Exciting news here at Whittaker Gregory Burton as a new web site is coming very soon. This new web site will allow you to register for a free appraisal on your successfully closed loan with Whittaker Gregory Burton, allow you to get a free pre appraisal on the property your looking to purchase or refinance! Plus tools and resources for your knowledge of what to expect and the many loan programs that I offer. Check back in a few days.
Several new reports confirm the housing market is soaring right now, but the headlines don’t tell the whole story.
On Friday, the National Association of Realtors (NAR) reported July’s existing home sales came in at an annual pace of 5.86 million homes. This crushed forecasts calling for 5.38 million, and demolished last month’s reading of 4.70 million. To top it all off, we haven’t seen a higher number since 2007! Great news, right?
Actually, yes, this is great news. The home sales market is doing every bit as well as anyone could hope for given the circumstances. But visual takeaway on the chart is misleading.
Our eyes might see the blue line at the highest levels since 2007 and conclude the housing market is as strong as it’s been since then. In a way, it is. July’s home sales were indeed higher than any other July in the past 13 years. But it remains to be seen if more homes will be sold this year vs last, even though the chart refers to the “annualized pace” of sales.
In NAR’s words, “the annual rate for a particular month represents what the total number of sales for a year would be if the relative pace for that month were maintained for 12 consecutive months.”
From there, we have to ask ourselves why July was so stellar. There’s no question homebuying demand is strong and that it might be even stronger if there were more homes on the market. But there’s also no question that a vast amount of demand that would otherwise have been seen in the previous months was pulled forward into July.
For instance, the 3 month total of unadjusted home sales from April through June 2019 was 1.526 million. Contrast that to the same time frame in 2020 which saw only 1.255 million–a gap of 271k sales. Adding in July drops that gap to 214k, and if we compare Jan-Jul, the deficiency drops to only 145k. That means 2020 isn’t quite on track to beat 2019 unless sales continue to outperform.
Still, the fact that we’re in a position to have such a discussion speaks volumes, given the obvious headwinds. It also helps us understand why construction-related housing data is doing so well. With so few existing homes coming to market, new homes have to rise to meet demand. Builders are as busy as they can possibly be, and it shows in this week’s confidence data from the National Association of Homebuilders (NAHB).
In separate data from the Census Bureau out this week, construction metrics painted a similar picture.
The Housing Starts data offers an important reminder. Notice the strong numbers at the end of 2019. In fact all 3 of the charts above were at the best levels in more than a decade in late 2019. Why?
Simply put, 2018 sucked. Rates were high. Stocks stumbled. And there were grumblings about the post-tax-cut economic expansion fizzling out. As 2019 progressed, we were reminded just how powerful a massive drop in interest rates can be–both for stocks and homebuying demand (and refinance demand, for that matter).
Given the power of low rates and the extraordinary length of time we’ve spent pushing into record low territory, everyone would like to know how much longer this will last and if we’ll see even lower rates. That’s something we’ll have to assess one week at a time. No one really knows when rates will bottom out without the benefit of hindsight.
What we do know is that this week’s market movement did more to reinforce the low-rate narrative than to threaten it (unlike last week, which saw rates move higher at the fastest pace since June).
The last point of order would be that US Treasury Yields are not a perfect indicator for mortgage rates, even though they’re perennially used for that purpose. Most recently, the surprise announcement of a new fee on refinance transactions caused a knee-jerk reaction in the mortgage market. It ended up affecting both purchases and refis, and by much more than the amount implied by the fee.
Had the housing agencies not implemented it so abruptly, things would be very different, but the damage is done. This is the reason that mortgage rates were noticeably higher at the beginning of the week even though the bond market said they should be lower. From here on out, we expect them to be better-connected, but still prone to inconsistencies for the next few weeks.
Ny HSH Market Trend
August 21, 2020 — The resiliency of the housing market coming out of the pandemic lockdown is on full display this week, and we’ll probably see a little bit more of that next week, too. Leading up to the pandemic, low and still-falling mortgage rates had already been driving demand into the housing market, a trend that was keyed by the Fed’s slashing of rates in the latter half of 2019 to try and offset an economy that was flagging due to trade troubles. Home sales had begun to kick higher in the last couple of months of the year, and helped by a warm winter, the spring housing season for both existing and new homes seemed to be getting an early start in 2020.
Then came the coronavirus outbreak, and the hard-stop of economic activity. Over a span of a few months, sales of new homes dropped more than 25%, and sales of existing homes slumped by about 32% as folks were concerned about venturing out to see homes and sellers were reluctant to let folks wander in their houses. Uncertainty over jobs and incomes and a rough period in the stock market and more was likely to blame for the drop in new home sales, but regardless of the reasons, sales pulled back.
