...from the desk of our founder...
Thoughts & Musings
Prices are going up (Inflation is a factor in that) but as Florida remains the most popular state, people are still coming here.
Homes are getting sold faster, albeit a slightly smaller number in the aggregate.
Rates are up, yes... but rent is going through the roof. If there is a time to buy... it is now. Please trust me on that.
We’re going to be doing these every few days.
…going from white-hot to red-hot…. is still hot.
Okay…. It’s been a while and a few things have changed. A lot of things have changed. But we’re still here.
This was from July, 1985 at a bank near the town where I grew up.
Three weeks for an approval (not closing… just the approval) and a best-rate of almost 12% with two points in origination!
Are things higher than we have been used to? Yes. Are we happy about that? No.
But perspective people… perspective.
So I just posted a CNBC article with the title, “Mortgage refinance demand hits lowest level in over a year, and homebuyers retreat, too”.
Um…. no.
Homebuyers are not retreating in Florida at all. And the only reason Refinances have slowed is because the Fed decided to add a gigantic "adverse market fee" that they charge lenders, and which lenders have no choice but to pass along to consumers. So rates at the consumer-level are far higher than they need to be.
Here’s the repost of the CNBC article:
Applications to refinance a home loan fell 5% last week and was 31% lower than a year ago, according to the Mortgage Bankers Association.
Mortgage applications to purchase a home fell 1% for the week from the pervious week.
It was a mixed week for rates, which started high and then fell slightly, but the damage was done early.
Total mortgage application volume decreased 3.7% for the week, according to the Mortgage Bankers Association’s seasonally adjusted index.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) decreased to 3.27% from 3.36%, with points decreasing to 0.33 from 0.43 (including the origination fee) for loans with a 20% down payment.
“Purchase and refinance applications declined, with most of the pullback coming earlier in the week when rates were higher, said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Refinance activity has now decreased for nine of the past 10 weeks, as rates have gone from 2.92% to 3.27% over the same period.”
For the week, applications to refinance a home loan fell 5%. Demand was 31% lower than a year ago and the lowest level in over a year. Most borrowers have already refinanced to lower rates or are unable to qualify for a refinance at today’s rate. The refinance share of mortgage activity decreased to 59.2% of total applications from 60.3% the previous week.
Mortgage applications to purchase a home fell 1% for the week but were 51% higher than a year ago, although annual comparisons will be an outlier for the next month as the housing market ground to a halt at the start of the pandemic and then rebounded dramatically. Purchase demand is lower than the same week of 2019.
“The third straight week of declining purchase activity is a sign that rising home prices and tight supply are constraining home sales — especially in the lower price tiers,” added Kan.
10-year Treasury yield climbs above 1.7% for 14-month high, 30-year rate briefly tops 2.5%
PUBLISHED THU, MAR 18 20215:30 AM EDT
UPDATED THU, MAR 18 20214:13 PM EDT
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KEY POINTS
The Fed expects core inflation to hit 2.2% this year, but has a long-run expectation of it sticking around 2%.
The U.S. central bank also indicated that it didn’t plan to hike interest rates through 2023 and that it would continue its program of buying at least $120 billion of bonds a month.
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, described the move in yields as a “belated overreaction” to the Fed’s projections and Jerome Powell’s statements on Wednesday.
The 10-year U.S. Treasury yield jumped above 1.7% on Thursday, its highest level in more than a year, despite reassurance from the Federal Reserve that it had no plans to hike interest rates anytime soon, nor taper its bond-buying program.
The yield on the benchmark 10-year Treasury note was up 8 basis points to 1.719%. The yield on the 30-year Treasury bond climbed 3 basis points to 2.472%. Yields move inversely to prices. (1 basis point equals 0.01%.)
Yields retreated from their highs of the day in afternoon trading. The 10-year broke above 1.75% earlier in the session, marking its highest level since Jan. 24, 2020, when it topped out at 1.762%. This is also the first time the 30-year has traded above 2.5% since August 2019.
