Housing remains the bright spot in a darkening economic outlook according to Freddie Mac's economists. Though they have revised their forecast for economic growth downward in the latest edition of the company's Outlook they are still forecasting housing will retain its momentum in 2016.
First quarter data painted "a bleak picture" of economic growth the report says. Information on consumer spending, manufacturing, auto and retail sales have led to successive downward revisions in real GDP growth estimates for the first quarter from others and Freddie Mac is revising its forecast from 1.8 percent to 1.1 percent. The company is looking for consumer spending, wage growth, and residential and business investment to pick up in the following quarters and for the GDP growth to be 2 percent for the entire year and 2.3 percent in 2017.
Even though job growth has been solid, Freddie Mac says wage growth has yet to materialize because of remaining slack in the labor market. However, labor participation did rise slightly in March as discouraged workers, seeing hope, again sought employment. The 0.6 percentage point increase since September 2015 means 1.5 million more workers. This more than offset the job gains over the same period so the unemployment rate ticked up 0.1 point to 5.0 percent in March.
This increase in participation suggests there is remaining slack in the labor force but perhaps not much; both the median weeks of unemployment and the share of those unemployed for 27 weeks or more have been declining, and unemployment should drop back below 5 percent for the rest of 2016 and 2017. "Stronger economic growth for the remainder of 2016 and reduced slack in the labor market will drive wage gains above inflation, though the gains are likely to be modest."
Freddie's economists maintain their positive view on housing and expect that the declines in long-term interest rates that accompanies much of the recent gloomier news should increase mortgage market activity, particularly refinancing, and housing will be an engine of growth. Construction activity will pick up as we enter the spring and summer and rising home values will help support renewed confidence in the remaining months of the year.
As of April 14, 2016, the national average for Freddie's 30-year fixed mortgage rate was 3.58 percent, the lowest since May of 2013. Mortgage rates have followed U.S. Treasuries closely, with the mortgage rate decline almost entirely a function of declining Treasury yields spurred by a flight to quality. As goes the 10-year Treasury, so too shall go the 30-year fixed mortgage rate which has fallen more than 40 basis points since the beginning of the year.
Freddie Mac has lowered its forecast for the 30-year rate for the second through fourth quarters by a tenth of a percent and expects that rate to average 4 percent for the year while still anticipating that the Federal Open Market Committee (FOMC) will raise short-term rates twice in 2016.
Both low rates and strong job growth should push home sales to the best year since 2006 even though they started the year slow. Chronically low inventories remain a challenge both for new and existing home sales and the report says, "At the current rate of construction, people should get used to seeing headlines about low inventory of for-sale homes in many markets for years to come. Demographics and demand are only going to increase the pressure on housing stocks."
Housing and Urban Development (HUD) estimates that between 2009 and 2011 there were over 800,000 1-unit housing units lost to conversion, demolition, disaster, condemnation, or other reasons. With approximately 90 million 1-units housing units in the country, about 414,000 must be replaced each year just to keep the stock constant. While single-family housing starts have been accelerating recently and are running above replacement rates, the difference is only about 400,000 units per year which is constraining growth in the single family market. Freddie Mac expects this to increase by another 200,000 over the next two years gradually alleviating tight inventories.
Tight supply along with demand driven by low rates and solid job gains will keep prices rising above historic average rates - an estimated 4.8 percent this year and 3.5 percent next year. This will also drive up homeowner equity from an estimated $12.4 trillion at the end of 2015, slightly below the not-inflation-adjusted peak of $13.3 trillion in 2006. The current surge in equity has not, like the earlier figure, been accompanied by a surge in mortgage debt but has gone almost exclusively to bolstering household balance sheets.
Mortgage debt will increase 3.5 percent this year and 4.0 percent in 2017, higher than in recent years but still well below the historic average of an annual 10 percentage point increase. There is also opportunity, given the low rates, for increased refinancing and since the recent drop Freddie Mac has refigured its February estimate that rates dipping below 4 percent would increase refinance potential by $122 billion.
