Mortgage market commentary: What's behind this?
Mortgages are back down to 5.5 percent, taken down by the 10-year T-note's return to 3.93 percent, that dive in turn caused by events overseas.
As of Friday, the mortgage market is in a pattern not seen since 1995: on a fee-equivalent basis (no points, no origination), 5/1, 7/1 and 10/1 hybrid ARM rates are about the same as fixed-Fannie. As the Fed pushed the cost of money from 1 percent to 3 percent in the last year (going to 3.25 percent this Thursday, 3.5 percent in August...), the ARM-to-fixed spread has narrowed and now closed. 3/1s can be had under 5.5 percent (for another month or two), and one-month COFI and MTA teasers are sub-3 percent, but both will index to the mid-fives, and then rise monthly as lagging indices catch up with the Fed. Figure a tenth a percent a month for a year or more. Cheers.
This ARM-to-fixed spread may go ARMs-on-top, and will persist until the Fed overshoots neutral and has to cut its rate; or the Fed turns out to be right about economic heat and inflation risk, and long-term rates blow out of a colossal mistake.
Domestic economic data were strong, but a European recession threatens to spread worldwide, except for the United States and non-Japan Asia. If the slowdown happens, even the exceptions will falter, and the prospect creates a lot of buyers for bonds.
Read the entire Lou Barnes article at Inman News
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Wednesday, June 29, 2005
Sunday, June 26, 2005
Economic upswing to spark more interest-rate hikes
Job market not so weak after all
Mortgage rates have behaved very well, low-fee 30s staying about 5.625 percent as long Treasury rates completed a return to 4.1 percent, "V"-ing out of sub-4 percent ground for the umpteenth time since 2003. This latest excursion below 3.9 percent was the temporary artifact of end-stage short-covering by rate bears and equally last-ditch buying by economic bears. Both extremes paid the price for error.
The business media are so completely preoccupied with Housing Bubble coverage that it's hard to find straight stories on the economy.
(The bubble stories all say that people in and near housing sound like tech stock players circa 1999; maybe, but the media are in a perfect replay of their Y2K coverage. This week's bubble-booby prize to the New York Times: its huge, front-page biz-section blast on the surge in interest-only mortgages since 2001 failed to mention that there weren't any available before 2001 – quarter-century-old products like equity lines of credit and option ARMs excepted.)
The economy is behaving in ways different from the cyclical patterns 1945-1990, and some we do not yet understand (the trade deficit), but the differences should not be mistaken for weakness. The changing market for jobs tops that list.
A "weak job market" has been the mantra of this post-bubble (stocks, that is) era: soggy growth in "non-farm payrolls"; wage growth barely even with inflation; 65 percent of Americans saying jobs are hard to find; and domestic employment suffering from overseas competition and outsourcing.
Read the entire Lou Barnes Inman News Article
Mortgage rates have behaved very well, low-fee 30s staying about 5.625 percent as long Treasury rates completed a return to 4.1 percent, "V"-ing out of sub-4 percent ground for the umpteenth time since 2003. This latest excursion below 3.9 percent was the temporary artifact of end-stage short-covering by rate bears and equally last-ditch buying by economic bears. Both extremes paid the price for error.
The business media are so completely preoccupied with Housing Bubble coverage that it's hard to find straight stories on the economy.
(The bubble stories all say that people in and near housing sound like tech stock players circa 1999; maybe, but the media are in a perfect replay of their Y2K coverage. This week's bubble-booby prize to the New York Times: its huge, front-page biz-section blast on the surge in interest-only mortgages since 2001 failed to mention that there weren't any available before 2001 – quarter-century-old products like equity lines of credit and option ARMs excepted.)
The economy is behaving in ways different from the cyclical patterns 1945-1990, and some we do not yet understand (the trade deficit), but the differences should not be mistaken for weakness. The changing market for jobs tops that list.
A "weak job market" has been the mantra of this post-bubble (stocks, that is) era: soggy growth in "non-farm payrolls"; wage growth barely even with inflation; 65 percent of Americans saying jobs are hard to find; and domestic employment suffering from overseas competition and outsourcing.
Read the entire Lou Barnes Inman News Article
Saturday, June 25, 2005
Signs the real estate market is changing
Economy, unsold inventory among things to watch
Hot real estate markets don't stay hot forever. In some areas around the country, the home sale market has already slowed after being robust for several years.
