colorado commented on this situation, “Commercial banks are just desperate to book an asset that will pay something.”

Wealthy Americans are taking advance of this rare occurrence and going on a shopping spree.  According to recent data from Realty Trac, the percentage of people buying houses in the price range of $1-$2 million with a jumbo mortgage increased to 63% in July, up from 49% a year over year.  Properties priced at $2-$5 million increased to 46% from 27%.  This could be correlated to still historically low interest rates and the opportunity to buy property before prices appreciate further.  For these wealthy Americans who are still sitting on lots of cash, this is more of an investment and financial decision rather than needing a roof over their heads.  Some believe this trend could continue if the cost of capital for banks remains stable while demand for mortgage loans continues to grow at a steady pace.

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Mortgage Applications and Home Prices Look Up

As the markets continue to ride the proverbial roller coaster, housing data has managed to avoid such large swings and appears to be steadily chugging onward and upward; showing a clearer picture than the last few weeks.  The Mortgage Bankers Association’s mortgage application activity index reflects refinancing and home purchase demand.  It reported a 1.3% increase during the last week of August which comes off the heels of a 2.5% drop the week prior.  Last week’s refinance index increased 2% from the week before.

render of rising arrowThis increase in mortgage applications could be due in part to the 30-year mortgage rate which dropped to 4.73% from its high earlier this year of 4.80%.  The slight drop in interest rates has also encouraged current homeowners to refinance before rates go any higher, even though they are still very low.  Some economists expect that as the fed begins to taper bond purchases, the housing recovery may in the long term slow and lose its momentum, meaning mortgage applications and home prices could top out.  For now, it could encourage potential home buyers to get off the sidelines and get in the game before rates rise even more and before home prices tick even higher.

The monthly CoreLogic report indicates that home prices, including distressed homes, jumped 12.4% higher in July from a year ago (1.8% up from a month ago).  This is the 17th month in a row for home prices to increase.  “Looking ahead to the second half of the year, price growth is expected to slow as seasonal demand wanes and higher mortgage rates have a marginal impact on home purchase demand,” said Mark Fleming, chief economist for CoreLogic.  This high number is also in part due to fewer distressed homes for sale.  Home prices were up 11.4% excluding distressed home sales over the last year.

The current supply of properties for sale is tight, which is also helping to push home prices higher.  Recently, home builders have slowed their pace of construction, not keeping pace with the demand for new homes, leading to lower inventory numbers.  Demand for housing is supported by the recently reported mortgage application numbers.  Some believe this situation won’t change much over the course of this next year.  Recalling from Econ 101, tight supply and strong demand will push home prices up whether they are new builds or existing homes.  The biggest threat to this bullish story in housing continues to be interest rates and how quickly they move up.

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Mixed Signals in the Housing Market?

Growing home sales graphic  designThe economy and the housing market seem to be at a cross roads right now with some economic indicators showing signs of growth and others showing signs of stalling or a slight retraction.  It seems as though everyone is holding their breath to see if the Fed will decide to begin tapering this next month or continue its rounds of bond buying.

For the month of June, U.S. single-family home prices rose at a slightly slower pace than in previous months.  The S&P/Case Shiller composite index which is comprised of 20 metro areas around the U.S. rose .9% on a seasonally adjusted basis.  May’s number was a 1% increase.  If you compare home prices year-over-year in June they jumped 12.1%.  This is down slightly from May’s year over year jump of 12.2%.  Could this be a signal the housing market is cooling?

On CNBC’s “Squawk on the Street”, Robert Shiller, Case-Shiller Index co-founder & Yale University professor of economics said on Tuesday, “Obviously we’re in a housing recovery, at least for the short term…Housing is a market with momentum and right now, the momentum is up…In the single family realm, I think that there is a chance that there is a weakening and there is all this fear about the tapering… The housing market has gotten very speculative and it goes through big cycles…It’s a roller-coaster, that’s what these markets have become.”

Home prices are still up double digits from a year ago but home sales show a more mixed picture of the housing market.  Last week the new homes sales figure dropped 13.4% in July to its lowest level in 9 months.  This was well below economists’ expectations and could be attributed to the increase in mortgage rates over the last few months.  However, existing home sales for July were strong and jumped 6.5% from June according to Mortgage News Daily.  Pending home sales index showed signs of weakness; it fell 1.3% from June to July.  This could be a foreshadowing of weaker home sale closures in the next few months.

Chief economist of the National Association of Realtors (NAR), Lawrence Yun, commented on these recent housing market figures. “The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown.  However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West.”

