Jun 272020
 

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

We hit record low mortgage rates a week ago on headlines about a possible second wave of the coronavirus. Rates had been trending higher this month after the amazingly strong May jobs report. That positive news was reinforced by private reports of increasing economic activity. The coronavirus news was a wet blanket that thrashed the stock market and caused flight to safety bond buying.

So, Treasury rates have returned to what I call their “covid range.” We saw little movement this week as investors seem to be waiting for more definitive information about the reopening of the economy. That’s been good news for mortgage rates because, as we’ve discussed before, mortgage rates have been suffering from a “risk premium” effect. That premium is slowly evaporating, and as it does, mortgage rates fall just a bit more.

If you haven’t refinanced yet or you’re thinking about buying a home, you may wonder if this means mortgage rates are destined to hit new record lows in the weeks ahead. Unfortunately, my crystal ball is clouded, so I can’t give you a definite answer. But we can discuss the factors that could lead to new record lows.

Simply put, it’s covid headlines.  Last week’s stock market swoon was driven by fears that the covid damage wasn’t done. Headlines about spiking virus cases will stoke that fear. For now, the fear seems to be balanced against the recent positive economic data, leaving rates stuck in their current range. Should the data begin to deteriorate, or should the headlines become more dire, rates could fall further.

But keep in mind that every new record low is a little harder to achieve.  For bonds, the rate is inversely proportional to the bond’s price. Thus, when we have record low rates, we have record high prices. Each time we hit a record high price, more bond investors are likely to view it as “the one,” sell their bonds and take their profits. If there are more sellers than buyers, rates rise.

Reasons it’s a good time to buy despite virus

 Real Estate Market  Comments Off on Reasons it’s a good time to buy despite virus
Jun 122020
 

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Spring typically is the peak season for home buying, but this year’s Coronavirus scare has given us a particularly unpredictable market.  As lockdown orders hit the economy, sellers took their homes off the market – either out of concern over people entering their homes or concern they wouldn’t be able to sell for their desired price.  Buyers had their share of concerns, too, as millions lost jobs, were furloughed, or took pay cuts.

Despite all that, many economists still suggest this summer will be a good time to buy a home.  Granted, some of these economists work in the real estate industry, and saying that is self-serving.  But their reasoning contains some logic, so if you’re in the market for a new home, you may want to consider these points.

  • First, this virus-induced recession is entirely different than the last one.  The real estate industry drove the Great Recession a decade ago, and home prices declined dramatically in many markets.  In this recession, it looks like real estate will remain relatively unscathed, which is what has happened in recent recessions other than the Great Recession.
  • Second, as lockdown orders are lifted, it’s likely real estate markets will see a flurry of activity due to pent up demand, and we are starting to hear this from local realtors.  It sounds likely you’re going to face the same competitive market we had last year.  Homes that are priced correctly will sell quickly.
  • Third, interest rates are at record lows, and I don’t expect they can get much lower.  If you wait and rates rise, you may not be able to afford as much home.

If you need to buy a new home, keep in mind that sellers are just starting to come back into the market.  Home choice may remain a little lean for a couple more weeks, but analysts are predicting a surge of listings this summer.  Get a good real estate agent to help you identify homes as soon as they’re available and to help you keep from paying too much.

Explaining the chances of lower mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Explaining the chances of lower mortgage rates
Apr 212020
 

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A question I keep getting asked – are mortgage rates going to drop any further?  I wish I had a crystal ball so I could give everyone a definitive answer.  Instead, I’ve tried to educate the questioners about the finer points of the mortgage bond market, but I find they usually fall asleep before I get to the tenth slide.

So, after trying to answer this question so many times, I think I have winnowed out the minutiae and will try to defend a simple answer.  I think there’s about a 75% chance mortgage rates will go lower, and here’s why I believe that.

Mortgage rates tend to follow the 10-year Treasury bond.  I say “tend to” because the correlation isn’t perfect, and current times are a good example.  If mortgage rates had followed 10-year Treasuries perfectly to their current very low levels, 30-year mortgage rates would be around 2.5%.  Instead, they’re hanging in the mid-3% range.