TICKER COMPANY YIELD CHANGE %CHANGE US3MU.S. 3 Month Treasury0.013-0.0020.00US1YU.S. 1 Year Treasury0.061-0.010.00US2YU.S. 2 Year Treasury0.139-0.020.00US5YU.S. 5 Year Treasury0.853-0.0140.00US10YU.S. 10 Year Treasury1.71-0.0190.00US30YU.S. 30 Year Treasury2.45-0.0260.00
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, described the move as a “belated overreaction” to the Fed’s projections and Jerome Powell’s statements on Wednesday.
“The realization in the fixed income market really is around commitment that Fed policy is going to be easy for some time and allow for yields to rise. That’s not a new theme,” said LeBas.
After the Fed’s two-day policy meeting concluded Wednesday, the central bank said it sees stronger economic growth than previously estimated, forecasting gross domestic product to rise to 6.5% in 2021. This is up from the 4.2% GDP increase forecast in December.
The Fed also expects core inflation to hit 2.2% this year, but has a long-run expectation of it sticking around 2%. The central bank also indicated that it didn’t plan to hike interest rates through 2023 and that it would continue its program of buying at least $120 billion of bonds a month.
These projections reinforced the idea that the Fed is willing to let the economy run hot for a period of time to allow the U.S. to recover from the Covid pandemic. Bond investors fear this means the central bank will let inflation increase more than normal, eroding the value in bonds.
Some strategists have pointed to overseas developments as a reason for Thursday’s spike in yields. The Bank of Japan is expected to widen a band around its long-term rate target, according to the Nikkei newspaper, signaling a step toward tighter policy.
“I think Japan had a lot to do with it because if you pull up a tick chart ... the jump from where we were, 1.66ish, to 1.73 or 4 happened in a really short period of time right as the Japan information was coming out,” said Kathy Jones, the chief fixed income strategist for the Schwab Center for Financial Research. “I think that was the catalyst, and I suspect it might have caught some people positioned the wrong way and then, it is an uptrend in yields, so other traders are going to jump on the bandwagon when you get a breakout like that.”
There has been some concerns that the recent rise in bond yields and inflation expectations could mean a repeat of the 2013 “taper tantrum.” This was when Treasury yields spiked suddenly because of market panic after the Fed said it planned to start tapering its quantitative easing program.
However, Willem Sels, chief investment officer for private banking and wealth management at HSBC, said the Fed’s message of a gradual normalization of policy meant this was a “very different situation than 2013, where bond tapering caught the market by surprise, leading the real yield to spike quickly and significantly, and causing equities, gold and risk assets to sell off.”
Initial jobless claims for the prior week came in a worse-than-expected 770,000 on Thursday, but the Philly Fed’s manufacturing outlook survey was better than expected.
Auctions were held Thursday for $40 billion of four-week bills, $40 billion of eight-week bills and $13 billion of 9-year 10-month Treasury Inflation-Protected Securities.
When you are instrumental in helping us close the hardest deal we have had in a half decade, you, like Sandeep, may partake in the boundless joy of the Donut of Glory.
Congratulations my friend.
I figured I would give a quick, but fairly detailed, understanding on one piece of the MBS market and charts. Cutting to the chase; nobody knows what is going to happen with rates. I think rates are going to go up and go up quickly, but the 10 Yr Treasury will be near zero and nobody is going to be able to explain to the consumer why.
The 10 Yr Treasury keeps breaking through ceilings from which is usually bounces back, but with euphoria in the stock market (false hope due to good things happening until that normalizes) the market stays up, which is not a bad thing. When stocks are up that means people are investing in the country.
Stocks are equity or ownership investments. When you buy stock you are part owner of a company. So people are optimistic about the future so they want to be in ownership, which means stock
On the other hand, bonds are part of the fixed rate securities where people flock when they are concerned about the economy. With bonds you are a debt holder of a company. You give them money - they give you a promise to pay a fixed amount on what you gave.