The month of September should give a clearer understanding of the direction of this current housing market.  Until these next figures are released, it seems that the housing market will try to decide whether it’s still in a bull market.

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Wait Times Shorten for Past Foreclosure Borrowers Seeking FHA Loans

The financial crisis that began in 2008 affected most Americans in some big fashion or another.   Whether it was the loss of a job, home, savings and/or retirement fund, or mounting student debt loans with no job prospects for new graduates, Americans are slowly regaining the financial foothold they lost.

The economy has shown traction in job creation.  Unemployment claims have dropped to near 6 year lows and the housing market appears to be thriving; U.S. existing home sales, released this week, jumped to their highest level in over 3 years to 6.5% in July.  The slight bump in mortgage rates does not seem to be deterring homebuyers just yet as rates are still historically very low.

But some have not been able to take advantage of this opportunity of low rates.  Several CLose Up One Hundred Dollar BillAmericans are still dealing with the effects from the massive foreclosures that ensued.  As they work to rebuild their credit and finances, and once again attempt to lay claim to the American Dream of home ownership, a new change in the FHA loan rules should help make this easier to accomplish.

The Federal Housing Administration (FHA) has amended the waiting period for borrowers who foreclosed on their home and are seeking to qualify for an FHA loan.  Originally, the wait time to qualify was 3 years after a foreclosure and 2 years after the conclusion of a bankruptcy.  Now, borrowers who sought bankruptcy, foreclosure, short sale, or deed-in-lieu can hope to qualify for an FHA loan in as little as 12 months if they meet certain requirements.

Borrowers will have to show proof that household income fell at least 20% for the last 6 months and that this drop was attributed to unemployment or some other event out of the borrower’s control.  Also required, proof of 12 months of house payments made on time, documentation showing at least 1 hour of approved home counseling completed and evidence the borrower has fully recovered from the event.  This new change for FHA loans are applicable to case numbers assigned on or after August 15, 2013 and will be effective till September 30, 2016.

Upon announcement of these changes, Commissioner of the FHA, Carol Galante, stated that the “FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”

This may be the break that some borrowers were hoping to catch.  It will be interesting to see how much this contributes to new and existing home sales over the coming months, if at all.

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Mortgage Rates and the Purchasing Power of a Dollar

Recent testimony by Fed Chairman, Ben Bernanke, has indicated a desire to begin tapering quantitative easing (QE) over the next few months but has stressed that interest rates will remain unchanged until certain economic indicators reflect an improving job market.  Interest rates have been held at record lows while the economy tries to get moving at full speed again.  Bernanke has stressed that he will continue to keep interest rates close to zero percent at least until 2015.

But mortgage rates have already started to climb as the housing sector grows legs.  The 30-year fixed-rate mortgage for this week is 4.56% and the 15-year fixed-rate mortgage is 3.62%.  While historically this is still low, these rates have increased by about 1% over the last 3 months.  Mortgage rates haven’t moved this much at such a quick pace since 2009.  So what does this mean if you are looking to purchase a home in the near future and why should you care about mortgage rates and monetary policy decisions by the Fed?

When mortgage rates rise, the purchasing power of the dollar diminishes in regards to home buying.  The degree to which it diminishes depends on how much mortgage rates fluctuate (inflation has a strong effect on purchasing power too, but that’s another conversation).  A home buyer is more concerned with the monthly cost and affordability of the house rather than just the sticker price of the house.  This is where mortgage rates can dictate how much home is actually affordable.


As Mortgage Rates Rise, Purchasing Power Falls

A 1% increase in mortgage rates will reduce purchasing power by 10.75%.  Likewise, if rates decrease by 1%, a homebuyer will gain a 10.75% increase in your buying power.  What does this look like?  A homebuyer originally decided they could afford to purchase a $600,000 house when rates were at 4.5% (assuming a 30 year loan).  If rates jumped to 5.5% they would now only be able to only afford a $535,000 house.

Even though mortgage rates are starting to creep up, they are still historically at all-time lows which translate into historically high purchasing power.  Comparing rates from early 2011 to late 2012, purchasing power grew more than 22% and has continued to grow as mortgage rates have continued to fall.

The longevity of this current mortgage rate environment will be affected in part by Bernanke’s actions to begin tapering QE and raising the Federal Funds Rate, which could lead to further gains in mortgage rates.  It will be interesting to see if the increase in mortgage rates recently have a negative effect on July’s Pending Home Sales from June’s Pending Home Sales number.

For information on effective ways to manage institutional and individual portfolios nationwide, or to shop for real estate visit First Preston HT.  Like us on Facebook. Follow us on Twitter.