Skip to content

More Affordable Than We Think?

March 14, 2018

More Affordable Than We Think?

The relentless march higher continues. Home prices continue to post at higher levels, as they have for the past five years., Case-Shiller, and Trulia data show home prices relentlessly rising across the country month after month.

The latest CoreLogic data confirms the trend. CoreLogic data show home prices in its latest home price index rose 6% year over year in January. It’s really dog-bites-man news. Six appears to be the magic number. CoreLogic data continually show 6% year-over-year increases. The latest data offer no surprises, but it does fortify the strength of the price trend, which is unlikely to reverse this year.

The price trend invites an obvious question: Have homes become less affordable?

Given the trend in home prices, and mortgage rates in recent months, the immediate answer would be yes. The answer wouldn’t necessarily be wrong, but it wouldn’t necessarily be right, either.

A new Trulia study shows homes have become more affordable over the past 40 years. The study shows that the median household can afford a home 1.5 times more expensive than the median home price. Back in the days of polyester, bad haircuts, and the last decent Rolling Stones album (Some Girls), the median household could afford only 75% of the median home price.

The trend in affordability is attributable to the trend in productivity. We’re more productive than we were 40 years ago. The more productive we are, the higher salaries we can command. The rise in salaries has outpaced the rise in home prices.

But homes are no homogeneous mass. The housing market is a very heterogeneous market: homes vary by size, location, accoutrements, design, demography, and, of course, price.

When heterogeneity is considered, homes can be less affordable, and Black Knight proves the point. Their Mortgage Monitor report shows some housing tiers are becoming less affordable. Homes across tiers don’t appreciate in unison (which averages obfuscate); they appreciate at varying rates. No surprise here, Black Knight’s data show tier 1 (lowest 20%) home prices rising faster than other tiers. The lower-priced homes have been outpacing the average by nearly two percentage points annually.

Affordability is unlikely to improve in the lower tiers. That’s the bad news.

The good news is that more millennials are moving into the housing market, according to the analysts at Morgan Stanley, as reported by Barron’s. The analysts forecast annual household formation of 1.35 million over the next five years. The average was 925,000 in the fourth quarter of 2017.

At least mortgage rates have been more accommodating of late. Rates have held firm over the past week. Yes, they’ve been holding in a higher range – 4.5% to 4.625% in recent weeks – but MBA data show more borrowers are able to avail themselves of mortgage financing these days.

So, are homes more or less affordable these days? The answer is yes.

Everything in Moderation
Mortgage-rate volatility has subsided over the past week. The mortgage rates we have today could easily hold through the week. Market participants are unsure how President Trump’s latest round of tariffs will impact GDP and corporate-earnings growth. (President Trump’s chief economic advisor has quit because of the tariff brouhaha.) Money should stay sequestered in haven investments – which include U.S. Treasury securities – over the near-term.

The latest Federal Reserve Beige Book, a report on Fed officials’ outlook on the economy, is larded with “moderation.” Fed officials see moderate employment growth, moderate economic growth, and moderate wage-rate growth.

Moderation in the growth of the important economic variables is to credit markets what the color beige is to a listed home: it’s inoffensive. It fails to motivate action one way or the other. Everything holds its place.

So, given what we know today, we see mortgage rates holding the tight range that they’ve held for the past couple of weeks. This suggests that any improvement in mortgage rates offers a reason to lock.

Meet the New Boss, Sorta Like the Old Boss.

March 7, 2018

Meet the New Boss, Sorta Like the Old Boss.

We have a new Federal Reserve Chairman. Jerome Powell leads the troops these days. As Fed Chairman, Powell will recurrently be run through the Congressional wringer. His first run through occurred last week.

From what we gleaned from Powell’s testimony, the new Fed boss holds similar views to the old Fed boss, Janet Yellen. Powell, like Yellen, holds a positive outlook on the economy and inflation. Like Yellen, Powell plans to raise the federal funds rate this year. Powell’s optimism, which exceeds Yellen’s, has led some market participants to believe that four rate increases could occur before the end of the year.

You would think the prospect of four rate increases would have interest rates trending higher. They did initially, but they then drifted lower. The yield on the 10-year U.S. Treasury note is down roughly 10 basis points compared with the yield last week.

