Fannie Sees Growth Slowing, Turns Bearish on Housing

Fannie Sees Growth Slowing, Turns Bearish on Housing

Bajak and Associates

Fannie Mae's economists have upgraded their second quarter economic forecast but say that may be about it for the year. In their July forecast, the company's Economic & Strategic Research (ESR) Group, headed by Doug Duncan, noted that the expansion just celebrated its ninth anniversary "with a bang."  Economic growth in the second quarter may have approached the high in that expansion that occurred almost three years ago.

The outlook for housing has turned bearish. Single-family construction starts were up in May for the fourth time in five months but still lagged the post-crash high of last November.  (Fannie Mae's economists prepared this report before the June data was released wherein housing starts plummeted by more than 12 percent.)  Multifamily starts rebounded in May, reversing about half of the prior month's drop but permits dropped for both single and multifamily construction.

Home sales were mixed.  New home sales rose in May, but the increase was driven by sales in the South which were at a decade long high.  Homebuyers are increasingly buying homes still in the planning stage, which suggests that building activity has not kept pace with demand.  Builders continued to face challenges from shortages of labor and rising building material costs.

Existing home sales fell for the second month and were lower year-over-year for the fourth time in five months.  The inventory of available homes has been down year-over-year for three years, impeding sales and driving price increases.  Typical marketing time is now 26 days, the shortest since the National Association of Realtors started tracking the number in 2011.  Pending home sales, a forward-looking indicator of existing home sales, also dropped for the second month in a row.

Even though interest rates stopped rising and even dipped a bit in May, purchase mortgage application activity was flat and refinance applications continued their decline, falling for the fifth straight month and the eighth time in nine months.  May volume was the lowest since December 2000.

The overall bearish activity in housing prompted Fannie Mae to lower its forecast for existing home sales from a slight increase over 2017 to a slight drop and downgrade purchase mortgage originations by $20 billion. They left their forecast for refinancing unchanged at a 26 percent decrease from last year, with an 8 point drop in the refinancing share to 28 percent.  Mortgage originations in 2018 are forecast to total $1.69 trillion, an 8 percent decline.

As to the overall economy, the ESR group estimate that GDP growth shot up to 4.2 percent during the second quarter from 2.0 percent in the first.  This was due to spending by consumers and the government, inventory investment and more favorable trade. Residential investment, which was a drag on growth in the first quarter appears to have made a modest contribution in the second.

Enjoy it while it lasts.  The economists say this growth will not be sustainable and that the GDP will finish out 2018 with 2.8 percent growth, one tenth-point higher than they predicted last month.  It will then slow to 2.2 percent in 2019 as fiscal impacts fade.

Trade will be a factor in the slowdown.  Canada has already implemented tariffs on $12.5 billion in U.S. goods and there is a back and forth with China involving tariffs on $34 billion in goods on each side.  The U.S. has proposed a 10 percent tariff on a list of another $200 billion in Chinese imports. The impact of these actions so far, Fannie Mae's economists say, have been small but potential retaliation from China "could be devastating for some local economies."

Even though wages remained flat - up another 0.2 percent - in the June employment report, inflation did increase.  The Fed's preferred indicator, the personal consumption expenditures (PCE) deflator, moved up, also by 0.2 percent, in May for the second straight month.  That brings annual growth to 2.3 percent, above the Fed's target measure of 2.0 percent.  The Fed has indicated it would tolerate inflation overshooting its target and there are also concerns about the flattening yield curve, the spread between  2-year and 10-year yields was at about 30 basis points at the time the forecast was written.  Despite these contra-indications, the ESR group says it expects the Fed to stay on its monetary normalization track and they changed their rate hike call to two increases in the second half of this year, in September and December, compared with the one hike they anticipated in their June forecast.


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Source: Jann Swanson, Mortgage News Daily, July 20, 2018

Mortgage Rates Flat Again, Despite Modest Market Weakness

Mortgage Rates Flat Again, Despite Modest Market Weakness

Bajak and Associates

Mortgage rates were flat again today, further prolonging a trend that's been in place for weeks.  During that time, we've seen modest ups and downs, but no significant changes.  To put the narrowness of the range in context, the "ups and downs" are only seen in the upfront costs associated with any given mortgage rate.  Rates themselves haven't changed for the average loan scenario.