Over this time, the demand for housing became pent-up, and perhaps even enhanced somewhat by mortgage rates sliding to new record low levels on several occasions. As we’ve come to understand to a greater degree, the COVID-19 shutdown and economic interruptions have hurt folks of moderate means to a greater degree (and still are), but the reality is that relatively few of this most affected group were likely to be homebuyers in the near term. As such, their inability to engage the market hasn’t had much of a damping effect on sales, at least so far.
The otherwise pent-up demand for housing has been or is being expressed, and what would likely have been a robust spring housing season became a robust summer housing season, and will probably help the fall to be a pretty solid affair, too. Debt and other concerns aside, the demographics are supportive of demand, as millennials are in their prime homebuying years. As well, there is purportedly a new exodus out of the condensed spaces of major metro areas into the suburbs (and beyond) happening, arguably due to coronavirus-related work changes, fewer amenities available in cities due to partial or complete closures of shops/restaurants/museums, etc. In some areas there is also a difficult political climate or rising lawlessness providing additional impetus to move elsewhere.
With these factors in mind, sales of existing homes bounced 24.7% higher in July, according to the National Association of Realtors, following up on a 20.2% jump in June in smart fashion. With the increase, the annualized rate of sale moved to 5.86 million, the highest level since late 2006, and the gain completed a “V” shape that spanned the last six months, with February (the other leg) sporting a 5.76 million pace. Of course, the rest of the existing housing story is again familiar; inventories of homes available to buy thinned out again to just 3.1 months at the present rate of sale, again close to a record low. Juiced by demand, prices of existing homes — which had cooled back in 2019 to a more moderate pace — re-accelerated to levels seen earlier this year, posting a year-over-year rise of 8.5%, and landing at a new record high median price of $304,100 for the month.
In this case, lower mortgage rates are both the cause of the demand that sparked prices and the cure for them. With existing home sales being tallied in the month in which the deal closes, July’s figures represent contracts being signed in late May and June. A median price some $10,000 higher in July compared to June only meant an increase in monthly payment of perhaps $20, as a decline in mortgage rates helped provide a partial or perhaps even a complete offset. With lower mortgage rates still in July and into August, odds favor more upward pressure for prices amid little inventory to purchase, but this combination — higher prices, nothing to buy — ultimately has a throttling effect on sales of existing homes. We saw that kind of tempered market back in 2018 and into 2019.
Although we won’t see what happened with sales of new homes in July until next week, all signs point to a very solid month. The National Association of Home Builders released its August Housing Market Index; at a value of 78, it is now at an all-time high (spanning 35 years). Sales of single-family homes moved up to 84, a 22-year high (and just 2 points below the record); expectations for sales over the next moved up to 78, a very robust level, and the measure of traffic at showrooms and model homes popped 8 points higher to an all-time high of 65. Builders are ebullient, and should be; Even with a long uptrend in sales of new homes the pace of construction and sales still has a good bit of upside available to get back to what might be considered a “normal” pace.
Busy builders are happy builders, and we saw a 22.6% increase in housing starts for July, which came after a surges of 17.5% in June and 11.1% in May. Starts have nearly returned to pre-pandemic levels and are now running at a level closer to pre-pandemic times, with a 1.496 million annual rate of construction. Not a perfect “V” shape, but pretty close. Starts of single-family homes flared higher by 8.2% to a 940,000 clip, but multifamily starts sported a 58.4% increase, jumping to 556,000 annualized units. Permits for future building surged, too, rising 18.8% to 1.495 million for the month. Single-family permits rose 17% to 983,000 and multifamily 22.5% to 512,000 for the month, so builders are not only busy now, they expect to continue to be well into the months ahead.
But what could temper these rosier sales and outlooks? An economy that struggles to get into a higher gear. Yes, growth in the third quarter will show a significant rebound compared to the gaping hole of the second, but that won’t change the reality of millions of folks out of work, or that there are extraordinary supports underpinning financial markets, or that without another round (or more) of fiscal stimulus and perhaps even more monetary policy accommodation that the risks of relapse into recession is very substantial.
The Fed has taken extraordinary, unprecedented steps already, and has been successful in many ways. In the minutes of the late July meeting, the central bank noted that “market functioning across a number of market segments remained stable at significantly improved levels. In Treasury and agency mortgage-backed securities (MBS) markets, many market functioning indicators had returned to levels prevailing before the pandemic, and, as a result, purchases were conducted at the minimum pace directed by the Committee. Importantly, with conditions in MBS markets continuing to stabilize, primary mortgage rates fell to historically low levels over the intermeeting period.”
The Fed also noted that “Substantial fiscal policy measures – both enacted and anticipated – along with appreciable support from monetary policy and the Federal Reserve’s liquidity and lending facilities were expected to continue bolstering the economic recovery, although a complete recovery was not expected by year-end.” That said, the Congress is still busy arguing over what kind of stimulus is warranted, and how much, and who gets the support, but the Fed acknowledged that “additional fiscal aid would likely be important for supporting vulnerable families, and thus the economy more broadly, in the period ahead.”