For years, the unsold inventory index has been used to predict which way the market and home prices were moving. The unsold inventory index reports how many months it would take to sell the existing inventory of homes for sale at the current sales pace.
Changes in the unsold inventory index are directly related to changes in supply and demand. When the demand for housing goes up, the pace at which homes sell accelerates and the existing inventory of homes for sale decreases. As inventories shrink, prices often go up as more buyers compete to buy a limited number of listings.
When demand for housing goes down, it takes longer for homes to sell. Inventories tend to rise, as does the unsold inventory index. In this sort of environment, prices may decline.
Read the entire Dian Hymer Inman News article
Hot real estate markets don't stay hot forever. In some areas around the country, the home sale market has already slowed after being robust for several years.
For years, the unsold inventory index has been used to predict which way the market and home prices were moving. The unsold inventory index reports how many months it would take to sell the existing inventory of homes for sale at the current sales pace.
Changes in the unsold inventory index are directly related to changes in supply and demand. When the demand for housing goes up, the pace at which homes sell accelerates and the existing inventory of homes for sale decreases. As inventories shrink, prices often go up as more buyers compete to buy a limited number of listings.
When demand for housing goes down, it takes longer for homes to sell. Inventories tend to rise, as does the unsold inventory index. In this sort of environment, prices may decline.
Read the entire Dian Hymer Inman News article
Wednesday, June 22, 2005
Major red flag of adjustable real estate loans
Adjustable-rate mortgages (ARMs) are becoming increasingly popular with borrowers, and the cost of borrower ignorance about ARMs is growing with it. Every day I encounter misperceptions that have led to bad decisions, or are about to.
To avoid getting trapped into a bad ARM, it is very useful to understand the difference between the interest rate and the fully indexed rate (FIR).
The ARM interest rate is the rate you see: it is the rate quoted by the loan provider, and the rate shown in the media. It is the same as the rate on a fixed-rate mortgage, with one difference. The ARM rate holds only for a specified initial period. That period can be as short as a month, and as long as 10 years. At the end of that period, the rate is adjusted.
The FIR is the rate you don't see. It is never quoted, never shown in the media, and is not a required disclosure. Yet it is the major indicator of what will happen to the rate at the end of the initial rate period.
If the initial rate period is long and the borrower expects confidently to be out of the house before it is over, the FIR is unimportant. But if the initial rate period is short, or if there is a reasonable probability the borrower will still have the mortgage when it ends, the FIR is critically important to the borrower.
The flexible-payment, or "option" ARM, which has been growing in popularity, has an initial rate period of one month. It is a favorite instrument of hucksters because they can advertise rates as low as 1 percent. They don't bother to mention that this rate holds only for the first month. The FIR, which provides the best clue as to what the rate may be in the 359 months that follow, is seldom volunteered.
Read the entire Inman News article by Jack Guttentag
To avoid getting trapped into a bad ARM, it is very useful to understand the difference between the interest rate and the fully indexed rate (FIR).
The ARM interest rate is the rate you see: it is the rate quoted by the loan provider, and the rate shown in the media. It is the same as the rate on a fixed-rate mortgage, with one difference. The ARM rate holds only for a specified initial period. That period can be as short as a month, and as long as 10 years. At the end of that period, the rate is adjusted.
The FIR is the rate you don't see. It is never quoted, never shown in the media, and is not a required disclosure. Yet it is the major indicator of what will happen to the rate at the end of the initial rate period.
If the initial rate period is long and the borrower expects confidently to be out of the house before it is over, the FIR is unimportant. But if the initial rate period is short, or if there is a reasonable probability the borrower will still have the mortgage when it ends, the FIR is critically important to the borrower.
The flexible-payment, or "option" ARM, which has been growing in popularity, has an initial rate period of one month. It is a favorite instrument of hucksters because they can advertise rates as low as 1 percent. They don't bother to mention that this rate holds only for the first month. The FIR, which provides the best clue as to what the rate may be in the 359 months that follow, is seldom volunteered.
Read the entire Inman News article by Jack Guttentag
Thursday, June 16, 2005
Harvard Study Reports Hot Housing Market Masks Eroding Affordability and Mounting Risks
Even though the U.S. housing market is continuing to break records, various risks are on the horizon that could pose serious problems for homeowners in the future, according to a new Harvard study.
