Rate update: The big reason mortgage rates aren’t lower

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The big reason mortgage rates aren’t lower
Aug 142019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Trade uncertainty last week set off a feeding frenzy in the bond market. Investors gobbled up Treasury bonds in a flight-to-safety buying spree that saw the 10-year rate drop by 40 basis points (0.4%) in just over a week. The 10-year rate is now the lowest it’s been since 2016.

Given that we always talk about mortgage rates tracking the 10-year Treasury, shouldn’t mortgage rates be looking superb right about now? Well, not exactly. While mortgage rates tend to move in the same direction as the 10-year T-bill, there’s one big reason that mortgage rates lag behind when it comes to rapid rate changes.

When an investor buys a 10-year Treasury bond with a 2% rate, the investor knows that bond will pay 2% interest for exactly 10 years. Period.

When an investor buys a 30-year mortgage security with a 3% rate, the investor knows it will pay 3% for 30 years if and only if the borrower doesn’t sell, refinance, die. Of these, refinancing is the greatest risk when rates are moving lower.

Let’s say an investor buys a mortgage security with a loan balance of $1 million paying 3%. The investor expects to receive payments equal to the loan balance PLUS the interest paid on the loan, so the investor pays $1.04 million for the security – a premium to account for interest.

Now, let’s say rates keep dropping, and the borrower refinances after 12 months. The borrower has paid roughly $30k in interest, but the investor paid a $40k premium. Not a winning investment strategy.

Investors still want to purchase mortgage securities, so what do they do? They reduce the premium they’ll pay. The way this shows up for borrowers is in the interest rate.

In the example above, it takes $40k of premium to make everyone whole in the mortgage transaction. If the investor only offers $30k, the lender needs to make up the extra $10k, and it does that by offering the investor (and, thus, the borrower) a slightly higher interest rate – thus inducing the investor to pay the required premium.

Now, the borrower will see a lower rate than before rates fell because the cost of money is lower, but the borrower’s rate won’t fall as quickly as that of more predictable bonds, such as Treasuries.

If Treasury rates settle into the current range for a while, the refinancing risk will abate, and mortgage rates eventually will catch up.

Or maybe home prices are falling

 Real Estate Market  Comments Off on Or maybe home prices are falling
Aug 122019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Is the housing market heating up or cooling down? Well, it depends on whom you ask. It also probably depends on where you look.

Last week, we reviewed at a Corelogic report that said home price appreciation is rising again. Today, we’ll look at a Redfin report that says the market is slowing.

According to Redfin, the national housing market has cooled dramatically. The brokerage company says home sellers are four-times less likely to receive multiple offers than a year ago. Only 12% of the offers written by its agents faced competition in Jun.

Redfin says home sales started slipping late last year when mortgage rates rose dramatically. Since then, rates have fallen back, but sales have been slow to recover. The report says properties are staying on the market longer, and more of its seller are having to drop prices than in the last two years.

Redfin reported the most dramatic slowdowns in West Coast markets.

The Case-Shiller price index seems to agree as the national index showed home price appreciation fell again in May. The reading of 3.4% was down a tick from Apr and down about 3 points from a recent peak last year.

While the index shows the pace of appreciation slowing, it’s important to remember that prices still are moving higher. In Case-Shiller’s 20-city composite index, only Seattle home prices were lower than a year ago, and prices there have been rising since Jan. For Dallas, the only TX city in the index, home prices have been rising consistently since the trough of the Great Recession.

Housing index says prices rising again

 Real Estate Market, Residential Mortgage  Comments Off on Housing index says prices rising again
Aug 062019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Home price increases are accelerating again, so says Corelogic, a leading real estate data provider. It reported that its Home Price Index is increasing again on a month-over-month basis. In fact, the index rose 0.9% from May to Jun alone. Corelogic reported the annual increase was 3.6%.

Analyzing the reasons for the increase, Corelogic suggests lower mortgage rates may be the culprit. Rates for fixed-rate mortgages have fallen by nearly one percent since last fall.

Another reason may be homeowners’ reluctance to sell. As home prices rise, homeowners are questioning their ability to afford a replacement home, especially one in the same area. In a survey in higher-priced markets, Corelogic found three times as many people planning to buy as sell. Simple economics says that situation will put pressure on home prices.

While the current home price index remains near its recent low, Corelogic forecasts that it will rise above 5% again in the next few months. Even with continued low interest rates, that is likely to exacerbate the housing affordability problem, especially for moderate income homebuyers.

Rate update: Thank cheap Chinese imports for lower rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Thank cheap Chinese imports for lower rates
Aug 052019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

If you needed a recipe for a rate rally, just take a look at recent financial headlines. Friday, the President announced a tariff on an additional $300B worth of Chinese imports, and the investor herd started making flight-to-safety trades, buying up US bonds. When the demand for bonds is high, rates are low (because the bond issuers don’t have to offer as much interest to entice bond purchases).

Almost lost in the stampede was last Wed’s Fed rate cut and the good jobs report on Fri. Without the stampede, I’d hazard that we’d be stuck in the summer doldrums again, wondering when rates would move higher or lower. Fed head Powell hemmed and hawed when asked if the Fed would cut rates again this year, and the jobs report was strong enough to suggest a continuation of moderate economic growth. Neither provided a clear signal to investors.

But investors got their signal Fri and believe it was reinforced by weak global economic data today. On top of that, China devalued it currency overnight to levels not seen since the depths of the Great Recession.

That matters because it suggests a number of rate friendly effects. It suggests the trade war isn’t going to end soon. By devaluing its currency, China hopes to keep its good competitive despite the tariffs. Lower import prices lead to lower inflation, the mortal enemy of interest rates. And it increases the chances of a recession, and that increases the chances the Fed will have to lower short term rates even further.

As usually happens when Treasury rates fall so quickly, only a fraction of the gain has filtered through to mortgage rates. However, if Treasury rates remain in this new, lower range, mortgage rates eventually will catch up.