What more can the Fed do? At least a few things are on the table: “A number of participants noted that providing greater clarity regarding the likely path of the target range for the federal funds rate would be appropriate at some point.” This could take the form of either “outcome-based” (e.g. growth, joblessness or inflation reach certain targets) or “calendar-based” approaches, where the Fed pledges to keep rates low for a given time period. Both have been used before with useful effect; alternative methods of keeping rates at a given desired level probably won’t be utilized anytime soon, as “many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the Committee could reassess in the future if circumstances changed markedly.” This approach and other things such as a negative policy interest rate are probably not going to happen — or at least the Fed would prefer not to have to use them, anyway.
Outside of housing, there are some clues that activity has cooled from a re-opening bounce. Two local measures of manufacturing activity show this, as reports from the Federal Reserve Banks of New York and Philadelphia both downshifted in August. The FRBNY’s local gauge dropped 13.5 points, falling from 17.2 in July to just 3.7 in August – positive, but just barely so. A measure of new orders turned negative, posting a -1.7 mark, but the employment metric in the report edged higher, adding 2 points to climb to 2.4 for the month. Still, that was a value good enough to be the best since February, so that’s something. Just next door in the Philly Fed’s district, things cooled a bit, but not to the degree seen in New York. This local barometer slid by 6.9 points, sliding to 17.2 and although still solid has faded over the last couple of months. Orders eased a bit, falling 4 points to 19, and employment stepped down from a big gain last month, declining 11 points to 9 for August. There are more such reports due yet to come this month, but the early read is that activity is softening.
Softening, too is the trend in the index of Leading Economic Indicators. The Conference Board reported that their gauge rose by 1.4% in July, a value fair enough if rather below the 3.1% and 3% pace of the two prior months. This broadly suggests that economic activity in July cooled but remained on an upward path, but also suggests that there isn’t a whole lot of momentum to power us through the end of the summer and into the early fall.
It’s hard to get a clean read on labor markets, what with all the extra-cash distortions. Two weeks ago, initial claims for unemployment benefits slipped below 1 million for the first time since the pandemic shutdown; however, it wasn’t clear whether this was related to the expiry of the “bonus” $600 benefit being added on top of the typical support amount. For some folks losing jobs it may not have been worth filing right away if the bonus wasn’t being paid, or that it might have been a stronger incentive to seek out another job at full scale rather than accept the reduced benefit. In the latest week, August 15, initial claims popped higher by 135,000 to 1.106 million, as an executive order was signed by President Trump to add an additional $300 bonus (possibly $400) to weekly unemployment checks. This may have prompted some folks to file, since even a $300 kicker might more than cover the loss of wages. We’ll see if there is any follow through to this in the weeks ahead.
Applications for mortgage credit continue to wax and wane, albeit at elevated levels. The latest week was a wane, as the Mortgage Bankers Association reported a 3.3% decline in new mortgage applications. Requests for purchase-money mortgages ticked 0.8% higher for the week while those for refinancing dropped by 5.3% as rates edged higher and a new GSE-imposed fee in refinancing provided a little deterrent to replacing an old loan with a new one.
Housing has certainly done its best to try to lift the economy out of the COVID doldrums; resurgent homebuilding has wide-ranging beneficial effects, and even refinancing creates income and spending streams that serve to prop up growth. With still-considerable economic headwinds evident and the pent-up demand that has powered the market higher unlikely to last for long, future activity may not be able to keep up the pace of this summer, and a slower market (and economy) would result. For now, we still have plenty of pieces in place to keep the ball rolling for another month or two, but after that, new demand will need to form more normally, and that requires an economy firing on all cylinders, which is not a sure thing at this point.
Still, that’s for tomorrow; meanwhile, we’ll enjoy the now. Mortgage rates have firmed up a little over the last couple of weeks, partly due to a realization of markets risks underscored by that new refi fee, and also likely as an ancillary effect of that fee being imposed so abruptly that it means lenders may have to cover some or all of that cost for loans in the works. Recouping those costs means passing them onto other customers, and that means increases in risk premiums and higher rates for everybody. Aside from that modest upward pressure, the underlying instruments that influence fixed-rate mortgages are rather flat of late, so we’ll probably only see a basis point or two move in the average conforming 30-year FRM as reported by Freddie Mac next Thursday morning.
With rates near all-time lows, millions of homeowners are frantically refinancing. Borrowers often think the only pertinent question is “how much can I drop my rate?”, when there’s other as (or more) important factors involved. Let’s look at some of those, and make more informed decisions on refinancing:
- What will it cost?