Today's absence of change belies market movement to some extent.  The bonds that underlie mortgage rates weakened enough through the course of the day that mortgage lenders were nearly justified in a mid-day rate sheet adjustment (for the worse).  When this happens (i.e. when bonds weaken, but not quite by enough to prompt mid-day changes), the implication is that tomorrow starts out at a slight disadvantage.  In other words, if bond markets simply hold steady overnight, borrowing costs could edge higher.

Ongoing Lock/Float Considerations

Rates moved higher in a serious way due to several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation.

Despite those headwinds, the upward momentum in rates has cooled off heading into the summer months.  This could merely be the eye of the storm, or it could end up being the moment where markets began to doubt that prevailing trends would continue.

It makes sense to remain defensive (i.e. generally more lock-biased) because the headwinds mentioned above won't die down quickly.  Temporary corrections can be explained away, but it will take a big change in economic fundamentals or geopolitical risk for the big picture to change.  While that doesn't necessarily mean rates have to skyrocket, there's a good chance it means rates will struggle to move much lower than early 2018 lows until more convincing motivation shows up.

If you plan to or are actively searching for a new home, this would be a perfect time to get pre-qualified.

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Source: Matthew Graham, Mortgage News Daily, July 18, 2018

Are Lenders Prepared for the Borrower of the Future?

Are Lenders Prepared for the Borrower of the Future?

Bajak and Associates

Uber. Zipcar. Airbnb. New concepts that are now mainstream and indicative of the demographic, financial, technological and cultural forces transforming America and reshaping how people think of themselves, their families and their future. The market is changing and along with it, our home buyers.

To prepare to meet the evolving needs of the next generation of home buyers, we need to understand them. That’s why Freddie Mac is studying the behaviors and attitudes of different demographics and their views of home ownership. They’re also partnering with thought leaders on future trends – such as New York University Professor Arun Sundararajan – to shed light on how emerging trends and socioeconomic shifts, such as digital technologies, affect home ownership.

Their goal is to help lenders better understand the hopes and fears, characteristics and challenges of the Borrower of the Future as they relate to home-ownership and find ways our industry can innovate to address the emerging market realities.

Here are some key trends to consider:

• America is becoming a more diverse nation, and our ideas about family, tradition and independence are becoming more diverse too.
• Optimism about home-ownership is on the rise in minority communities, and as America becomes a “majority-minority” nation, that may change our idea of what “home” means – and who lives there.
• The nature of employment is changing, with more self-employed and contract workers and the digital age allowing work to be done from virtually anywhere.
• In an on-demand world, no one wants to wait. Younger borrowers expect a frictionless, digital-first experience.
• With many coming of age in the Great Recession, the Borrowers of the Future tend to have lower levels of accumulated savings.
• Baby boomers are “aging in place” and millennials are likely to live with their parents.

These are just a few of the trends. For more, including the latest article by Professor Sundararajan's, "How the Sharing Economy Could Transform the US Housing Market," visit www.borrowersofthefuture.com. The article is the first in a series that will examine how the sharing economy and new ways of working are altering the home buying process.

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Source: FreddieMac, July 3, 2018.

A Foolish Take: 2 Ways to Save With 15-Year Mortgages

A Foolish Take: 2 Ways to Save With 15-Year Mortgages

Bajak and Associates

It's not just about getting a lower rate.

Jul 9, 2018

For those looking to buy homes, the most popular way to finance a home purchase is to take out a 30-year mortgage. With mortgage rates having been exceptionally low for years, it's been possible to get extremely attractive monthly payments even on relatively large mortgage loans, and the 30-year term gives homeowners a long time to get their mortgages paid off.

Yet what's somewhat surprising is that relatively few people look at an alternative to the 30-year mortgage. A 15-year mortgage requires larger monthly payments, but their interest rates are almost always significantly lower. For instance, right now, a typical 30-year mortgage has an interest rate that's more than half a percentage point higher than what 15-year mortgages charge.

Half a percentage point doesn't look like a lot. But when you compare the amount of interest you'll pay on a 15-year mortgage at 4% compared to the corresponding amount on a 30-year mortgage at 4.5%, the difference is astounding.