Mortgage rates followed suit. Yes, they remain near a four-year high, but there was some back-sliding, at least at the national level. Quotes on a prime 30-year fixed-rate conventional mortgage remain range-bound between 4.5% and 4.625%. Closing costs, though, have become more accommodating to prospective buyers.

Ascribing an accurate cause for lower yields and interest rates is more art than science. Perhaps more market participants expect inflation to remain subdued longer into the future. Stock-market volatility could be a contributing cause. Stocks have been bobbing and weaving more than usual of late. Higher stock-market volatility increases demand for haven investments like U.S. Treasury securities.

We can only guess the cause; we know the effect.

When market participants expect interest rates to fall, they will fall immediately, and when market participants expect them to rise, they will rise immediately. Expectations set the current rate.

Future interest rates follow a random walk. The path can be deciphered if you can accurately anticipate what will coalesce with other market participants. Many of us can accurately decipher the path a few times. Rare is the individual who can do it consistently. But we’ll keep trying.

Mortgage credit availability has been one positive that’s accompanied rising mortgage rates. The MBA’s Mortgage Credit Availability Index trended higher in January. Availability increased across the board. The good news is that more borrowers have availed themselves of a purchase mortgage. Purchase applications rose 6.0% in the February 23 week.

As for the choice between lock and float, our opinion remains unchanged. Rate pullbacks, as minor as they may be, offer the opportunity to look. A meaningful pullback — such as a pullback to mortgage rates that prevailed to start the year — is a long-shot bet at best. Our experience suggests that it’s best to avoid long-shot bets.

No End to the Frustration
A comment from a Kelli M. at Mortgage News Daily accurately captures the housing zeitgeist in which we live.

Kelli M. says, “I’m a frustrated buyer. The supply is very low and the houses still on the market are flawed or too high [too highly priced].” Ms. M. was referring to the lower end of the market. She went on to observe that homes at the higher end — $600,000 and above — just sit. Kelli M. didn’t tell us anything we didn’t know: Many home markets are bifurcated markets. That said, it’s telling when a layperson makes the observation.

Prices are the overarching issue. Prices across the 20 cities covered by the S&P CoreLogic Case Shiller Home Price Index show prices up 6.3% year over year in December. None of the regions the index covers showed real, inflation-adjusted price declines in 2017.

We see no end to this continuous march to higher ground. Home prices will climb. The lower-end of the market will likely remain on the steepest incline.

Costs are a driving factor behind rising home prices. Due in part to tariffs applied to imported Canadian lumber, the cost of two-by-four lumber, is at a record high. Other input costs could follow lumber’s lead. The New York Times reports that Secretary of Commerce Wilbur Ross is recommending a 24% tariff on all steel imports. Lumber is a key input to new construction and home upgrades, steel is another.

As for the human element, don’t expect a reprieve on that end. CNBC reports that skilled construction labor is not only expensive, it is difficult to find. Wages will likely trend higher.

So, expect more of the same on housing: rising home prices and rising frustration among potential buyers like Kelli M.

The 5% Rate Quote: Sooner or Later?

February 28, 2018

The 5% Rate Quote: Sooner or Later?

A four-year high, at least that’s the Mortgage News Daily verdict.

Rate quotes on the prime conventional 30-year mortgage center on 4.625% – a four-year high – more often than not these days. Rate quotes clicked higher after the minutes of the latest meeting of Federal Reserve officials were released. The minutes showed officials were more upbeat on the economy than most market watchers expected.

Fed officials expect U.S. gross domestic product (GDP) to grow at a 2.5% annualized in 2018. The growth rate is considered bullish. The bullish outlook, in turn, increases the likelihood of at least two more increases in the federal funds rate.

The federal funds rate is an overnight lending rate. Its impact on long-term lending rates can be minimal, as it has been in the recent past. The prospect of strong GDP growth stoking inflation fears is another story. Consumer-price inflation posted its largest increase in a year in January. Rates on the long-end of the rate curve have been rising.

Inflation influences the long end of the yield curve more than the short end. We’ve seen the yield on the 10-year U.S. Treasury note rise 60 basis points over the past three months. That’s a 25% increase. Rates on the prime 30-year loan are up roughly 12% over the same period.

