Mortgage Business

Oil Prices and Interest Rates

20140309-080351.jpgIt was a very interesting time for a meeting of the Federal Reserve Board’s Open Market Committee. As we discussed the past few weeks, the increased pace of job growth will cause the economy to expand more quickly and this will make it easier for the Fed to make a decision to raise rates more quickly. On the other hand, there are other factors in play. For example, many world economies are slowing significantly. Our economy is intertwined with the global economy and the Fed must worry whether this slowdown might affect our strengthening recovery.

Oil prices represent another wild card. The magnitude of the drop in the price of oil has been absolutely stunning. The move from $110 per barrel in August of 2013 to less than $60 per barrel by the middle of December represents a decrease of around 50% in a little over a year. Lower oil prices are also good for the economy because of the potential for reduced consumer inflation. This reduced inflationary pressure enables the Fed to be less inclined to raise interest rates.

Not all of the effects of lower priced oil are positive. The energy sector is a significant industry and if the price of oil stays too low, we could lose jobs within this sector. For example, the jobs created in the oil shale industry may be lost if it is not cost effective to extract oil from shale. And going back to the global focus, major nations such as Russia depend upon revenues from oil and their situation is potentially much graver than ours. Of course, the oil factor also influences the thinking of the Fed with regard to rates and when the announcement was made on Wednesday, there was a sense that the Fed wanted to calm the markets somewhat with the use of words such as “patience.” If that means continued low rates with low oil prices, we say Happy Holiday!


The Markets. Fixed rates on home loans fell to their lowest levels of the year in the past week. Freddie Mac announced that for the week ending December 18, 30-year fixed rates fell to 3.80% from 3.93% the week before. The average for 15-year loans decreased to 3.09%. Adjustables were also lower, with the average for one-year adjustables decreasing to 2.38% and five-year adjustables falling to 2.95%. A year ago, 30-year fixed rates were at 4.47%, which is over 0.5% higher than today’s levels. Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac — “The 30-year fixed rates on home loans dropped to its lowest point of 2014 this week. Rates fell along with 10-year Treasury yields, which closed at their lowest level since May 2013. November housing starts came in at a seasonally adjusted annual rate of 1.028 million starts, down 1.6 percent from an upwardly-revised October value. Housing starts for the calendar year will likely come in around 1.0 million, above the 2013 pace, but lower than forecasters had expected at the start of 2014. Consumer prices declined more than expected in November, with the Consumer Price Index contracting 0.3 percent.” 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 December 19, 2014

Daily Value Monthly Value
Dec 18 November
6-month Treasury Security 0.12%  0.07%
1-year Treasury Security 0.25%  0.13%
3-year Treasury Security 1.10%  0.96%
5-year Treasury Security 1.68%  1.62%
10-year Treasury Security 2.22%  2.33%
12-month LIBOR  0.562% (Nov)
12-month MTA  0.114% (Nov)
11th District Cost of Funds  0.671% (Oct)
Prime Rate  3.25%

  The Federal Housing Finance Agency has announced the maximum conforming loan limits for home loans to be acquired by Fannie Mae and Freddie Mac in 2015. For much of the country, the conforming loan limit for a one-unit property will remain at $417,000 for 2015 with the limit at $625,500 in the highest cost areas. In 46 counties the limit will rise because those counties experienced increases in local home values. Both FHA and VA also announced their loan limits for 2015 and these agencies generally follow the conforming limits. However, under the Veterans Benefit Improvement Act of 2008, VA had allowed higher loan limits in some high cost areas. Because the Act expired in 2014, these limits must now be the same as conforming limits as well, unless Congress extends the law. VA will honor the higher loan limit after January 1, 2015 only if the sales contract and loan application are completely ratified before that date. Meanwhile, Congress has acted on the expired Mortgage Debt Forgiveness Act, extending the tax exemption for short sales, as well as the deduction for mortgage insurance. Sources: FHFA, FHA and VA Note: If you are thinking about using your VA eligibility to purchase a home in a high cost area, there is still time to get in under the wire before the end of the year. 

Renters need to brace themselves: Apartment rent is expected to continue to outpace inflation next year. It’s a landlord’s market, which means strong demand continues to give landlords justification to hike rents. Rent growth will likely reach 3.9 percent in 2015, only a slight dip from 4 percent this year, according to a recent forecast released by the National Association of Realtors®. For at least two more years, vacancy rates for rental apartments are expected to remain low. “Low housing inventory and the sizable demand for rentals will continue to spur multifamily construction as well as keep rents rising above inflation through next year,” says Lawrence Yun, NAR’s chief economist. The Bureau of Labor Statistics shows that annual rental inflation is nearly double the price of overall inflation. Builders are increasing the construction of multifamily units but are struggling to keep pace with demand. Source: MarketWatch

The size of the typical home is shrinking, which may be a sign that a wider array of buyers, including first-timers, are returning to the market. The median size of a single-family home has decreased for the past two consecutive quarters, and it will likely continue to go down as more first-time buyers look to purchase, according to the National Association of Home Builders. The median size of a single-family home dropped 2.3 percent in the third quarter over the previous quarter, falling from 2,472 square feet to 2,414. That marks the smallest size since the fourth quarter of 2012. Home sizes were on the rise coming out of the recession, mostly due to a surge in the luxury market, NAHB notes. “Typical home size falls prior to and during a recession as some home buyers cut back, and then sizes rise as high-end home buyers — who face fewer credit constraints — return to the housing market in relatively greater proportions,” NAHB notes on its blog, Eye on Housing. “This pattern has been exacerbated in the last two years due to market weakness among first-time home buyers.” But the decline in square footage now indicates that entry-level buyers are on their way back. The latest drop in the median home size “doesn’t reflect changes in preferences, necessarily. It reflects who’s buying new single-family homes,” Robert Dietz, an economist with NAHB, told The Wall Street Journal. Sources: NAHB & The WSJ

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