Refinance expenses vary widely by state. Florida and New York have hefty state taxes and title fees. Attorneys are required in some states, but not others. A refinance that costs $2,000-$3,000 in low cost states could be $8,000-$10,000 elsewhere. Refinancing in the 5 boroughs? Don’t forget to account for your mansion tax!
- Can I get a lender credit to cover any closing costs?
Mortgages have interest rates in .125% intervals. Actual loan pricing doesn’t break down so neatly. A 3% loan might net a credit from your lender to help offset closing costs, when a 2.875% rate loan doesn’t. Ask your loan officer what your options are for lender credits.
- The lowest rate doesn’t always equal the best loan.
Sure, a 2.5% rate sounds sexy, and will impress your buddies who just refinanced at 2.875%, but if obtaining that rate cost you substantial discount points, was it still a good deal? Be sure to look at the monthly savings for buying your rate down versus the cost. If you’ll break even in a few years (and plan to stay in the house), it may be worth it. If it will take you 8 years to recoup your initial costs, think hard. After all, paying discount costs to buy your rate down is essentially betting rates won’t drop in the future. As we’re seeing now, that’s often a losing proposition. Someone who paid significant costs to buy their rate down from 4% to 3.5% in 2018 didn’t get much bang for their buck, with average “top tier” rates now under 3%.
- How much do you owe?
It’s far tougher to benefit when refinancing a $50,000 loan compared with a $500,000 one. In many cases, the costs associated with a refinance only vary slightly with loan size. Investing $3,000 to drop your rate .5% on a $500,000 loan is a no-brainer. Spending the same $3,000 to cut your rate .5% on a $50,000 loan will seldom, if ever, be a sound fiscal decision.
- How many ways can you benefit?
Sure it’s great to lower your rate, but let’s look for additional benefits in your refi. Can you eliminate or reduce your PMI? Can you shorten your loan term? Can you obtain cash to pay off higher interest consumer debt? If you can combine multiple benefits, refinancing may make sense when just lowering your rate slightly wouldn’t.
- You may not need an appraisal!
Fannie and Freddie have both greatly expanded the use of Property Inspection Waivers (PIWs). If they have sufficient data on your property (including an appraisal done during the past 10 years), you may not need an appraisal, saving time, uncertainty, and money. And yes, PIWs are available for purchases and refinances, even cash out or investment property refinances! When originators run loans through Fannie or Freddie’s underwriting engines, the results show whether an appraisal is required or not.
- Has Covid-19 impacted you economically?
The CARES Act allows borrowers who’ve suffered economic hardship due to Covid-19 to postpone their mortgage payments with no impact to their credit. Folks who’ve done so, however, can’t refinance until their missed payments have been made (or they work out a repayment schedule with their lender and make 3 payments under that agreement). If your income has been cut since the pandemic started, that will also impact
your ability to refinance. Self-employed borrowers face extraordinary scrutiny now and must provide more detailed proof of income than previously required.
- Don’t get greedy!
When rates fall substantially, it’s only human nature to hope they’ll continue to do so. It’s more likely than not, however, that rates will rise – they can’t drop indefinitely! If you like your rate, lock it in while it’s available. Unless you crave risk and are prepared to close at a higher rate, locking is the only way to guarantee you obtain the rate you’ve being quoted.
As we’ve seen, there’s many areas to consider when refinancing. Perhaps the most important is finding a loan officer you’re comfortable with, who can address your questions and provide reliable answers and service. Remember, if your loan doesn’t close on time, or you don’t get accurate information, your loan’s rate and costs won’t be your biggest concern. Mortgages are both a product (rate/costs) and a service (lender’s ability to correctly structure, document, and process the loan).
Consumer Alert: All Fannie Mae & Freddie Mac Refinances (Not Purchases) are going to be charged 50 basis points across the board on every loan effective immediately. All loans that are currently locked, lenders are paying this LLPA (Loan Level Pricing Adjustment). All loans that are not locked, borrowers will pay. What does this mean? A $400K loan will have a new $2000 fee to the borrower. They are saying that this is a result of an adverse market due to Covid 19. But to me this looks like Freddie and Fannie are trying to protect themselves with the intention of going back to being private .Good news though, rates are still low and millions of American’s are refinancing their loans in the 2’s still!
With most lenders still easily able to quote a 30yr fixed under 3%, mortgage rates are very low in outright terms. But relative to the recent trend and the general level of volatility, today was a bit rough. Rates rose as fast as they’ve risen since early June, ultimately hitting the highest levels in more than 2 weeks.
Some prospective borrowers will now be looking at aneighth of a point (0.125%) increase versus yesterday’s rates. That comes out to roughly $20/month on a $300k mortgage. Others will experience the shift in the form of higher upfront costs (or a lower lender credit). Either way, today is noticeably more expensive than yesterday.