The trend in mortgage rates has been up, to state the obvious. Does that mean it will continue to be up?

Inflation, again, is key. If consumer-price inflation comes in hot over the next couple months, long-term interest rates will trend higher. But it’s not a done deal. Consumer-price inflation was hotter than expected than January, but it was still (at the core) below the Fed’s target rate of 2% annualized growth.

We’ve seen the yield on the 10-year Treasury note level off in the past few days. Quotes on mortgage rates have also leveled off. Stock-market volatility has some investors seeking havens. Treasury securities are preferred havens. We’ve seen some firming of Treasury prices. We’ve seen some firming of mortgage-rate quotes.

It’s also worth noting that the Fed continues to support the mortgage market.

The Fed holds roughly $4.4 trillion of assets on its balance sheet. Most of these assets comprise Treasury securities and mortgage-backed securities (MBS). The Fed has said it would like to “normalize” its balance sheet. In other words, the Fed would like to reduce its asset holdings. (Before the 2008 financial crisis, the Fed owned roughly $870 billion of assets, mostly short-term Treasury bills.)

The fact is, though, the Fed continues to hold a lot of MBS. There has been only a slight decline since the Fed announced in October that it wanted to wind down its balance sheet. Its MBS holdings had drifted slightly lower. They’ve drifted higher in recent weeks. The dollar value of the Fed’s MBS holdings is about where it was in October. The Fed is no rush to normalize.

So, what about mortgage rates? If by “later,” we mean the second half of 2018 for a 5% rate quote to materialize on the 30-year loan, we would bet later. Fortunately, no one forces our hand.

Business as Usual
We could call it a tale of two markets.

We have the new-home market where optimism dominates. Home builders, in particular, are optimistic. Confidence, as measured by the home builder sentiment index, continues to hover near a decade high.

Confidence is backed by activity. Housing starts continue to trend higher, with starts posting at 1.326 million on an annualized rate in January. Capacity is the leading challenge these days. Builders struggle to meet strong demand.

We also have the existing-home market, where stagnation dominates. Existing-home sales were down in January, falling 3.2% to 5.38 million on an annualized rate. The decline was led by the multi-family component, but the single-family component also reported a decline. The dual culprits of low supply and rising prices are again to blame for lack of sales growth.

Higher mortgage rates have taken some steam out of the market. Purchase activity has waned in recent weeks. The good news is that Realtors continue to report strong traffic, so the interest is there. Buyer interest occupies a higher plane, even if mortgage rates occupy a higher plane. Strong buyer interest in the face of rising financing costs speaks well to underlying housing fundamentals.

Inflation Leads Mortgage Rates to Higher Ground

February 21, 2018

Inflation Leads Mortgage Rates to Higher Ground

Federal Reserve officials have wished for more consumer-price inflation in recent years. It appears their wish has finally been granted by the powers able to grant such wishes.

The Labor Department reports that its Consumer Price Index (CPI) rose 0.5% in January. The percent increase was higher than most market-watchers’ estimates. The consensus estimate called for only a 0.3% monthly increase.

Stock prices initially fell on the hot CPI report, but they soon recover. Bond prices also fell, but unlike stock prices, they stayed down. The yield on the 10-year U.S. Treasury note rose above 2.9%. It remains above 2.9% as we write. The yield hasn’t been this high since January 2014.

As the yield on the 10-year U.S. Treasury note goes, so go mortgage rates. Quotes on a prime conventional 30-year fixed-rate loan hit a four-year high this past week. Mortgage News Daily’s latest survey shows that 4.625% has become the predominant quote across the land.

The ascent has certainly been palpable. We entered 2018 with quotes on a prime 30-year loan vibrating between 4% and 4.125%. Quotes are up roughly 50 basis points in the past seven weeks.

Inflation is to blame, though Interesting enough, the CPI isn’t all that heated if we consider the year-over-year change. The CPI shows consumer-price inflation up a tepid 2.1% over the past 12 months.

Of course, the future is what matters. Perhaps bond investors are extrapolating the latest monthly CPI reading to indicate the year-over-year rate will rise. Or perhaps bond investors take their cue from other data sources.