Then…. you have Jerome Powell coming in and saying The Fed is going to keep rates near 0%, which makes it next to impossible to explain to your clients why rates are going up, but Jerome says they are staying the same.
Put bluntly; The Fed does not dictate interest rates. The market dictates rates, and it’s complicated.
In a nutshell; you will hear that the bond market is “oversold”. What does that mean? That means you have more sellers than you have buyers. When you have a lot of inventory and no few buyers, you sell for a lot cheaper. Think “clearance sale”.
Right now we have a ton of inventory with not buyers. Why? Some invested in the stock market, (you have a stimulus package coming out which comes in the form of treasury sales: the 30 yr bond is paying 2.29% which is crazy high, and then you have industry news coming out that impacts everything like unemployment, new home sales, inventory, GDP, etc). Which way that moves overall rates is anyone’s guess when you have so many moving parts, but my guess is up. Banks aren’t stupid and they are going to want to hold on to as much cash in reserve as they can. Banks need rainy-day funds too, and they can see the clouds on the horizon as well as anyone.
This is what the MBS chart for 2% coupon looks like right now.
The red and green symbols represent each trading day. They’re called “candlesticks”. The green candlestick means that the current price is better than the closing price the previous day. Red means we lost ground from the previous close. It is important to understand that MBSs are pegged each day from the previous days close and NOT from the opening price. As I type we are down about 67 bps, for the day. So why is it green?
On the left chart the close is 101.031. On the right chart this morning it opened at 100.016. This means overnight the yield lost 101.15 bps. So if you take 101.031 (yesterdays close) minus 100.359 (current yield) that equals a negative 67 bps since yesterdays close. But we are actually up from the opening yield. The open on the right chart is 100.016 and current is 100.359 so since opening we are actually green to the tune of 34 bps hence green. So candlestick is open to current and tracking is previous day close to current.
So how much have we lost? If you look to the far right you will see 104.00. Picture that as a rate sheet. On Jan 4th the 2% coupon was paying 104.11 in yield. As of today the 2% coupon is paying 100.359. That means we have lost 375 bps since Jan 4th. Show your clients this and they might understand a little more.
The coupon means the investors rate of return. “Coupon” just means how much the investor will receive back if they buy an MBS security. That is not the note rate. The Note rate includes guarantee fees as well as servicing fees. For example. Let’s say your rate is 3.25%. Each time a customer pays a payment to the servicer the interest that is paid the 3.25% interest part of the payment is broken out. The servicer receives .25% of that interest to service the loan. Then the agencies get paid .25% of that loan to guarantee the loan stating if the borrower does not pay then the agencies will make sure they do get paid. That also falls on the servicer but again basic stuff. So the net the investor receives is only 2.75%. So this would be a coupon of 2.75%.
The lines that you see labeled 0%, 23.6%, 38.2% are what we call lines of resistance. As the mbs goes down they will typically hit those floors (decreasing) or ceilings (Increasing) and then bounce back up. Basicly, the resistance lines are when trading would get to a point where the market would react and stabilize between those two lines and life would be normal. So market analyzers will say we are about to hit a floor of resistance and we hope it will bounce up but once it breaks that floor then now we are in a new trading window. For example we are at the bottom floor line of 100.133 so hoping it will bounce back up in the new trading window. So the 100.133 is the floor of resistance and the 100.688 is the ceiling of resistance. So if we make some ground we will likely hit the ceiling and bounce down. But in this current market nobody knows what will happen because it keeps breaking right on through all of the resistance lines.
Hopefully this can at least help you understand what you are looking at even if you cannot explain why it is doing what it is doing.
Let me teach you a basic economic principle: The Price Floor.
See that point where the two bold lines meet?
That’s equilibrium; free markets naturally find it.
And that minimum wage line?
Push that higher and it’s simple: Unemployment soars.