The bigger question is whether this rate spike is a sign of things to come or merely a normal market correction that got a bit carried away. At some point, the bond market will make a clear case for higher and higher rates. Most market participants agree we’re probably not there yet simply due to economic realities as well as ongoing support from the Federal Reserve.
All that having been said, “market participants” don’t have crystal balls. Their guess is actually no better than anyone’s. We’ll only really know when the big bounce happens with the benefit of hindsight. Between now and then, days like today should serve to increase our level of caution when it comes to assuming rates will continue to move lower. Also, it should argue for an increased level of preparation so we can make sure we can take advantage of opportunities to capitalize on any potential rate recovery.
Posted by ft Editorial Staff Aug 6, 2020
The average adjustable rate mortgage (ARM) rate decreased to an average rate of 3.03% in July 2020, down from 3.47% a year earlier. ARM rates have decreased as a direct result of the Federal Reserve’s (the Fed’s) action to pull back short-term rates to combat the 2020 recession. Similarly, the average 30-year fixed rate mortgage (FRM) rate has fallen to historic lows in 2020, averaging 3.00% in July 2020.
The average ARM rate is now above the average 30-year FRM rate, making these riskier mortgage products unappealing to homebuyers. Therefore, ARM use will remain low over the next couple of years, as the Fed will continue to keep interest rates on FRMs low.
Chart update 08/06/20
|Jul 2020||Jun 2020||Jul 2019|
|Average 5/1 ARM rate||3.03%||3.06%||3.47%|
|Average 30-year FRM rate||3.00%||3.14%||3.80%|
ARM rates rise from bottom
ARM rates peaked in 2006 at just over 6%. ARM use (the ratio of ARMs to all other residential mortgage loans) at the time was extremely elevated: three out of every four mortgages originated as ARMs, a recipe of disaster for the future housing market.
The rate is tied to a specified index that varies based on market factors. On adjustment, the new ARM rate equals the yield on the index specified in the ARM note plus the lender’s profit margin. Common indices used to periodically adjust the ARM rate include the:
- Treasury Securities average yield – one-year constant maturity;
- Cost of Funds;
- London Inter-Bank Offered Rate (LIBOR);
- 3-month Treasury bill;
- 6-month Treasury bill; and
- 12-month Treasury bill.
ARMs are riskier than FRMs because the rate reset often results in substantially higher payments, and payment shock. This was experienced on a wide scale during the Millennium Boom as payments rose beyond homebuyers’ ability to pay. California’s 2008-2009 foreclosure crisis was driven in large part by these rate resets. The mortgage market is nearly fully recovered from the foreclosure crisis, seven years later in 2016.
Further, new underwriting standards (the qualified mortgage rules) require ARMs to be underwritten at the maximum allowable interest rate after five years from the date of the first payment. These new rules attempt to mitigate the risk of payment shock, which will work if the homebuyer takes out the ARM with the reset rate in mind rather than the more appealing teaser rate. [12 Code of Federal Regulations 1026.43(c)(2)]
So, are ARMs ever beneficial to homebuyers? ARMs do work well for seasoned, short-term investors who plan to sell within the initial lower-rate period. But owner-occupant homebuyers are advised to stay far away.
ARM use follows buyer purchasing power
When FRMs are available to homebuyers at reasonable rates, well-informed homebuyers choose FRMs over much riskier ARMs. However, when other market pressures are at work, even well-informed homebuyers find themselves considering the more risky ARM option.
This is because ARM use is tied inescapably to buyer purchasing power. As FRM rates rise, less of the monthly mortgage payment for which a homebuyer qualifies is applied to the principal. Thus, homebuyers cannot afford to buy at the same price they were able to a year earlier. Today’s spread between ARM and 30-year FRM rates is inverted, with ARM rates actually higher than FRM rates.
Likewise, when home prices rise more quickly than the rate of consumer price inflation (CPI) (as they did during the Millennium Boom and more recently during the 2013 year of the speculator), homebuyers are unable to qualify for the same amount of house as they used to.
This is where ARMs come in. Homebuyers turn to ARMs to increase their purchasing power, as the initial interest rate allows more money to be applied to principal. This allows homebuyers to afford a more expensive home. A quick fix, but a poor one in the long run.
Similarly, ARM use declines when FRM rates and prices are low. This occurred in 2009 at the tail end of the recession, when ARM use bottomed at almost zero.
The past year has seen a difference between ARM and FRM average rates too small to sway many homebuyers into considering the risks of taking out an ARM. It won’t be un until FRM rates rise again — not likely to occur until 2022-2023 — that ARM use began to rise.
Prior to 2014, mortgage rates had been on a steady decline since 1980. This downward trend enabled lenders and agents to encourage homebuyers to “just refinance” out of their resetting ARMs. However, the next two to three decades will bring a slow tide of rising mortgage rates. Thus, ARMs have the potential to be more dangerous for homebuyers in years to come than in recent memory.
