Friday, August 30, 2013

Mortgage Matters



 
Keeping you updated on the market! For the week of 
August 26, 2013

MARKET RECAP
Expectations Theory Sways Markets
Existing-home sales soared to 5.39 million annualized units in July, far surpassing the consensus estimate for 5.12 million units. The NAR cited “panic” over rising interest rates for the surge in buying activity.
“ Panic” might be an overstatement. Expectations, more than anything, was the likely motivator. More consumers, shocked by the spike in lending rates that occurred two months ago, expect both interest rates and housing prices to push higher.
Therefore, it's understandable that buyers acted as they did. The past – at least the near-term past – is frequently prologue.
On the lending front, rates have moved to a higher plateau compared to the plateau they occupied earlier this year. This past week, mortgage rates moved notably higher again, as if they were attempting to reach an even higher plateau. Rates today are about where they were two years ago.
Rising rates have jarred memories: Everyone today now realizes rates don't move only down; they also move up.
A few years ago, it appeared home prices could move only down. Since then, price action continues to prove that's hardly the case.
The median price of an existing home rose to $213,500 in July, a 13.7% increase from July 2012. This marked the 17th-consecutive month where prices have increased year over year. As improbable as this might seem, the national median price is a mere 7.3% below the all-time high of $230,000 that existed seven years ago.
It can be dangerous to extrapolate a trend indefinitely; trees don't grow to the sky, submarines don't descend to the depths of the ocean. But trends can hold for a while. We expect both trends – higher mortgage rates and higher housing prices – to prevail into the relevant future.
The Federal Reserve assures us that mortgage rates will occupy a higher plateau. (We further explicate this subject below.) Home prices will remain at a higher plateau as well. Inventory remains tight, and buyer interest continues to expand.
Just as important, the composition of the housing market is as healthy as it has been in years: Foreclosures and short sales continue to drop as a percentage of overall sales. Concurrently, price appreciation continues to lift more owners above water.
Expectations point to less affordable housing in the future, so it's perfectly logical to act (buy) on those expectations today.
 
Economic 
Indicator
Release 
Date and Time
Consensus 
Estimate
Analysis
S&P/Case-Shiller Home Price Index
(June)
Tues., Aug. 27,
9:00 am, ET
0.5% 
(Monthly Increase)
Important. Home-price appreciation is a major positive that's lifting consumer confidence.
Mortgage Applications
Wed., Aug. 28,
7:00 am, ET
None
Important. Expectations of higher rates are driving purchase-application volume.
Pending Home Sales Index
(July)
Wed., Aug. 28,
10:00 am, ET
0.7% 
(Increase)
Important. Increased supply and rising prices are spurring more sales activity.
Gross Domestic Product
(2nd quarter 2013)
Thurs., Aug. 29,
8:30 am, ET
2.4% (Annualized Growth)
Important. GDP growth is expected to be revised upward, though it remains sluggish .
 
It's All About the Federal Reserve
Until the recent past, interest rates were driven by the economy: recession or expansion, job growth, inflation, risk aversion, productivity, etc. These factors would converge to form an interest rate that best reflected consumers and investors expectations.
It's different today. The Federal Reserve is the overriding factor in lending markets. Everyone is trying to game the Fed's next move on quantitative easing. Specifically, everyone is attempting to forecast when the Fed will begin tapering its purchases of Treasury notes and bonds and mortgage-backed securities. The Fed's purchases – its demand – for these instruments is largely responsible for the low lending rates we've enjoyed over the past few years.
The chief reason mortgage rates moved so high so quickly in past months is that many market watchers expected the Fed to begin tapering next month. Markets, after all, are anticipating entities (they act on expectations), so mortgage rates naturally move higher on the prospect of higher rates.
Based on the minutes of the last meeting of Fed governors, the Fed is unlikely to begin tapering as early as September. Inflation remains low and job growth remains sluggish. We don't expect either to pick up soon, which is why we think tapering could be delayed until later in 2013, and possibly into 2014.
But as long as market participants are anticipating higher interest rates, there is a good chance rates will continue to rise. (Paradoxically, when the Fed actually begins tapering – when expectations become reality – rates could actually fall.)
Needless to say, this is confounding market, but it's still one in which we think it's more prudent to act today than to wait and anticipate tomorrow.
 
 
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