Mortgage Rates Spike

The bond market went a little crazy last week, and mortgage rates followed. By Monday of this week most lenders were quoting 4.0% for a 30-year fixed-rate mortgage (FRM). The market calmed a bit midweek, and by Thursday Freddie Mac reported a slight easing to 3.94%.

The speed of the increase was close to unprecedented. Rate analyst Matthew Graham said on Monday that the previous three days had seen rates move higher at a pace that was only matched by the three worst consecutive days of the 2013 “taper tantrum.” That was the period when markets reacted to the Federal Reserve’s announcement of a reduction in the quantitative easing program. But Graham added, “If there’s one saving grace apart from the platitude about 4% still being relatively low in the biggest of pictures, it’s that the mortgage payment on a $200,000 loan would only be $14 higher today vs. (last) Thursday.”

We would add another “saving grace.” One year ago, per Freddie Mac, the 30-year FRM rate was 3 basis points higher than today. And look where we have been since then.

Mortgage activity, both purchase and refi, responded quickly to the upturn in rates, and the Mortgage Bankers Association (MBA) reported that application volume was down across the board, especially for refinancing which dropped 11%. It didn’t help that the business week was shortened by the Veterans Day holiday on Friday.

But there was good news–exceptionally good news–as well. Housing starts, which had fallen unexpectedly in September due to a huge loss in the multi-family sector, came roaring back in October, jumping 25.5% for the month and landing 23.3% ahead of last year. The increase was primarily due to the multi-family construction regaining its footing, but single-family starts were up more than 10% and are now at a seasonally adjusted rate of 1.32 million, 23% ahead of last year.

Permits, which had lagged in late summer, also were up slightly, building on a solid increase in September. They too are at a recent high of 1.23 million.

There won’t be an update next week, but we are guessing you will probably be too busy eating to miss it. The following week will be chock-a-block with housing news so we will catch up then. Have a wonderful Thanksgiving and if you are traveling, do so safely.

Demand For Higher Loan Limits

The Employment Situation report for October was a solid one again, with 161,000 new jobs, less than analysts’ consensus of 178, but in the mid-range of their estimates. The unemployment rate fell 0.1% to 4.9%, which Econoday says some consider full employment. Probably the sweetest data nugget however was average hourly earnings. They rose “an outsized” 0.4% bringing the year-over-year rate to 2.8%, a post-recovery peak.

Conforming loan limits, the maximum size of a mortgage that can be sold to or guaranteed by Fannie Mae and Freddie Mac, (and used by the VA and FHA as well) are adjusted annually but they have not budged since 2006. The limit was at $417,000 for most of the nation, although 294 “high cost” counties had limits as high as $721,050. Then the housing market crashed and Congress passed emergency legislation preventing any upward adjustment until national home prices returned to pre-crisis levels. Since prices are a hairsbreadth away from that goal, chatter about raising the limits has begun.

Black Knight Financial Services analyzed all loans originated just below and above the limit over the last year, looking at them in $1,000 “buckets” They found a pretty consistent number of originations in 15 of the 16 buckets just under the limit. In the 16th, the $416-$417,000 bucket, there is a 17-fold increase; 100,000 loans in that tiny little pail; 1.5% of all loans originated and 2,5% of the dollar volume. In the very next bucket, the one labeled $417,001, originations plummeted by 70%. This means, Black Knight explains, that many people are bringing money to the closing table or using “piggy-back” mortgages to fit under the limit.

They also found that “piggy-back,” originations skyrocket right at the cusp of the loan limit. Loans in that final bucket are nine times more likely to have a second than other loans and one quarter of the total have one.

The take-away, Black Knight says, is a strong demand for a higher limit. The company estimates raising it by $10K would result in a 1% increase in lending– 40,000 more loans next year–$20 billion worth. There is a congressionally mandated formula for adjusting loan limits and this is the season. The Federal Housing Finance Agency should be unpacking their slide-rules soon.