Years from now when scientists examine mortgage rates in July 2020, they’d be forgiven for coming to the conclusion that rates only ever move lower. As we’ve learned in the first week of August, rates also rise.
To be fair, there were a few days in July where more than a few lenders moved slightly higher in rate, but it really wasn’t until this week that we arguably saw a shift in the broader trend–or at least warning signs about a potential shift.
What does that mean, exactly?
It might not mean much at all, depending on where we go from here. Over longer time horizons, it’s entirely possible that rates return to recent record lows. This week’s upward movement serves as more of a warning about complacency and about being ready to lock if you happen to have a loan in process.
In that regard, August is no different than any other month. Lenders all have certain requirements that must be met–certain documentation that must be submitted–before they’ll lock your loan. It’s always a good idea to clear those hurdles ASAP as it leaves you in the most flexible position. If scary things are happening in the rate market, you can lock ASAP! If rates are moving calmly lower, you’re ready to react whenever that changes and can rest easy in the meantime.
So is this one of those scary times?
As of right now, things aren’t too scary. Rates have certainly moved up a bit from recent lows (despite what you may have seen elsewhere), but they remain exceptionally low in the bigger picture. The decision to roll the dice on rates coming back down is a matter of personal preference, but I wouldn’t take it lightly.
We can get a sense of momentum in the broader bond market by looking at 10yr Treasury. These don’t directly dictate rates, but if there’s a decisive shift in 10yr Treasuries, mortgage rates will likely be moving in the same direction.
In thinking about the link between coronavirus and rates, it’s easy to conclude that rates will stay low or move lower. A lot of people have made similarly easy conclusions about market movement in the past only to find out that the market doesn’t always behave logically.
To be clear, I’m NOT saying rates are destined to continue higher from here. Instead, the takeaway from this week is that rates CAN move higher even when it looks like such a move isn’t in the playbook. Moreover, we should increasingly be on the lookout for corrections when rates have been doing one thing in a very consistent way for weeks on end. This is one of the key reasons for last week’s discussion on whether or not you should wait for lower rates.
What are the key factors likely to drive that momentum (or the potential reversal)?
Past precedent teaches us that rates consistently respond to the economy. With Friday’s big jobs report–traditionally the most important economic data to the bond market–coming in stronger than expected, it’s tempting to blame it for the upward pressure on rates.
In the current environment, however, traders are far more interested in stimulus negotiations and next week’s Treasury auctions (where the US government sells Treasury notes/bonds to investors). Both of these speak to the SUPPLY of bonds in the market. Simply put, we need a lot of them to pay for stimulus and the ongoing revenue shortfall (due to things like tax cuts and significantly lower economic activity).
Like anything, higher supply means lower prices, and when it comes to bonds, lower prices mean higher rates. Of course this is one of those “all other things being equal” kind of points. Traders already knew about stimulus and supply. Even so, it’s not uncommon to see the bond market get a bit nervous as it waits for clarity. After next week’s record-sized Treasury auctions and additional stimulus negotiations, we’ll have a much better sense of the effects on supply as well as the market’s willingness to buy it!
In a normal world, positive economic news can usually be counted on to be accompanied by firming interest rates. After all, if the prospects for growth are rising, so too are the chances that taking on financial risks could produce higher rewards, and money tends to follow its best opportunity. In such cases, investors often allocate more money toward equities and away from safe (but low yielding) bonds, a shift which tends to see bond yields rise. As well, in more typical times, rising growth would be associated with a potential future increase in inflation, and to hedge against that, investors begin to require higher yields in order to keep “real” rates of return on target.However, these are anything but normal times. The economy is climbing out of a record-size hole at an uncertain pace, and one perhaps with somewhat less vigor than recent and most current economic data may reveal. Even as we celebrate signs of improvement, we can’t help but view the data with a skeptical eye, as improvements from the re-opening of a pandemic-shuttered economy just don’t feel all that durable. Of course, we’ll only come to know this in time.The two broad facets of the economy were moving forward at a fair pace in July, according to the latest reports from the Institute for Supply Management. The barometer covering manufacturing edged higher by 1.6 points to 54.2 for the month, the highest values seen here since March 2019, with the upward move over the last two months helping to fill in some of the March-May hole. Subdued as they had been, measures of new orders pushed higher, rising to pretty robust territory at 61.5, but an expression of wariness about the strength of these gains could be seen in the employment measure, which, while improved, remains at a level where more manufacturers are shedding jobs than adding, which has been the case since last July (intensified by the pandemic, of course)
The larger and more important services side of the economy sported a similar outcome for July. The ISM non-manufacturing gauge has completed a “V”-shaped rebound, and is back to about where it was in February. At 58.1, this indicator gained just a point for the month, but that was sufficient to be the best reading since February 2019. New orders rose to a very robust 67.7, but employment faded, declining by a point to 42.1, a value more consistent with recession than expansion.The ISM series are useful indicators but like all series have limitations. The indicator uses a par value of 50, with figures above signifying increase in a given component or sum, and those below signifying contraction. Importantly, they only reference such change when weighed against responses from a month ago, and even though things improved this month relative to last it doesn’t necessarily mean that the broader trend is fully reflected. That items such as orders have improved relative to last month is helpful to know, but it doesn’t reveal whether the number of value of orders are actually higher than, say, where they were at the start of the year. Still, improvement is improvement, and we are glad to see it happening.One demonstration of the improved-over-last-month-but-still-not-great can be seen in the monthly report covering sales of new vehicles. According to AutoData, the annualized rate of sales of new cars and trucks sold in July rose by 2.3 million from June to July, climbing to 15.0 million units. Now, that 18.1% month to month rise in sales is appreciable, but even so, any car dealer will likely tell you that things are better but not good, given that the rate of sales as recently as February was 18 million units, annualized, and relative to last July, sales were off more than 11 percent. Still, it’s better than the 9 million of a few months ago, and the trend is heading in the right direction.