This analysis comes as affordability continues to be a dilemma for many Americans, the Joint Center for Housing Studies reports.
In 2004, housing markets posted record growth. Homeownership reached an all time high of 69 percent, with households of all ages, incomes, races and ethnicities joining the home buying boom. Single-family starts hit a record 1.6 million units, while new and existing home sales grew to nearly 8 million. Mortgage product innovations helped markets stay hot. Subprime loans gave millions with blemished credit records, who would previously have been denied a loan, the chance to buy a home.
Meanwhile, interest-only and adjustable rate loans are helping blunt the impact of higher home prices. Indeed, adjustable rate mortgages accounted for more than a third of all mortgage loans last year and interest-only loans for nearly one-quarter.
Read the entire article at RIS Media
This analysis comes as affordability continues to be a dilemma for many Americans, the Joint Center for Housing Studies reports.
In 2004, housing markets posted record growth. Homeownership reached an all time high of 69 percent, with households of all ages, incomes, races and ethnicities joining the home buying boom. Single-family starts hit a record 1.6 million units, while new and existing home sales grew to nearly 8 million. Mortgage product innovations helped markets stay hot. Subprime loans gave millions with blemished credit records, who would previously have been denied a loan, the chance to buy a home.
Meanwhile, interest-only and adjustable rate loans are helping blunt the impact of higher home prices. Indeed, adjustable rate mortgages accounted for more than a third of all mortgage loans last year and interest-only loans for nearly one-quarter.
Read the entire article at RIS Media
Monday, June 6, 2005
Real estate rates fall after Fed official drops 'bomb'
But more rate hikes expected
A peculiar confluence of weak data and goofy Fedology suddenly knocked the 10-year T-note below 4 percent, which in turn took mortgages under 5.5 percent.
The rate slide started on Tuesday with the newest drop in the purchasing managers' index, down in a straight line for a year from healthy-pink 60s to 51.4, perilously close to the economic stall marker at 50. Weekly filings for unemployment insurance have popped to 350,000; the Challenger layoff forecast has sharply deteriorated, especially in IT; and this morning's payroll gain for May was an anemic 78,000, less than half the forecast.
The lousy payroll number "should" have taken rates even lower, but by Friday rates had fallen so far that lousy wasn't enough; we needed awful.
Enter the peculiar parts. The economy does not appear to be all that weak – feeling the effect of global competition, but not in a stall. Example: U.S. auto sales slumped 8 percent in May – "U.S." as in GM, Ford, and DaimlerChrysler. Foreign-made cars, or cars made here under foreign management, did fine. Ford takes 37 hours to build a car; Toyota less than 28.
Foreign competition hurts wages and employment, but it has also slammed the lid on the inflation that $55/bbl should have brought. Should the Fed tighten more, into a low-inflation, sluggish-employment, and slowing economy?
Managing the economy is serious business, but last week's Fed follies were full-on black comedy. Wednesday morning, wearing a big grin on CNBC, the rookie president of the Dallas Fed, Richard Fisher: "We've gone through eight innings here, 25 basis points an inning. The next meeting in June is the ninth inning."
Read the entire Lou Barnes Inman News article at Citywide Services
A peculiar confluence of weak data and goofy Fedology suddenly knocked the 10-year T-note below 4 percent, which in turn took mortgages under 5.5 percent.
The rate slide started on Tuesday with the newest drop in the purchasing managers' index, down in a straight line for a year from healthy-pink 60s to 51.4, perilously close to the economic stall marker at 50. Weekly filings for unemployment insurance have popped to 350,000; the Challenger layoff forecast has sharply deteriorated, especially in IT; and this morning's payroll gain for May was an anemic 78,000, less than half the forecast.
The lousy payroll number "should" have taken rates even lower, but by Friday rates had fallen so far that lousy wasn't enough; we needed awful.
Enter the peculiar parts. The economy does not appear to be all that weak – feeling the effect of global competition, but not in a stall. Example: U.S. auto sales slumped 8 percent in May – "U.S." as in GM, Ford, and DaimlerChrysler. Foreign-made cars, or cars made here under foreign management, did fine. Ford takes 37 hours to build a car; Toyota less than 28.
Foreign competition hurts wages and employment, but it has also slammed the lid on the inflation that $55/bbl should have brought. Should the Fed tighten more, into a low-inflation, sluggish-employment, and slowing economy?