They say the contract rate on most loans clusters around every eighth of a percentage point. For example, there are clusters of loans around 3 percent, 3.125 percent, 3.25 percent, and 3.5 percent, but not many loans with contract rates in between. If borrowers react to specific rate incentives, e.g., refinance if market rates drop 1 full percentage point below the borrower's contract rate, then refinance activity will tend to ratchet higher with each eighth point rate reduction. In the week of April 7, 2016, mortgage rates had their biggest one-week decline in over a year of 0.12 percentage points (nearly one eighth). Replicating its February analysis, the company says that one-week decline increased in-the-money refinance potential by $66 billion.
They also ran a macro simulation of the U.S. economy, housing, and mortgage market. That showed the decline relative to the February analysis increased refinance activity by about $50 billion. Based on these calculations, Freddie Mac revised its 1-4 family mortgage originations estimate for 2016 up by $50 billion to $1.70 trillion.
By Crissinda Ponder
rates on mortgages fell for the 4th consecutive week as economic worries
maintain a stronghold over international markets.
as expected, the Federal Reserve's policy-setting committee refrained from further raising
the federal funds rate. Concerns were raised about the broader
economy, including falling oil prices, however.
committee is closely monitoring global economic and financial developments and
is assessing their implications for the labor market and inflation, and for the
balance of risks to the outlook," a statement from the committee reads.
Home price increases continue
home prices ticked up 0.9% on a seasonally adjusted basis from October to
November 2015, according to the S&P/Case-Shiller home-price index released
Tuesday. Year over year, prices increased 5.3% from November 2014.
San Francisco and Portland, Oregon, were the only 3 cities in the 20-city
composite that saw year-over-year double-digit price gains.
the housing market, as measured by prices, is in good shape and the more prices
rise, the more homeowners have the equity to make a move," Joel Naroff,
president and chief economist for Naroff Economic Advisors in Holland,
Pennsylvania, says in a blog post. "That is good news."
data from the Federal Housing Finance Agency show that home prices rose 0.5%
from October to November on a seasonally adjusted basis, and were up 5.9% from
the same month in 2014.
A look at this week's rates
The benchmark 30-year fixed-rate mortgage fell
to 3.94% from 3.98%, according to a Jan. 27 survey of large lenders. A year
ago, the rate was 3.8%. Four weeks ago, it was 4.15%. The mortgages in this
week's survey had an average total of 0.21 discount and origination points.
Over the past 52 weeks, the 30-year fixed has averaged 4.01%. This week's rate
is 0.07 percentage points lower than the 52-week average.
The benchmark 15-year fixed-rate mortgage fell
to 3.21% from 3.23%.
The benchmark 30-year fixed-rate jumbo mortgage
fell to 3.83% from 3.87%.
The benchmark 5/1 adjustable-rate mortgage fell
to 3.3% from 3.31%.
Ready for a refi?
applications jumped 8.8% last week compared with the week before, according to
data from the Mortgage Bankers Association's weekly survey. The unadjusted
purchase index inched up 0.4% and was 22% higher than the same week last year.
MBA's survey includes an adjustment for Martin Luther King Jr. Day.
the delight of borrowers, mortgage rates have improved overall since the Fed's
initial rate hike at its December meeting, says Brett Sinnott, vice president
of capital markets for CMG Financial in San Ramon, California. This is
especially true for those interested in
gone back to levels that are close to early 2015 at this point," he says.
"Any borrower that was going to miss the train for a refinance got lucky
and a 2nd train came through."
New home sales surge
single-family home sales increased 10.8% from November to December, the U.S.