!Also heading in the right direction was the nation’s trade imbalance. An uneven recovery across the globe means such improvements in the difference in value between imports and exports will likely be erratic at best. In June, that gap narrowed by $4.1 billion, landing at $50.7 billion for the month, and the first decline since the impact of the pandemic started to become clear. Although still $40+ billion below pre-pandemic levels, exports managed to grow by $13.6 billion for the month, so at least some of our trading partner’s economies picked up, while out appetite for imported goods increase by $9.4 billion, a figure also about $40 billion or so below where we were before the global outbreak. A whole lot more trading needs to happen to get us back to where we were before, and it will be a while before we get there. We have watched the weekly initial claims for unemployment assistance begin to pick up again in recent weeks, a sign that the recovery in labor market may have been faltering. In the latest week, initial claims suddenly dropped by 249,000 to 1.186 million, easily the best of the post-shutdown period. After weeks of both barely declining and actually increasing, the question is “What changed in the week of August 1 to cause such an improvement?” and “Is it a coincidence that the additional $600 weekly benefit provided by the federal government expired on July 31?” For some portion of folks that have recently been laid off, does this change make it more beneficial to go look for another paying job at full scale since state-only benefits only provide a partial recovery of income? It’s hard to say, but the number of claims for those extra funds also fell by an eerily similar amount – 253,000 for the same week. If these above-and-beyond benefits are renewed, it will be interesting to see if initial weekly unemployment claims might rise again following any reinstatement.
Other labor market metrics were generally improved, if less so than in other recent months. The payroll processor ADP’s monthly look at private payrolls was expected to show as many as 1.5 million new hires for July, but that turned out to be a wildly optimistic guess by the markets as just 167,000 new jobs were added. Conversely, the outplacement firm of Challenger, Gray and Christmas tallied announced workforce reductions of 262,649 for July. Between the two was a net loss of employment, although how much is unclear, since not all announced job cuts take place here in the U.S. and not all happen immediately, so the difference is probably a wash overall. The employment situation for July did improve a bit, though, according to the Bureau of Labor Statistics. In July, 1.763 million new hires took place, a figure a little higher than was expected, if only about one-third of the job resumptions that happened in June. Still, the improvement in hiring was enough to bring the official unemployment rate down to 10.2%, so there has been a 4.5 percentage point improvement since the April peak. The labor force contracted a bit in July, declining by 62,000 folks, leaving the labor force participation rate at a still-subdued 61.4%, so there are plenty of able bodies should work become available. In March and April, a cumulative 22.13 million people lost their jobs. In May, June and July, some 8.829 million have gained them back (or found new ones). Although this amount of job creation in such a short while is remarkable, it bears remembering that only about 40% of the jobs lost have been recovered so far, and recovering that other 60% will be a lot harder and take a lot longer than this first chunk. Even if jobs continued to be created at a million per month, a full labor market recovery is more than a year off, and any gains are of course offset by any losses over that time. To continue to make progress, monthly job increases need to start outpacing the kinds of job losses that are keeping initial claims above the million mark each week. Challenges lie ahead.
For the first time since February, consumer use of credit rose. June’s $8.9 billion increase in debt was a meager one, with new balances on installment-type loans (autos, education loans) increasing by $11.3 billion dollars. That said, consumers must still be flush with disposable cash for smaller-ticket items, as balances on revolving accounts (mostly credit cards) contracted another $2.3 billion for the month, the sixth time in the last eight months that outstanding balances have been trimmed. Stimulus checks and other income supports are helping to power personal consumption, as are savings from no commuting costs and other fortunate COVID-related happenstances over the last few months, so paying cash rather than putting it on plastic is an option for many. Mortgage rates moved to new record lows again this week, but low and even falling rates don’t seem to be attracting as much attention as you would think they would. In the week ending July 31, applications for mortgage credit declined by 5.1%, noted the Mortgage Bankers Association. Requests for funds to buy homes slipped by 1.8% , a third decline in the last four week, while those for refinancing existing mortgages dropped by 6.8% after a 0.4% fall the week prior. It’s peak vacation season, and odds favor that apps will pick up again, but it’s also likely that the spring-pushed-to-summer homebuying season may be starting to show signs of normal seasonal waning. Of course, tight inventories of homes to buy and somewhat stiffer mortgage underwriting conditions are probably playing a role in that as well.
