Mortgage Business

Well, Perhaps Not The Best of All Worlds

20140309-080351.jpgLast week we spoke with optimism about the fact that the economy is indeed recovering but interest rates are remaining lower than most had predicted for this year. We wondered whether we might actually have the best of both worlds — at least for a short period of time. However, we have to recognize why rates are so low while the economy is edging its way back to normal. If rates are low because there is no evidence of inflation and the economy is not in danger of overheating, that is a good thing. As long as the economy keeps improving.

On the other hand, if rates are down because of the violence which is occurring in several areas of the world, that is another matter. When the world is in crisis, it is not unusual for U.S. Treasuries to be a safe haven for investors. While the effects of low rates are still positive for our economy, we can’t actually describe this as a good thing. And there is a connection between the economy and these events. For example, the economic sanctions levied against Russia are already affecting the European economy. During the financial crisis we saw how an under-performing economy in Europe can affect our economy’s performance.

With regard to our economic recovery, this past week’s jobs report gave us evidence that the economy is not about to overheat and thus the Federal Reserve Board is not likely to move on increasing interest rates more quickly than originally anticipated. Wage growth has not been strong enough to contribute to concerns about inflation at this point in time. When you add the aforementioned concerns about world conflicts, it appears the Fed is more likely to keep rates low until sometime next year. On the other hand, the fact that 142,000 new jobs added in a month is now considered disappointing shows how far our economic recovery has progressed over the past year.

The Markets. Fixed rates were stable again in the past week, remaining near their lows for the year. Freddie Mac announced that for the week ending September 4, 30-year fixed rates remained at 4.10%. The average for 15-year loans ticked down slightly to 3.24%. Adjustables also were stable, with the average for one-year adjustables moving up to 2.40% and five-year adjustables remaining at 2.97%. A year ago 30-year fixed rates were at 4.57%. Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac — “Rates on home loans were little changed amid a week of light economic reports. Thirty-year fixed-rates remained unchanged from the previous week at 4.10 percent. Of the few releases, the ISM’s manufacturing index rose to 59.0 in August from 57.1 the previous month. This was the highest reading of the index since March 2011.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages Updated September 5, 2014

Daily Value Monthly Value
Sept 4 August
6-month Treasury Security 0.05%  0.05%
1-year Treasury Security 0.10%  0.11%
3-year Treasury Security 1.01%  0.93%
5-year Treasury Security 1.71%  1.63%
10-year Treasury Security 2.45%  2.42%
12-month LIBOR  0.559% (Aug)
12-month MTA  0.115% (Aug)
11th District Cost of Funds  0.668% (July)
Prime Rate  3.25%

A pick-up in the economy is expected to help propel the housing market forward, with an increase in household formation and a stronger recovery, according to Freddie Mac’s Economic and Housing Market Outlook for August. “We are getting closer to a more normalized economy, and now we are expecting to see housing driven by fundamentals, and, in fact, we’ve already seen this in some markets,” says Frank Nothaft, Freddie Mac’s chief economist. “The economic growth and labor market gains we saw in the second quarter of this year are projected to continue, strengthening household formations and the housing sector. A recovering housing sector will sustain the rally in homebuilding, despite likely increases in long-term rates. Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand. The result is an economy that gradually recovers back toward its potential.” The labor market has added an average of 230,000 net new jobs during the first seven months of the year, the first solid improvement after several years of weak employment. Over the past four quarters, net household formations totaled 458,000, according to Census Bureau data. But the Joint Center for Housing Studies is projecting that to jump 1.2 million to 1.3 million per year in the long-term. The number of persons per household has risen by 2.6 percent since 2005, from 2.69 to 2.76 persons. “If the persons per household had held steady over the period, there would be an additional 3 million households today,” according to Freddie Mac’s report. Source: Freddie Mac

Following two years of increasing home sizes, the median size of new-homes appears to be leveling off as entry-level buyers return to the market drawn to more modest homes. The median size of homes that builders started construction on in the second quarter was 2,478 square feet, holding the same as the previous quarter. It remains near the record high of 2,491 square feet, which was reached in the third quarter of 2013, the Commerce Department reports. The median size of new homes began to increase in 2012 as move-up and luxury buyers began a drive to purchase larger homes. Also, buyers were showing preferences for more bedrooms (at least three), larger garages, basements, and wide-open living spaces like great rooms, according to a 2012 survey of new-home buyers conducted by the National Association of Home Builders. While move-up and luxury buyers mostly drove the demand to bigger homes, entry-level and first-time buyers, who tend to buy smaller homes, have been notably absent from the market. However, homebuilders are reporting a slight uptick in entry-level buyers heading back into the market. Homebuilders such as D.R. Horton Inc., KB Home, PulteGroup Inc., and Century Communities Inc. have all reported a slight increase in entry-level buyers re-emerging. For example, Pulte reports that sales of its entry-level Centex homes, priced at an average of $202,000, rose by 26 percent in the second quarter compared to a year earlier. “The expectation will be, whenever we see an increase in first-time buyers, that will put downward pressure on the trend of new-home sizes,” says Robert Dietz, an economist with the home builders group. “Then it will be a question of whether we’ll see some actual decreases in the median as the market mix [of buyers] changes over the next two years.” Source: The Wall Street Journal

The next generation of home buyers say they will move to the suburbs if it means they can find quality schools there, according to a newly released survey by®. In fact, millennials – the generation born between 1980 and 2000 – are less likely than other generations to compromise on school districts when in house-hunting mode, the survey revealed. Fifty-two percent of millennials said school districts are a deal-breaker in their home search, compared to 31 percent of all buyers, the survey found. “Local schools are clearly more important to specific population segments—such as today’s millennials, who either have or are planning to have children,” says Jonathan Smoke, the® chief economist. “High-ranking schools can have a positive impact on home values over time as new families pay a premium for access to better schools.” The majority of buyers who are using the® search-by-school web tool to find school information are researching elementary schools in particular while looking up homes for-sale online, according to®. “This indicates the majority of people who research good schools either have young children or expect to start a family when they buy their next home,”® notes. Source:®

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