Census Bureau and the Department of Housing and Urban Development said
Wednesday. The seasonally adjusted annual rate was 544,000, which is 9.9% above
the December 2014 rate.
the median and average sales prices declined last month, from $302,000 to
$288,900 and from $373,500 to $346,400, respectively. The estimated total of
new homes sold in 2015 is 501,000 -- the highest number of sales since 2007.
is a great time to enter the housing market, says Jeff DerGurahian, executive vice
president of capital markets at LoanDepot in Foothill Ranch, California.
rates still hovering at 4%, affordability is still in a good spot," he
Purchase lending in June was at its highest level since the beginning of the housing crisis and early reports from the third quarter indicate that this trend is continuing. Black Knight Financial Services said today that the 15 percent annual increase in the whole of the second quarter of this year and the apparent 11 percent increase in the third quarter were driven primarily by high credit borrowers, those with credit scores of 700 or better. Only 20 percent of purchase loans in that quarter went to borrowers with lesser scores.
At the same time refinancing is dropping among high-credit borrowers, indicating that there is a refinance "burn-out" after such a prolonged period of low rates. This is tipping average credit scores lower. This, Black Knight says in its latest Mortgage Monitor based on September data, might be mistakenly interpreted as signaling a loosening of credit.
The company's Senior Vice President Ben Graboske explains that the two factors are related. He said that role of high credit buyers in the increase in purchase originations means that year-over-year comparisons show that purchase volumes from lower-credit borrowers are actually flat to slightly down. "Only 20 percent of purchase loans originated in the past three months have gone to borrowers with credit scores below 700. That's the lowest level we've seen in well over 10 years. The weighted average credit score for purchase mortgages has also hit an all-time high of about 755," he said
"At the same time, refinance originations have been steadily declining since March, signaling a degree of 'burnout' as those both interested and able to take advantage of currently low interest rates likely already have refinanced. We've also noticed that prepayment speeds - historically a good indicator of refinance activity - as well as refinance originations have been dropping most significantly among these same high-credit borrowers. In contrast to purchase mortgages, we've seen average credit scores for refinance originations decline, which has some suggesting that credit is loosening for these products. As these higher-credit borrowers - in many cases, 'serial refinancers' who have repeatedly taken advantage of drops in interest rates and their good credit standings - hit 'refi burnout,' and total originations decline, lower-credit borrowers make up a larger share of total volume, and weighted average credit scores for the total population naturally decline. It's not an indicator of loosening credit standards at all."
Black Knight also looked briefly at adjustable rate mortgages (ARMs) which currently have about a 5 percent share of originations, down from a 5 to 10 percent range pre-crisis. There are about 5.7 million active ARMs nationwide, down 57 percent since 2006 and the lowest number outstanding since 2003. Black Knight says this low inventory will limit the market impact of increasing interest rates.
About 1.5 million of the outstanding ARMs are still under teaser rates; about three out of four active loans have already reset. In 2006, on the cusp of the crisis, there were 13.3 million outstanding ARMs 10.7 million of which were in pre-reset status. That is 2.5 and 7 times respectively the number in each category today.
In addition to fewer ARMs being originated, the initial term has changed. In 2005-2006 nearly 60 percent of ARMs originated were 3/1 hybrids. Today 90 percent of ARMs are originated with an initial reset of five years. Black Knight says these longer initial fixed terms increase the likelihood that "whether through refinance of the purchase of a new home - many of these loans won't exist at the point of an ARM reset."
Black Knight also looked at some key Q3 2015 mortgage performance indicators and found that as of the end of the quarter, all but five states had seen reductions in their foreclosure inventories. As Graboske noted, Florida's improvement stands out.
"As of the end of September," he said, "Florida has ended its 8-year reign as having the highest number of loans in active foreclosure in the U.S. Over the past 12 months, the state has reduced its inventory of loans in active foreclosure by 43 percent." The state, however, still has the largest number of properties 90 or more days past due but not in foreclosure. That's nearly twice the national average of 22.5 percent. New York - which has seen only a 19 percent reduction in its foreclosure inventory over the past year - is now the state with the most loans in active foreclosure with New Jersey in third place. Outflow or foreclosure completions has been an issue in both New York and New Jersey since the foreclosure moratorium ended in 2010/2011.
While repeated foreclosure starts were up, first time foreclosure starts in the third quarter were at the lowest level in more than 10 years. Completed foreclosures also fell in the third quarter, down 10 percent from the second quarter and the lowest they have been since 2006.