That begs the question why.  We’ve discussed some of the reasons previously, but it seems the most tractable one is the CARES Act.  The Act gave homeowners with a mortgage the right to request a forbearance from mortgage payments for up to 12 months with seemingly no penalty to the homeowner.  Unfortunately, loan servicers, the companies to which you send your mortgage payment, still have to pay the investors who bought those mortgages, as well as pay property taxes and insurance premiums for homeowners who escrow.  The Mortgage Bankers Association estimates servicers may need to come up with $100 billion (that’s billion with a B) to cover the forborne payments, and the Act didn’t provide servicers with any assistance.  As a result, the bond market is requiring higher mortgage rates to account for this risk.

A number of Congressmen and Senators as well as trade associations have asked the Executive Branch to do what Congress failed to do – provide a borrowing program for mortgage servicers.  Rumor has it that the Treasury Dept has heard them, and something is in the works.

For mortgage rates, the questions then become:

  • whether markets think the program will be effective, thus relaxing what is essentially a risk premium currently built into mortgage rates; and
  • how quickly will it happen?

The risk for those waiting for lower rates is that the economy ramps up again, allowing rates to rise naturally, before markets eliminate the risk premium, allowing rates to fall.  But if your mortgage needs are more urgent, or you’re more risk averse, the current 3.5% mortgage rate really is pretty sweet.

Rate update: It’s the government’s fault

 Interest Rates, Residential Mortgage  Comments Off on Rate update: It’s the government’s fault
Mar 262020
 

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By G. Steven Bray

Quite simply, mortgage rates are all over the place right now, and the market is a mess.  Despite conspiracy theories you may be reading on social media, the government isn’t keeping rates artificially high to help Wall Street make a fat profit.  In fact, it’s because of government involvement that rates are as low as they are.

Let’s take a short look back.  It was only about 20 days ago that mortgage rates hit all time lows.  Those lows lasted all of a couple hours one morning – and then rates started moving quickly higher.  I discussed in my last blog some of the reasons that happened. In the simplest sense, it was due to basic economics.  There were a LOT of mortgage bonds to sell due to the record low rates, and there were very few buyers of those bonds due to market turmoil surrounding the coronavirus.  In order to clear the market, mortgage rates shot up over 5% in short order.

Since then, rates have been extremely volatile, falling back below 4% some days, then jumping back above 5%.  But I said the government has been keeping rates low. How does that jive with the volatility?

Well, this weekend, the Federal Reserve basically wrote a blank check – indicating it would purchase an almost unlimited amount of mortgage bonds to restore liquidity to the market.  That means markets can trade on the certainty that there will be a buyer for mortgage bonds. Now, that doesn’t guarantee low rates because the Fed is not setting the rates of the mortgages it buys.  Instead, it allows the market to set rates knowing there will be a buyer.

The desired result – which I think we’re beginning to see – is more restrained volatility.  Thirty-year rates were back below 4% the last couple days for most lenders, and despite continued volatility, have remained there.

Rate update: Virus outbreak leads to lower mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Virus outbreak leads to lower mortgage rates
Jan 282020
 

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

By G. Steven Bray

Tragedy can lead to uncertainty, and uncertainty is good for lower interest rates. The outbreak of the coronavirus in China has unsettled global markets, and investors are running to the safety of Treasury bonds. Investors are concerned the virus will seriously impact global growth. One analyst already is predicting the virus will shave 0.4% off global GDP, and the outbreak seems to be growing.

The effect on stock and Treasury bond prices has been much more significant than the effect on mortgage rates. Even so, mortgage rates are the lowest they’ve been in over 3 years.

If you’ve been watching for low interest rates, don’t procrastinate. As quickly as these rates have appeared they could evaporate. If the number of new cases of the virus starts to decline, markets may conclude the effects will be limited, and rates will snap back.

In that case, we’re back to watching economic data and events, which ramp up this week. The Federal Reserve meets today and tomorrow. While no one expects the Fed to change its current policy – no rate hikes or cuts until inflation or unemployment change significantly – investors love to parse the post-meeting statements for hidden meanings.

Next week we get the ISM reports and the Jan jobs report. The service sector of the economy has remained strong despite the trade disputes, but pundits have been predicting its deterioration for many months. Should the ISM report hint a downturn, rates could improve further. Likewise, should the jobs report deviate from its current trend, that could gets rates moving.