Another inflation measure, the Fed’s Underlying Inflation Gauge (UIG), shows 12-month inflation growth at 3% in December. That’s the highest rate recorded in nearly 11 years. The last time the UIG measure was this high was September 2006.

Consumer-price inflation remains within the realm of Fed reasoning, according to the CPI. The UIG tells a different story. Perhaps bond investors at least consider the UIG when deciding on portfolio allocations.

The bottom line is that inflation rules the roost these days. Past increases in the federal funds rate (the rate the Fed manipulates) have had little lasting influence on longer-term credits, such as mortgages. Inflation expectations are another story. More market participants anticipate rising inflation, which is evinced in rising yields on long-term credits.

Many borrowers long for mortgage rates that existed only a couple months ago. People naturally anchor their expectations to the recent past. For this reason, a borrower might be tempted to float in hopes better rates will materialize. The journey can be perilous.
The mortgage-rate waters are as treacherous as they’ve been in years. It would be worthwhile to wait for a few days of calm (flat or easing rates) before venturing a float.

The Key Variable for Sustaining the Housing Market
Raising mortgage rates have led to lower mortgage activity. Refinance activity understandably trends lower. Purchase activity has also trended lower in recent weeks. Lower purchase activity has dropped the year-over-year gain to 4%.

Market watchers are concerned rising mortgages will derail the housing market. A Mensa IQ is hardly needed to understand that rising financing costs lower affordability without a compensating drop in home prices.

Of course, affordability can be sustained in other ways, such as through rising wages or additional compensation. The good news is that recent tax reform, which lowered the corporate income tax rate to 21% from 35%, has motivated more companies to either increase wages or offer additional bonuses.

Major companies like Wal-Mart, Comcast, Charter Communications, Apple, Cisco Systems, Delta Airlines, AT&T, Boeing, Home Depot, CVS Health, and others are funneling more money to their employees through higher wages and bonuses. They can funnel more to their employees because lower corporate-income-tax rates means they funnel less to Washington.

Many of these same companies are also funneling more money to their shareholders through increased dividends. It’s fair to assume most working Americans own a dividend-paying stock either directly or indirectly, such as through a mutual fund in a company-sponsored retirement account.

Yes, mortgage rates are higher, but so is borrower income. Therefore, we remain upbeat. We hold our upbeat sentiment with important company.

Home builders remain upbeat as well. The home builder sentiment index posted positively for February. Home builders are particularly upbeat about first-time buyers entering the market. First-time buyers are leading beneficiaries of higher wages and tax-driven bonuses.

Falling Stock Prices Halt (Briefly) the Mortgage-Rate Rise

February 16, 2018

Falling Stock Prices Halt (Briefly) the Mortgage-Rate Rise

Falling Stock Prices Halt (Briefly) the Mortgage-Rate Rise: To say stock prices have been volatile over the past week is to say Eagles QB Nick Foles played a decent game in the Super Bowl. It’s to understate the obvious.

The Dow Jones Industrial Average dropped 1,175 points last Monday. The point drop, in absolute terms, was the largest on record.

When things get a little testy in the stock market, investors seek havens elsewhere. U.S. Treasury securities are frequently the haven of choice. The price of the 10-year U.S. Treasury note was bid higher to see its yield lowered by nearly 12 basis points.

Stock prices rallied over the subsequent days. Prices of U.S. Treasury securities, in turn, fell. Yields rose.

Mortgage-backed securities (MBS) take their cue from long-term U.S. Treasury yields. Mortgage rates take their cue from MBS. Long story short, mortgage rates fell and then trended higher. They trended high enough to touch recent highs set the week before.

We thought we would see a little more down drift in mortgage rates. The bond-market response to the stock-market route was more tepid than expected. The prospect of rising consumer-price inflation and three increases in the federal funds rate tempered investor enthusiasm for bond havens.

Enthusiasm was tempered further by the employment numbers for January. Another 200,000 payrolls were added for the month. The number was strong, but wage growth was the real story.

Hourly wages grew 0.3% in January, while wage growth in December was revised higher to 0.4%. The year-over-year rate of wage growth stands at 2.9%. This is the highest annual increase since the economic recovery began in 2009.