Managing the economy is serious business, but last week's Fed follies were full-on black comedy. Wednesday morning, wearing a big grin on CNBC, the rookie president of the Dallas Fed, Richard Fisher: "We've gone through eight innings here, 25 basis points an inning. The next meeting in June is the ninth inning."
Read the entire Lou Barnes Inman News article at Citywide Services
Friday, June 3, 2005
Greenspan uses F-word to describe real estate
But Fed chair does not see significant price declines
Long Treasury rates stayed in a 4 percent-4.09 percent band, and mortgage rates grudgingly acknowledged the improvement, dipping just below 5.625 percent.
Economic data played no role. First-quarter GDP was revised upward to 3.5 percent, as anticipated, confirming that an apparent early-spring slowdown was a mirage.
All week long, the financial markets were dominated not by data, but by chatter. The loudest: housing, housing, housing, bubble, bubble, toil and TROUBLE!
Federal Reserve Chairman Alan Greenspan turned up the eye-of-newt volume: "We don't perceive that there is a national bubble, but it's hard not to see...that there are a lot of local bubbles."
Oh, really. This from the man who as late as 2000 refused to use the words "bubble" and "stock market" in the same sentence, except to say that a bubble could only be detected in retrospect? That markets must be trusted? That the Fed should not attempt to intervene, and instead should wait, repairing any damage from a blown bubble after detonation? That same guy, who wouldn't snip margin loans?
Yeah, that guy. He has aged visibly; his exceedingly precise use of language departing. Perhaps he didn't quite mean what he said. In all this housing shouting, there is a terrible problem with terminology. A real bubble is price-bloat followed by a crash; not a mere "correction" (a 10 percent drop in price is the limit for that euphemism), not a "retracement" (a one-third decline), but an honest-to-Pete crash. Authentic bubbles: the Nasdaq is still 60 percent below its bubble top; the Nikkei fell 80 percent from its 1989 peak at 38,134, and today still languishes 70 percent below.
Are several local housing markets over-extended? Sure. Are some current rates of appreciation "unsustainable?" Of course. No market for anything can compound at 20 percent per year for long. But, are home prices poised for the 33 percent-plus decline required to classify as a bubble? Not even the Chairman thinks so, pointing to losses ahead only for latecomers to the party. Housing is NOT in a bubble; in places it is overdone and due to correct, painfully for some, but not free-fall.
Read the entire Inman News article by Lou Barnes
Long Treasury rates stayed in a 4 percent-4.09 percent band, and mortgage rates grudgingly acknowledged the improvement, dipping just below 5.625 percent.
Economic data played no role. First-quarter GDP was revised upward to 3.5 percent, as anticipated, confirming that an apparent early-spring slowdown was a mirage.
All week long, the financial markets were dominated not by data, but by chatter. The loudest: housing, housing, housing, bubble, bubble, toil and TROUBLE!
Federal Reserve Chairman Alan Greenspan turned up the eye-of-newt volume: "We don't perceive that there is a national bubble, but it's hard not to see...that there are a lot of local bubbles."
Oh, really. This from the man who as late as 2000 refused to use the words "bubble" and "stock market" in the same sentence, except to say that a bubble could only be detected in retrospect? That markets must be trusted? That the Fed should not attempt to intervene, and instead should wait, repairing any damage from a blown bubble after detonation? That same guy, who wouldn't snip margin loans?
Yeah, that guy. He has aged visibly; his exceedingly precise use of language departing. Perhaps he didn't quite mean what he said. In all this housing shouting, there is a terrible problem with terminology. A real bubble is price-bloat followed by a crash; not a mere "correction" (a 10 percent drop in price is the limit for that euphemism), not a "retracement" (a one-third decline), but an honest-to-Pete crash. Authentic bubbles: the Nasdaq is still 60 percent below its bubble top; the Nikkei fell 80 percent from its 1989 peak at 38,134, and today still languishes 70 percent below.
Are several local housing markets over-extended? Sure. Are some current rates of appreciation "unsustainable?" Of course. No market for anything can compound at 20 percent per year for long. But, are home prices poised for the 33 percent-plus decline required to classify as a bubble? Not even the Chairman thinks so, pointing to losses ahead only for latecomers to the party. Housing is NOT in a bubble; in places it is overdone and due to correct, painfully for some, but not free-fall.
Read the entire Inman News article by Lou Barnes
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