Brighter Days Ahead

The housing and lending markets have had a rocky road in 2022.

The highest inflation rate in 40 years, rising interest rates, skyrocketing home prices, and a persistent housing shortage have all contributed to a downturn in the housing and mortgage sectors.

But in the last few weeks there have been some positive indicators that suggest we may be finally turning the corner. Of course, it’s early and we will need to see more evidence to know for sure, but there may be reasons to be cautiously optimistic that market pressures are easing.

  • Inflation: Quite unexpectedly, U.S. consumer prices fell in August, the first drop in six months. According to the Bureau of Labor Statistics, the consumer price index, or CPI, rose 8.5% over the past year as of July, a marked slowdown from 9.1% in June. This was primarily due to a decrease in food and energy prices. While still elevated, the decline of consumer price hikes from its near-record pace in June gives hope to policymakers and consumers that inflation may have peaked.

  • Interest rates: As of August 11, the average rate for the benchmark 30-year fixed mortgage is 5.60%. Though that is significantly higher than what rates were a year ago, it is down considerably from the 52-week high of 6.11%. Though we expect that rates might continue to fluctuate for a time, there is reason to believe that interest rates may have topped out.

  • Housing: Earlier in the year when available homes were exceptionally scarce, buyers were participating in outlandish bidding wars, driving up home prices to extreme levels. But according to realtor.com, active listings jumped 128,200 in July to 747,500. That’s the single biggest jump in the site’s database since 2016.

What does it all mean?

The housing market is beginning to cool off. As housing inventory increases, home prices will begin to come down, bringing more buyers into the market. We are already witnessing this effect in certain parts of the country.

All of these factors are contributing to a slight increase in mortgage demand. According to the Mortgage Bankers Association (MBA), mortgage applications rose slightly for the second week in a row. The Market Composite Index for the week (ending August 5) increased 0.2 percent on a seasonally adjusted basis.

Surprisingly, much of this increase was attributed to an increase in refinancing. The Refinance Index was up 3.5% from the previous week, its largest gain since early June. Refinance applications constituted 32.0% of the total received during the week.

Of course, we are not out of the woods, and given the massive economic disruptions that the pandemic induced, it might be a while before normalcy is fully restored. But I do believe there are encouraging signs that the worst might be behind us and that brighter days lie ahead.

A Little Perspective.

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.

Don't Believe the Headlines.

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.

About That Refinance You Were Considering

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

Jesse Pound@JESSERPOUND

Vicky McKeever@VMCKEEVERCNBC

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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.

TREASURYS

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.