Wage growth due to productivity growth is never an issue. If employees are more productive, and if employers can sell more product profitably, employers will logically offer higher wages to lure employees. (But keep in mind, wages are relative. A potential employee will move to another job only if the wage is higher than the one he or she currently receives, ceteris paribus.)

Wage growth across the board, on the other hand, is a monetary phenomenon. New money the Federal Reserve injects into the economy can slither into asset prices, consumer prices, and wage prices. We’ve seen asset prices rise. We see that consumer prices are rising. We could see wage rates rise at an accelerating rate.

We could see a rise in inflation pervade the entire economy.

If this occurs, the Fed is sure to continue raising the fed funds rate. More important from our perspective, investor interest in long-dated bonds would continue to wane. Interest rates, including mortgage rates, would continue to rise.

A lot of theorizing, to be sure, but rising interest rates are what market participants anticipate these days. Any deviation from the script — such as a dip in mortgage rates — should be viewed as an opportunity to lock.

Is Rising Market Volatility in Our Best Interest?
We refer to stock-market volatility, which is really a euphemism for falling stock prices.

Falling stock prices occurred on the previous Monday: stock prices fell, and so did interest rates. Mortgage rates are a version of interest rates. They, too, fell.

Good for us, at least for the short term. But to answer the question, no, stock-market volatility isn’t in our best interest.

For one, cosmic justice frowns upon engaging in schadenfreude — pleasure derived from another person’s misery. In addition, falling stock prices, though good for interest rates, would be a net negative, principally for their impact on the wealth effect.

Rising stocks raise the wealth effect — emotions associated with changes in investment and asset values. A positive wealth effect — rising investment value — imbues people with a sense of comfort and security, which prompts spending. Spending on big-ticket items, like homes, are keen beneficiaries of a positive wealth effect.

Mortgage rates were a hot-button issue five years ago. Today, the issue has cooled. Job security, productivity-driven wage growth, the wealth effect are more influential considerations. The good news is that all three trends positively.

So, if higher mortgage rates are the price to pay for a positive wealth effect, so be it. We don’t see rising mortgage rates derailing housing and mortgage lending. Purchase-mortgage activity supports our assertion. It’s mostly up this year, even though mortgage rates are up too.

A Rising Start to 2018

February 8, 2018

A Rising Start to 2018

Market participants have anticipated rising mortgage rates for a while. Some have anticipated for years. If the recent trajectory of mortgage rates sets the tone for 2018, no one needs to anticipate anymore.

To belabor the obvious, mortgages are on a rising trajectory. Mortgage News Daily’s latest survey shows the range of quotes on a prime 30-year fixed rate loan at 4.375%-to-4.5%. The range was last this high in March 2017, which was a brief outlier. Before that, we have to go back to 2014.

A respite in the near future appears unlikely. The Federal Reserve is expected to raise the federal funds rate when Fed officials meet in March. Futures traders are betting a 77.5% chance the Fed will raise the range 25 basis points to 1.5%-to-1.75%.

If we look further afield, the same traders offer the best odds on the fed funds rate being raised two more times — in 25-basis-point increments — past the March increase. The best odds are given on the fed funds rate ending the year in the 2%-to-2.25% range.

The fed funds rate is an overnight lending rate among commercial banks. It’s a short-term interest rate, which has had a marginal and fleeting impact on long-term interest rates in the past. This go-around we have a few new variables in play: Major tax reform, higher GDP growth expectations, and a shrinking Fed balance sheet (tentative) favor higher interest rates over lower interest rates.

Inflation, though, could be the most influencing variable. Consumer-price inflation has been dormant (by official Fed measures) since the 2008-2009 recession. Fed officials are bullish on inflation: They see it rising more this year than in past years. (Fed officials are singularly attracted to inflation because of a singular phobic fear of deflation.) If the Fed is right in its forecast, mortgage rates are more likely to maintain the current trajectory.

With the important variables aligned on the same side of the fence, the broad trend for mortgage rates is negative. A major shock — a stock-market correction, a geopolitical conflagration, an encompassing political scandal, or some such outlier — would be needed to get rates trending lower.

