Bulls & Blogs

Rate update: Trade war is our headliner again

Interest Rates, Residential Mortgage Comments Off

May 072019

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

By G. Steven Bray

Last week’s two big ticket items, the Federal Reserve meeting and the jobs report, lived up to their billing. The Fed didn’t change policy, nor did the post-meeting announcement really make any waves. It was Fed head Powell, at his post-meeting press conference, who got things moving. He acknowledged that foreign economies look a little stronger than earlier in the year and was equivocal when asked whether the next rate move would be a cut or a hike. (Investors have been hoping for a cut.) Interest rates quickly bounced higher.

Then, we got the jobs report on Fri. The headline numbers were great: a solid beat on jobs created and the lowest unemployment rate in 50 years. However, wage growth was tepid, reinforcing concerns about falling inflation (which tends to depress rates). On top of that, the services sector report missed expectations. Interest rates edged down again, and it looked like we’d be riding the range a while longer.

This week set up to be rather quiet until Friday’s inflation report – until the Chinese pulled away from trade negotiations. Markets have been hopeful for a trade deal, so the president’s threat to impose new tariffs created waves of uncertainty. Investors responded to that by buying bonds, which pushed rates down.

So, where do we go from here? Given that multiple recent economic reports have agreed about receding inflation, it’s unlikely Friday’s Consumer Price Index is going to have much effect on rates. If the index surprisingly doesn’t agree with the other reports, rates may tick up a bit.

However, I suspect rates will rise or fall based on the trade talks. A further breakdown is bound to make investors nervous about a full blown trade war, leading to lower rates.

FHA crack down on down payment assistance

Loan Guidelines, Residential Mortgage Comments Off

Apr 292019

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

By G. Steven Bray

One of a myriad of causes of the housing collapse during the Great Recession was the absence of “skin-in-the-game.” Borrowers used no-money down loans to purchase homes, then walked away from those homes when the economy went sour. Given that they had put none of their savings into the homes, walking away was easier.

One way to achieve no-money down during that time was to use seller-provided down payment assistance with an FHA loan. The seller provided the necessary 3.5% down payment and usually boosted the home’s sale price a little to make up for it. Congress outlawed this practice in 2008, mandating that no party with a financial interest in the home sale – including the seller, the agents, and the lender – could provide the homebuyer’s down payment funds. However, the law allowed governmental programs to continue providing down payment assistance.

Well, where there’s a will, there’s a way, and an entrepreneurial fellow in UT partnered with the Paiutes tribal government to create a fund, the Chenoa Fund, that lenders could use for down payment assistance. Whereas government down payment programs target homebuyers in the governmental jurisdictions, the Chenoa Fund was available nationwide, and it made a profit on the transactions.

Borrowers in down payment assistance programs become delinquent about twice as often as those who use their own funds, and the Feds see these programs as an increasing risk to the FHA Mutual Mortgage Insurance Fund, which backstops FHA mortgages.

Last week, HUD published new guidelines that clarify which entities can provide down payment assistance. The guidelines seem to target the Chenoa Fund, and it will be interesting to see how it responds.

But that still leaves the bigger issue of higher default rates for down payment assisted loans unaddressed. Many of these programs offer the assistance in exchange for higher-than-market interest rates, which stretch a homebuyer’s ability to repay the mortgage. In addition, they perpetuate the problem Congress thought it had addressed in 2008 – homeowners with no skin in the game.

FHA changes aim to deny riskier borrowers

Loan Guidelines, Residential Mortgage Comments Off

Apr 272019

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

By G. Steven Bray

Late last month, FHA made some changes to its automated underwriting system that may prevent as many as 50,000 potential borrowers from qualifying for an FHA loan. FHA said the changes are meant to limit exposure of its insurance fund from higher risk situations.

According to the agency’s annual report to Congress, it’s seeing a concentration of mortgages with high debt-to-income ratios and low credit scores. It also reported a 60% increase in cash-out refinances. (This isn’t an issue in TX as TX homeowners cannot take cash out using an FHA loan.)

An FHA official told The Wall Street Journal that the system changes will affect 40,000 to 50,000 loans each year, which is 4 to 5% of all loans FHA insures.

The changes will flag loans with a combination of higher debt-to-income ratios and lower credit scores for “manual underwriting,” which means underwriting performed by a human being. Unfortunately for borrowers, manual underwriting also means more stringent loan guidelines, and many of those who qualified before the system changes no longer will qualify.

Housing index focused on home prices

Real Estate Market, Residential Mortgage Comments Off

Mar 192019

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

By G. Steven Bray

Fannie Mae’s housing index was down slightly last month, continuing a slow deterioration of the index that began last year. It’s down 1.5 points since last Feb. While consumers still express strong confidence about their personal finances, their confidence in the housing market is slipping.