Rate update: Markets shrug off war drums

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Markets shrug off war drums
Jan 082020
 

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By G. Steven Bray

When I predict whether rates will rise or fall, I always issue the caveat “absent unexpected headlines.” Well, the past few days have provided a case in point. Rates dropped quickly following the US drone strike last week on the Iranian general and rose just as quickly today following the President’s address that suggested the crisis has passed.

Where does that leave us? Rates are stuck in the range again and waiting for inspiration. Potential sources for that inspiration are many, but let’s focus on a few of them.

First and foremost, if the Iranians don’t “stand down” as the President suggests, rates are certain to fall again. Renewed hostilities will make investors more cautious, and that caution will lead to lower interest rates.

Assuming that doesn’t happen, and markets currently seem confident it won’t, the next big event is this week’s jobs report. Recession whisperers were headliners on cable news last fall when it appeared the jobs market was softening. That changed with Dec’s blowout jobs report. Markets expect another strong report this Fri. Because of this expectation, its verification is unlikely to change rates much. Should the report disappoint, rates should improve a little.

Trade is the other major source of inspiration. The Senate is expected to pass the new trade deal with Mexico and Canada soon, and the President said he expects to sign a Phase 1 deal with China mid-month. Markets widely expect this to happen, so when it does, it’s unlikely to change market sentiment. Rates seem to be experiencing some slight upward pressure, and that probably would continue. However, should we experience a hiccup in either deal, we’d likely see at least a short-term drop in rates.

Rate update: All I want for Christmas is a trade deal

 Interest Rates, Residential Mortgage  Comments Off on Rate update: All I want for Christmas is a trade deal
Dec 042019
 

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By G. Steven Bray

I hope you and your family had a blessed Thanksgiving. It was a fairly uneventful one for bond markets with interest rates sticking to their recent range. In fact, rates have been stuck in this range since Sep. Sure, rates move a little week to week in response to headlines and economic data, but I still think the next trend for rates ultimately depends on a trade deal with China, an imminent resolution to which is looking increasingly unlikely.

The main wildcard at this time is the global economy. Earlier in the year, rates dipped invitingly based on weak economic data coming out of Europe and China. There was great concern that the US economy would follow suit. Instead, the US economy, except for manufacturing, showed resillence and even robustness in sectors such as housing. Europe and China now seem to be bottoming out, and some analysts are predicting renewed global growth next year.

As we’ve discussed many times, a growing economy tends to push up interest rates, so that’s the background through which we have to consider our current situation. A trade deal, even a partial one, is likely to foster renewed optimism and, in turn, economic growth. On the other hand, should the trade dispute deepen, it’s likely the hand-wringing and talk of recession will start again. While that’s good for lower interest rates, we risk talking ourselves into a recession regardless of the strength of our economy.

Rate update: Reasons rate should be lower

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Reasons rate should be lower
Sep 162019
 

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By G. Steven Bray

What a difference a couple weeks make. Last week, the press was reporting the lowest mortgage rates since 2016. This week? Well, we lost a little ground. Rates rose about half a point in two weeks.

So, if you approach decisions cautiously (like I do) and didn’t jump into a refinance, are you out of luck? I think not, but you may have to practice a bit of patience. Last week’s bounce higher may have been nothing more than a market reaction to the rapidity with which rates fell at the end of Aug.

Recall back to earlier posts when we discussed the reasons rates were falling: Europe appears headed for a recession, Brexit remains unresolved, and China’s economy is slowing dramatically due to the ongoing trade dispute. On top of that, talking heads have spent the summer trying to talk the US economy into a recession. Little has changed to mitigate those concerns.

Given that, I think it’s likely rates will ooze back down again. The question is when. Here’s what I’m watching:

  • The Federal Reserve meets this week, and pretty much everyone expects it to cut short term rates by a quarter point. That’s already priced into rates. What I’ll be watching is what the Fed puts in its post-meeting announcement and what Fed head Powell says at his press conference. If the Fed doesn’t acknowledge ongoing risks to the economy, rates will remain elevated longer.
  • Second, US manufacturing data has been soft, but consumer data has remained strong. If consumers stop spending money, the US economy will be headed for a soft patch, and that will move rates lower.
  • Finally, the trade war with China is hurting both countries, but it seems to be hurting China more. That may be softening China’s resistance to compromising on some of the thornier issues. A complete resolution seems unlikely anytime soon, but a thawing of positions might give markets confidence in the US economy and keep rates higher.

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
 

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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.

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.