Rent Relief

Is the end of seemingly endless rent hikes at hand? Laura Kusisto reports in the Wall Street Journal that apartment rents have actually come down in some of the nation’s priciest cities this quarter, perhaps the first sign that the six-year boom in rents is ending. It is a tiny beginning–rents are down by 3% in San Francisco, 1% in New York and have dipped by fractions in Houston and San Jose–but it marks the first declines in those markets since 2010.

Furthermore, while rent growth still averages 4.1% nationwide, increases have slowed for four straight quarters and have even turned negative in key regions. This suggests, Kusisto says, that the overall market could be headed lower.

Those cities with the highest rents are likely also those that offer the best job opportunities to Millennials as they enter the work force. High rents have been cited by some studies as being, along with student loan debt, major reasons why Millennials are unable to save up for buying a home.

While it may take a while for any rent relief to be wide-spread, Catey Hill, an editor at MarketWatch suggests an alternative. Get a roommate. Not a terribly original idea but her numbers are compelling.

Many renters already share their space, with a significant other or perhaps with someone they had never met before the moving van showed up, but for those living alone, a roomie can mean significant savings. A person who opts to share a two-bedroom apartment and splits the rent 50/50 can save an average of $470 a month over the cost of occupying a one-bedroom apartment alone. And those pricey cities where millennials flock, the savings could be even greater; $1,106 in San Francisco, $810 in Boston, $564 in San Diego, $546 in Portland.
A few years of squirreling away such savings could substantially speed up acquiring a downpayment.

Actual housing news was in short supply this week, limited to the Census Bureau’s report on August construction spending which continues to be flat. Residential spending was down slightly with single family construction losing 0.9%, the third straight monthly contraction, putting it 1.5% behind August 2015. Multi-family construction remains about the only bright spot in the whole report. It was up 2.4% for the month, and is running almost 14% ahead of last year.

As hurricane Matthew bears down on the east coast, we hope you all stay safe.

A Respectable Report

Given the spectacular showing of new home sales in July–up 12.4% and topping an annual rate of 600,000 for the first time since the crash–no one really expected August sales to continue the breakneck pace. And they didn’t. But last week’s report from the Census Bureau and the Department of Housing and Urban Development was none-the-less respectable.

Sales of newly constructed homes were at a seasonally adjusted annual rate of 609,000 units, a 7.6% decline from the upwardly revised July rate of 659,000 and a 20.6% year-over-year gain. Analysts had expected sales to dive back down under the 600,000 mark.

Inventories remain tight; there were 235,000 new homes available at the end of August, an estimated 4.6-month supply. Even that estimate is generous as only 132,000 of those homes are completed and ready for occupancy.

Sales of existing homes haven’t been nearly as ebullient as those of new homes in recent months, and are now lagging 2015 numbers. This week’s Pending Home Sale Index doesn’t hold much promise for those sales in the short term. After a very slight uptick in July they resumed their trend down, falling for the third time in four months and are now below last year’s level.

The final two July home price indices showed fairly steady gains. CoreLogic Case-Shiller’s national index had gains of 0.7% and 5.1% for the month and year, about the same as in June. Black Knight’s HPI gained slightly less for the month and slightly more for the year, but the difference is hardly worth mentioning. The new home sales report put the average price of a home sold in August at $363,600.

Fannie Mae (with Freddie Mac sure to follow) has institutionalized their new “trending credit” standard into its automatic underwriting system. First introduced last October, trending credit gives the equivalent of bonus points to borrowers with credit histories showing responsible management of their debt. This means paying off revolving debt or making more than the minimum monthly payment. It is a small change, but may make the difference in approval or denial for some borderline borrowers.

Finally, far be it from us to spread rumors–except for this one. Inside Nonconforming Markets says it is likely that the baseline conforming loan limit for Fannie Mae and Freddie Mac mortgages will rise at the first of the year–the first upward revision in a very long time. It isn’t expected to be a big move–the guess is to $422,000 from the current $417,000, but still helpful for some. No word yet if those areas considered high-priced markets will also have their limits raised.