The overwhelming majority of respondents still expect their personal financial situation to stay the same or improve in the next year, and a 14-point majority thinks the economy is on the right track. Those percentages have changed little over the last year.

What has changed is the share of respondents who think it’s a good time to buy or sell a home. The “good-time-to-sell” component is down 6 points from last year and down 17 points from its peak last Jun. This may be a reflection of consumer’s softening expectations about home price growth. While a net 33% still expect prices to rise in the next 12 months, that’s down 19 points from the peak last year.

The “good-time-buy” component is down 7 points from last Feb, and has been declining steadily since summer of 2013. Interestingly, this also may be due to rising home prices as it’s the most frequently cited concern of potential homebuyers.

The positive takeaway is that as declining expectations for higher home prices sink in, potential homebuyers may begin to view buying a home as an affordable option again. Consumers still expect rents to rise almost twice as fast as home prices over the coming year.

Link to the full report.

Rate update: 4 events that could break the range

Interest Rates, Residential Mortgage Comments Off

Mar 132019

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

By G. Steven Bray

Still riding the range. It’s not a bad place to be when mortgage rates are the lowest they’ve been in a year. This range has held for an unusually long time, and we’ve been looking towards this month as the time when the range finally might break down. There’s no sign of that yet, but let’s review some events that could make it happen.

US economic data probably carries the greatest weight. Most of the data this year has shown continued economic strength – until the Feb jobs report. The report didn’t just miss expectations, it was anemic. Could it be an outlier due to the government shutdown or seasonal factors? Possibly. The Jan number was oddly high. Regardless, the weak jobs report combined with this week’s tame inflation reports have bond buyers in a frisky mood, and that’s good for interest rates. Any additional weak economic data likely will get the recession whisperers going again, and rates could break lower.

The other elephant in the room is the ongoing Chinese trade talks. I still think a trade deal is likely to pump up rates a bit as it not only will remove impediments to economic growth, it will remove the uncertainty that acts like a weight on rates.

Foreign economic uncertainty carries less weight, but its pervasiveness at the moment may be giving it an over-sized effect. Brexit talks continue to flounder, and a no-deal divorce between Britain and the EU is full of unknowns. The European Central Bank last week again lowered its growth estimates and discussed stimulus measures to shore up the European economy. Chinese growth has cooled significantly, and recent data shows its manufacturing sector in contraction.

Finally, we have the Federal Reserve meeting next week. The Fed had a large part in setting up the current range with its about-face on rate hikes following its Dec meeting. Markets currently see little chance of the Fed raising interest rates soon. Should the Fed’s post-meeting announcement suggest otherwise, rates could make a quick jump higher.

Fewer home flips could be temporary blip

Real Estate Market, Residential Mortgage Comments Off

Mar 052019

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

By G. Steven Bray

Recent data from ATTOM Data Solutions, a national property data warehouse, shows that the total number of homes and condos flipped last fall reached a 3.5-year low. The total of almost 46,000 was a 12% decrease from a year earlier.

ATTOM’s senior vice-president Daren Bloomquist suggested this could indicate a cooliing housing market as home flips are quick transactions and provide almost real-time data on the state of the market. Last fall was the third consecutive quarter of year-over-year decreases for flips. Bloomquist said the last time that happened was in 2014 after mortgage rates jumped.

For some context, flips decreased for eleven consecutive quarters preceding the housing crash, so it’s unlikely this trend is indicative of an echo crash. Like 2014, the recent swoon may be a reaction to rising interest rates, and it will be interesting to see whether flipping activity picked up this winter when rates retreated.

The report contained a wealth of interesting data on home flipping. The average gain-on-sale for home flips was $63,000, a slight decrease from a year ago when it was $65,000. This represented a 42.6% return on investment, which was a 6.5 year low and was lower than the 48.1% ROI a year earlier.

Almost half of all flips in the quarter sold for less than $200k, with most of those flips having a gross ROI of 50% or better. However, the highest ROI occurered for flips with a sales price north of $5 million.

The highest rate of home flipping occurred in AZ, TN, and NV, and the highest gross returns were in PA, OH, and KY.

ATTOM’s summary of the report

Rate update: Range is a nice place to be

Interest Rates, Residential Mortgage Comments Off

Feb 262019

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

By G. Steven Bray

Mortgage rates remain range-bound, and fortunately for us the range is a pretty nice place to be. Rates are the best they’ve been since last summer. At some point, the range is going to break, so let’s look at the factors that may influence that break.

Rates hit their recent peak and started heading lower last Nov in response to stock market losses and concerns about the economy. The stock market has rebounded, and recent US economic data looks pretty rosy, so we don’t have those factors working for us anymore.