Mortgage credit is a little tighter at the moment than it was, according to the Federal Reserve survey of Senior Loan Officers and lending practices. Although banks are not the dominant players in the mortgage market at the moment, their stances on lending are likely reflective of the industry as a whole, if to varying degrees. Majorities of the 70 banks the Fed includes in its quarterly poll reported “somewhat” or “considerably” tighter underwriting conditions across all classes of mortgage; for example, 45.3% of banks reported unchanged conditions for lending GSE-eligible mortgages, but 54.7% reported increasing things like downpayment requirements or required credit scores and the like. The greatest amount of tightening could be seen in jumbo mortgage classes, where QM-eligble jumbos saw 58.9% of banks increasing requirements, and non-QM jumbos posted a whopping 70.2% of respondents making it more difficult to get one of these loans. Risks of making, servicing and investing in mortgages remains elevated. This remains the case even as loans in forbearance have been gently declining for a while, and many loans are now passing (or past) the four-month window in which servicers are required to make payments on GSE-backed loans to investors before the loan is taken over by Fannie or Freddie. Yesterday’s risks may be diminishing, but with a troubled economy all around and an uncertain level of future fiscal support coming, more difficulty in the mortgage space seems likely as we move forward in time. So the economy is improving, a good thing, but remains far from healthy, and the road ahead is likely to be bumpy. The recovery remains uneven, if moving in the right direction in the aggregate, but the speed and amount of recovery vary greatly from region to region, state to state and household to household. Until we start to contain the virus more effectively, and certainly until a vaccine becomes available, it will likely be this way. The big blast of improvement is behind us now, and with new COVID-related headwinds in place and more likely to come when “indoors” becomes a thing in the coming months, it’s hard to gin up much enthusiasm for what’s to come. After weeks where underlying interest rates should have caused mortgage rates to fall, they finally succumbed to that pressure this week and fell meaningfully. It may be this way — a plateau for a bit before a drop to the next level — and at the moment, it looks like next week will be a pretty flat spot, probably one of a few before the next leg down. We think there will be a couple of basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday.
by Tyler DurdenThu, 08/06/2020
Freddie Mac’s multi-year lending outlook for apartment buildings reveals the economic devastation among the working poor due to the virus-induced recession.
Multi-family loan origination volume for apartment buildings could plunge as much as 40% in 2020 compared with 2019.
Freddie said the “magnitude of the decline would be tied to the recovery of the economy and ability to contain the virus.”
We’ve highlighted, in recent weeks, the recovery has already reversed, as per the latest Goldman Sach’s high-frequency data.
The financial well-being of the working poor has been crushed in the downturn. At least 30 million folks are still collecting unemployment benefits. Renters’ hardships were realized one week before the month ended, with a rent moratorium expired, indicating landlords can now start collecting past rents and begin the eviction process for millions of folks.
“Renters are expected to be more impacted than homeowners from this recession given their susceptibility to the industries harder hit from the lockdowns,” Freddie said.
Many renters make low wages and have low skilled jobs, primarily in service sectors like retail, hospitality, and travel. As we’ve highlighted, millions of jobs aren’t coming back, which will leave folks unemployed for an extended period, unable to make rent payments and service debt.
As the recovery reverses, a fiscal cliff underway, and an eviction wave just beginning, the latest jobs report reveals initial and continuing jobless claims are now on the rise, signaling the labor market has been thrown into reverse.
International Financing Review (IFR) said, “falling rent collection, together with any pickup in evictions, may cause banks to pare lending to apartment owners to refinance and developers to build new multi-family properties.”
The ripple effect of renters skipping out on monthly payments has caused apartment building operators to also skip out on mortgage payments, resulting in a surge of multi-family property delinquencies among specific CMBS series.
Rising delinquencies in multi-family properties and hotels are pressuring CMBS series 9.
When the cycle breaks, that is, the renter fails to pay the landlord, well the whole system implodes. The multi-family housing boom has been put on hold this year. Now, the government is working on a bailout for the CMBS industry. Also, the second round of stimulus and a rent moratorium extension could save the working-poor in the short run, but as it becomes increasingly clear, the ability for millions to pay rent has yet to be resolved. The crisis is far from over.