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Wednesday, August 14, 2013
Mortgage Matters....End of 30 year fixed term Mortgage
Keeping you updated on the market!For the week of August 12, 2013
More of the Same, But for How Long?
For now, the cavalcade continues; that is, the cavalcade of home-price increases that began nearly two years ago.
CoreLogic's Home Price Index shows prices increased 1.9% in June compared to May, which marks the 16 th consecutive monthly increase. This latest increase lifts the index's year-over-year gain to 11.9%. For 2013, home prices are already up nearly 10%.
But not all indicators suggest the trend will continue unabated. Trulia's data show asking prices dropped 0.3% in July compared to June, which marks the first monthly decrease since this past November.
A slowdown in home-price gains wouldn't necessarily be bad. We've argued in the recent past, that double-digit yearly price increases are unsustainable. A lower rate of annual increase would be a more sustainable rate, and one more attuned to historical norms. The last thing any of us wants is another bubble market followed by a bubble burst.
We've also a seen a slowdown in the rise in the price of mortgage funding over the past month.
Rates, though higher than they were six months ago, have stabilized. What's more, it appears consumers are becoming acclimated to the new higher-rate reality. A recent survey by Fannie Mae finds that 60% of respondents believe interest rates will increase over the next 12 months. At the same time, three out of four of these respondents believe now is a good time to buy a home. The prospect of buying an appreciating asset appears to trump the higher cost of financing that asset.
But are the respondents expectations properly calibrated?
After the latest employment report, we are less sure of interest rates rising.
The employment report, issued the past Friday, points to sluggish job growth. In July, businesses increased payrolls by only 162,000, roughly 20,000 below most economists' expectations. To be sure, the unemployment rate dropped to 7.4% from 7.6%, but this was attributed to a lower labor-participation rate, which fell to a 35-year low.
The current trend in labor participation runs counter to recent history. After a recession, the labor force usually grows. But this post-recession period has been an anomaly. We are four years into a recovery, yet labor-force growth, as well as job growth, remains stubbornly stagnant.
Many economists believe disappointing job numbers won't dissuade the Federal Reserve from throttling back on quantitative easing. In fact, a few economists speculate the Fed could throttle back as soon as next month. At a minimum, that means mortgages won't drop any further.
We're not convinced, and we don't think most market participants are either. Mortgage rates have held steady for the past six weeks, as has the yield on the benchmark 10-year U.S. Treasury note. Given stubborn economic weakness, we expect quantitative easing to continue through the remainder of 2013.
Moreover, quantitative could even extend deep into 2014, depending on who takes the reigns of the Federal Reserve next year after Chairman Ben Bernanke steps down. Of the frontrunners, one in particular, Janet Yellen, appears keen to keep the Fed's current monetary policies going for a while longer.
Release Date and Time
Wed., Aug. 14, 7:00 am, ET
Important. Purchase activity is picking up as consumers become acclimated to higher lending rates.
Consumer Price Index (July)
Thurs., Aug. 15, 8:30 am, ET
All Goods: 0.2% (Increase) Core: 0.2% (Increase)
Important. Consumer-price inflation remains below the Federal Reserve's target rate and will have little impact on interest rates.
Home Builder's Index (August)
Thurs., Aug. 15, 10:00 am, ET
Important. Builders remain confident, but optimism appears to be plateauing.
Housing Starts (July)
Fri., Aug. 16, 8:30 am, ET
895,000 Units (Annualized)
Important. Starts are expected to return to their upward trajectory after June's disappointing pullback.
The End of the 30-Year Fixed-Rate Loan?
President Obama caused a stir this week when he said he'd like to see the private sector take over as the primary driver behind the mortgage market. The president went as far as to say he'd like to see Fannie Mae and Freddie Mac dismantled.
It's a worthwhile idea, but there are a few obstacles. For one, the government, through Fannie Mae, Freddie Mac, the FHA, and the Department of Veterans Affairs, backs 90% of all newly originated mortgages. For the most part, there really is no private mortgage market.
At the same time, the president said he'd insist on keeping the 30-year fixed-rate mortgage affordable at today's low rates. Unfortunately, the goal of the prevailing rate on the 30-year fixed-rate mortgage is incongruous with the goal of privatizing the mortgage market. We say that because private money won't lend for 30 years at today's rates without government backing.
So does this mean the end of the 30-year fixed-rate mortgage? That's unlikely. At the same time, it's also unlikely we'll see a mortgage market dominated by the private sector. In other words, it looks like business as usual into the relevant future.