Trade concerns, especially the ongoing tariff battle with China, added uncertainty to the market, which put downward pressure on rates. However, it’s looking increasing possible that China and the US will resolve their trade issues and remove that as a factor.

Concerns about global economic growth have been a factor for a while, and those concerns seem to be intensifying. Recent data from Europe, China, and Japan have indicated weakening economies, and Europe still has its Brexit headache. Remember that slowing economies lead to less demand for money, which leads to lower rates.

But I’d say the biggest factor affecting rates right now is the Federal Reserve. It was the Fed meeting in Dec that put the exclamation point on the stock market swoon, and it was the Fed’s reaction to the swoon at its last meeting that solidified the current rate range. More recently, the Fed has hinted it may start buying bonds again, which would put more downward pressure on rates.

Despite those hints, Fed head Powell has been clear that the Fed is keenly interested in economic data (both US and global) and will respond accordingly. Most of the US data released this month was polluted by the government shutdown, and it won’t be until mid-Mar until that pollution clears – which could be the time rates finally leave the range.

Big rebound in housing sentiment

Real Estate Market, Residential Mortgage Comments Off

Feb 252019

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

By G. Steven Bray

Fannie Mae’s housing index rebounded in Jan after Dec’s big drop in sentiment. Most of the gain was the result of consumers’ confidence about their personal finances. Thirty-four percent of respondents reported their income is higher this year while only seven percent said their income has fallen. This is an 11 point improvement from the index a year ago.

The overall index, which measures how consumers feel about the housing market, rose 1.2 points in Jan. However, the index is down almost 5 points from the same time last year, a negative trend that started last summer.

Three other components of the index stood out. The net share of respondents who thinks home prices will rise fell one percent, declining for the fourth consecutive month. This component is down 22 points from the same time last year.

The net share of respondents saying mortgage rates will fall increased three points. However, this component hasn’t changed much in the last year, and the overwhelming majority of consumers still think rates will rise.

Finally, the net share who thinks now is a good time to buy a home rose four points last month to 15%. It was this component that caused the Dec index to sink.

Taken together, the positive improvements in the index may signal that consumers are sensing improving home affordability, and that could portend an active spring homebuying season.

The best day to buy a home

Real Estate Market, Residential Mortgage Comments Off

Feb 192019

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

By G. Steven Bray

Do know which day is the best day to buy a home? Well, according to ATTOM Data Solutions, a national property data warehouse, it’s the day after Christmas. ATTOM studied closings for the last 5 years and determined that buyers who closed on Dec 26th realized the greatest discount from market value.

The purchase price for buyers on that day averaged 1.3% below what ATTOM considered the market value. To determine market value, it used a computer-based valuation model, which can have laughably inaccurate results. However, ATTOM analyzed more than 18 million transactions, so you’d expect the laughable outliers would average out.

But why that day? It might be because in order to close on Dec 26, a buyer would be submitting an offer around Thanksgiving. Those sellers who wanted to sell before the end of the year probably were getting a little more motivated to cut a deal.

Interestingly, ATTOM’s analysis showed only 10 days during the year when buyers had the upper hand getting a below market price. That’s probably a testament to the strength of the recent seller’s market. Seven of those days occurred in Dec with one day in each of Feb, Oct, and Nov.

Rate update: Investors think Fed is done raising rates

Interest Rates, Residential Mortgage Comments Off

Feb 122019

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

By G. Steven Bray

The Federal Reserve gave rate watchers a great gift a couple weeks ago – assurances that it’s well aware of the potential for slowing economic growth. Markets reacted with a big rally, and analysts now predict the chances of the Fed lowering rates before the end of the year as high as the chances it will raise rates again.

However, lost in the excitement was the Fed’s reiteration that it will tweak its plans based on economic data. Two days after the Fed meeting, the Jan jobs report crushed expectations, and other economic reports showed the economy still seems to be humming along.

Investors still have other concerns: the government funding deal, the Chinese trade dispute, and weakening global growth. All have created uncertainty that’s counteracting the good news on the economy, and that seems to be keeping rates trapped in a very narrow range.

So, what to watch? Personally, I don’t think anyone in Washington wants another shutdown, and I think markets already expect the compromise to pass. Chinese trade, on the other hand, could be a market mover. As long as a trade deal remains elusive, I think rates will remain capped. If a trade deal happens, watch out for higher rates. Even then, I think global growth concerns will remain background uncertainty that keeps rates from rising too fast.

We have one other issue to watch. The Fed meets again in mid-Mar. Based on the Fed’s last post-meeting announcement and press conference, markets seem convinced the Fed has hit the pause button on tighter monetary policy. If the Fed’s dot plot in Mar continues to show more rate hikes, or if Fed governors over the next month backtrack on their earlier caution, look for rates to rise again.

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