Sunday, February 24, 2013

Mortgage Matters Update

Wow!!!  More great News.    

Keeping you updated on the market! For the week of 
February 25, 2013


Pessimism has always been the default intellectual position. The more dire the prognostication, the higher the regard the prognosticator is held.
This thought comes to mind because a rising tide of commentary is questioning the sustainability of the housing recovery. These Doubting Thomases feel emboldened by a recent spat of housing data that wasn't quite up to snuff.

Housing starts, for one, failed to meet expectations. The annual pace of starts dropped 8.5% in January to 890,000 units, falling short of the consensus estimate for 918,000 units. The shortfall was attributable to a 24.1% decline in the multi-family component (which is volatile anyway).
Slower new-home traffic also raised concerns, though weather and the lingering impact of Hurricane Sandy were contributing factors. The good news is that home builders don't appear to be especially put off; permits advanced 1.8% in January to an annual pace of 925,000 million units.

The trend in existing-home sales continues to frustrate many industry watchers, because the trend still hasn't gained traction. That said, existing-home sales did rise slightly in January, by 0.4%, to an annual rate of 4.92 million units.

We are all aware that inventory is the issue. The supply of for-sale homes is down to 4.2 months based on the current sales pace, which is a considerable reduction from 4.5 months and 4.8 months in the two prior months. Inventory is as low as it has been since the bubble days in the early 2000s.

Of course, we're not suggesting another bubble looms (though we have heard rumblings to that effect). We say that because we see markets in distressed and non-distressed properties becoming normalized. In the fourth quarter of 2012, the average foreclosure discount, a comparison between a foreclosed home's market value and its sales price, dropped to 12% compared to 25% during the depths of the recession.

The new phenomenon of large institutional investors entering the market is another attenuating factor. As we mentioned last week, institutional investors are purchasing large swaths of distressed properties and rehabilitating them for rentals. Their actions, combined with those of individual investors and owner-occupied buyers, will ensure an orderly reduction of distress-property inventory and a firming of housing prices.

But could rising mortgage rates derail the recovery?

We think it's highly unlikely. Job growth, consumer outlook, and borrower accessibility to funds are the key drivers these days, not rates. To be sure, mortgage rates are at a five-month high, but they are still very inexpensive from a historical perspective.

That said, some mortgage products are set to become a little less inexpensive, even if rates stand pat.

Borrowers considering an FHA loan need to keep two deadlines in mind: On April 1, the FHA will increase its annual mortgage insurance premium by 0.1% to 1.35% of the balance of the loan. To avoid the higher fee, borrowers must apply by March 29.

The FHA has raised its insurance rates five times in as many years; we don't expect this latest increase to be the last.

Date and Time
Consumer Confidence Index
Tues. Feb. 26,
10:00 am, ET
58.9 Index
Important. Slow income growth is holding consumer optimism in check.
New Home Sales
Tues. Feb. 26,
10:00 am, ET
385,000 Units (Annualized)
Important. Weather will likely have slowed sales growth in January.
Mortgage Applications
Wed., Feb. 27,
7:00 am, ET
Important. Low inventory and weather are hampering purchase-application volume.
Pending Home Sales Index
Wed., Feb. 27,
10:00 am, ET
101 Index
Important. Limited supply points to limited sales growth.
Gross Domestic Product
(4th Quarter 2012)
Thurs., Feb. 28,
8:30 am, ET
Important. This upward revision in GDP growth points to a strong start to 2013.

The End of Cheap Money?
Many mortgage watchers expect mortgage rates to maintain today's lows indefinitely. After all, the Federal Reserve has stated it will continue to buy $40 billion in mortgage-backed securities and $45 billion of longer-term Treasury securities each month (known as quantitative easing) for as long as it takes for the unemployment rate to fall to 6.5%.

But that commitment might be less firm than initially believed. The Fed recently clarified that its unemployment target isn't necessarily a specific number. In addition, a growing number of Fed governors are concerned over market risks associated with the Fed's asset purchases, which could lead the Fed to taper or end quantitative easing sooner than some economists expect.

These factors (along with a few others) have prompted Goldman Sachs to raise its yield expectation for the 10-year Treasury note – a good proxy for 30-year fixed rate mortgages – to the 2.25%-to-2.5% range this year.
Historically, the 30-year loan rate has averaged roughly two percentage points more than the 10-year Treasury note yield. The note currently yields around 2%. In other words, it's quite possible we could be looking at lending rates half-a-percentage point higher than today's rates by year's end.

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