You save twice with a 15-year mortgage. You have a lower rate, but the main reason why you pay so much more interest on a 30-year mortgage is simple: You take twice as long to pay down a 30-year mortgage. For example, on a $200,000 loan, monthly payments on a 30-year mortgage at 4.5% will be around $1,010. A 15-year mortgage at 4% will have monthly payments of about $1,480. The $470-per-month difference pays down the principal balance on the loan that much faster, and over time, that adds up to massive interest savings.


In many real estate markets, prices are too high for many homebuyers to afford a 15-year loan. If you can, however, consider the 15-year option closely. Lower rates and faster payouts will cut the amount of interest that goes to the bank and boost what you keep in your own pocket.

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Source: Dan Caplinger, 7/9/2018, The Motley Fool

US Existing Home Sales Fall for Second Straight Month

US existing home sales fall 

for second straight month

Bajak and Associates

·         Existing home sales fell in May.

·         The number of transactions was expected to increase.

·         This is the second straight month of declines.

U.S. home sales unexpectedly fell in May as an acute shortage of properties on the market pushed house prices to a record high.

The National Association of Realtors said on Wednesday that existing home sales slipped 0.4 percent to a seasonally adjusted annual rate of 5.43 million units last month. It was the second straight monthly decline in sales.

April's sales pace was revised down to 5.45 million units from the previously reported 5.46 million units.

Economists polled by Reuters had forecast existing home sales rising 1.5 percent to a rate of 5.52 million units in May. Sales rose in the Northeast, which accounts for a small fraction of the market. They fell in the West, South and Midwest.

Existing home sales, which make up about 90 percent of U.S. home sales, dropped 3.0 percent on a year-on-year basis in May. They have declined on that basis for three straight months.

Home sales have largely treaded water this year as strong demand depletes the supply of properties on the market, causing house prices to rise faster than wages.

Supply has been especially tight at the lower end of the market, which accounts for a large portion of the housing market. With mortgage rates rising back to seven-year highs, purchasing a home could become even more expensive for first-time buyers. Housing demand is being driven by the lowest unemployment rate in 18 years.

The 30-year fixed mortgage rate rose eight basis points to an average of 4.62 percent last week, according to mortgage finance agency Freddie Mac. Mortgage rates are likely to rise further after the Federal Reserve increased interest rates last week for a second time this year and forecast two more rate hikes before the end of 2018.

There were 1.85 million previously-owned homes on the market in May. While that was up 2.8 percent from April, housing inventory was down 6.1 percent from a year ago. Supply has declined for 36 straight months on a year-on-year basis.

At May's sales pace, it would take 4.1 months to exhaust the current inventory, up from 4.0 months in April. A six-to-seven-month supply is viewed as a healthy balance between supply and demand. The median house price increased 4.9 percent from a year ago to an all-time high of $264,800 in May. That was the 75th consecutive month of year-on-year price gains.

U.S. financial markets were little moved by the data. U.S. Treasury yields rose after Fed Chairman Jerome Powell said the U.S. central bank should continue with a gradual pace of rate increases.

Stocks on Wall Street were trading mostly higher while the dollar was almost flat against a basket of currencies.

US Existing Home Sales

Supply likely to improve

Builders have struggled to plug the inventory gap, citing higher prices for lumber as well shortages of land and labor. The NAR is, however, optimistic the inventory situation will improve later this year.

The Commerce Department reported on Tuesday that housing starts increased 5.0 percent to a rate of 1.350 million units in May. Housing completions increased 1.9 percent to a rate of 1.291 million units last month.

Still, both starts and completions remain below the range of 1.5 million to 1.6 million units that realtors and economists said is needed to ease the supply squeeze.

According to the NAR, sales of homes priced below $100,000 plunged about 18 percent in May from a year ago. Houses for sale typically stayed on the market for 26 days in May, matching April's seven-year low and slightly down from 27 days a year ago. Fifty-eight percent of homes sold in May were on the market for less than a month.

First-time buyers accounted for 31 percent of transactions in May, down from 33 percent in both April and May 2017. Economists and realtors say a 40 percent share of first-time buyers is needed for a robust housing market.

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Source: CNBC Wed. 20 June 2018