This isn’t to say minor pullbacks can’t occur. If they do, they surely offer an opportunity to lock. That said, floating and hoping is risky business. Yes, you can look like a genius if you time it right.
But you can never know if it was timed right because of genius or chance.

All good things must end — a party, a vacation, life, the sun. We can add low interest rates to the list. Though the end is eventual, it doesn’t mean its imminent, but recent market trends point to the end being more imminent than not.

Look Beyond the Seen to the Unseen
Let’s wander off course with an observation and a thought experiment.

The observation: Home prices have risen relentlessly at the national level since the start of the decade. They continue to rise to this day. Rising input costs are key contributors. No cost has risen more than lumber. The NAHB tells us lumber prices have risen 30% since summer. For this, we can thank the 20.8% tariff the U.S. Commerce Department slapped on imported Canadian lumber.

The Commerce Department slapped Canadian lumber with the tariff because it claims the Canadian government is subsidizing Canadian lumber. This allows Canadian lumber providers to sell at a lower price — a price that hinders U.S. competitors.

Now for the thought experiment: Let’s take it to the extreme. Let’s say the Canadian government is willing to subsidize its lumber industry to the point that the providers can give lumber to the United States. U.S. lumber providers would go bankrupt, no doubt. But what about U.S. lumber consumers?

Home prices would be significantly cheaper. Demand for homes would rocket. More homes would be built and sold. People who bought products made with lumber would have more money. Taken in total, we would have more money that could be spent on many other goods and services. We’d also have more money to invest.

U.S. lumber providers would suffer an obvious immediate loss from free Canadian lumber. But lumber consumers suffer a far greater loss with a tariff applied to Canadian lumber. Lumber providers are a tiny, concentrated constituency. The rest of us are a large, disbursed constituency. The former has much more political influence than the latter.

So we ask, do the benefits of the U.S. tariff on Canadian lumber outweigh the costs?

What does the new tax plan mean for homeowners? Read More at %LO Blog Page%

February 2, 2018

What does the new tax plan mean for homeowners? Read More at

Near the end of 2017, the federal government passed one of the most significant pieces of new tax legislation in years, known as the Tax Cuts and Jobs Act. With an unusually short time between the bill’s creation and its final approval by President Donald Trump, taxpayers would be forgiven if they felt unsure about its ultimate effects on their budget. For homeowners in particular, the new tax law could change how some of us approach tax planning and budgeting. For others, though, the overall impact may be minimal.

Knowing exactly how the TCJA will affect your finances can be difficult without the help of a tax professional. However, here are a few key changes and possible effects to be aware of now:

Mortgage Interest Deduction
One provision of the new tax law that’s specific to residential real estate concerns changes to the mortgage interest deduction. Under previous tax rules, homeowners with mortgages valued at or above $500,000 could deduct what they paid in interest on those loans from their annual taxable income, with a maximum deduction of $1 million per year for couples filing jointly.

Under the provisions signed into law, any mortgage taken out after Dec. 15, 2017 will be subject to a lower deduction cap of $750,000, down from $1 million. That could mean higher tax bills for some homeowners, although this deduction is only used by a small number of households mostly in high-priced markets. Those who had already been taking advantage of this deduction on mortgages taken out before Dec. 15, 2017 will not be impacted.

Local and Property Tax Deductions
One change to the tax code that affects homeowners more broadly involves how they pay property taxes or any taxes specific to their county or state. In the past, taxpayers could choose to deduct the cost of any state and local taxes – including those assessed on property and income, or sales taxes – from their annual income. Now, those deductions will be subject to a limit of up to $10,000 per year for those filing jointly. Previously, there was no limit on these deductions.

This change is offset somewhat by the new, larger standard deductions available to most taxpayers ($12,000 for single filers or $24,000 for joint filers). Since many people choose to take the standard deduction rather than itemize, the net effect of this change may be limited or inconsequential. Some states do not even impose their own property, income or sales taxes anyway. However, homeowners in cities or states with higher-than-average tax liabilities who usually deduct those costs could see their tax bills rise next year.

Fortunately, as far as preparation for tax returns due this April, it’s business as usual for most American homeowners. But it’s a good idea to take time to estimate how the new tax law could change next year’s bill, and understand any steps that should be taken in the meantime to more adequately prepare.