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What to Consider as a First-Time Homebuyer

July 27, 2017



Buying a home for the first time can be intimidating.

Whether you’re fresh out of college or buying for the first time later in life, there are several things potential homeowners need to consider before making a purchase. Making a wrong decision when it comes to buying a home will not only be disappointing, it will be costly.

Here are a few things consumers should keep in mind before signing on the dotted line:

What type of mortgage is best?

Deciding what type of mortgage to pursue is one of the biggest decisions homeowners make before buying their home. Fixed-rate and adjustable-rate mortgages each have their own advantages, but they can be costly for individuals who choose the wrong one. To ensure that doesn’t happen, consumers should consider three things: how long they plan to stay in a home, how much they can afford as a monthly payment, and how high interest rates are at the time they want to purchase.

Fixed mortgages tend to be better for homeowners who plan to stay in their homes for many years. Adjustable-rate mortgages go up over time, which means homeowners in it for the long haul might find themselves making higher monthly payments several years later than when they first started. Individuals who don’t have room in their budget for an increasing payment might consider shying away from this option.

However, adjustable-rate mortgages can be great for homeowners who think they might move in a few years. If an individual purchases a home when interest rates are low, they will likely reap the reward of lower rates on the monthly payments and leave before rates increase. Adjustable-rate mortgages can also be a savvy choice if interest rates are high when a homebuyers move into their home. In this case, as interest rates fall over time, homeowners will also see their monthly payments drop.

How can I impress my lender?

For those who have never applied for a mortgage before, it can be confusing to know what lenders will use to determine a consumer’s eligibility. Simply having a lot of money in the bank won’t guarantee a lender’s approval. An individual’s credit score will hold the most sway over lenders when they are determining whether to approve someone for a loan. Banks will typically look at that score, any unpaid collections, or previous bankruptcies or foreclosures.

To maximize the likelihood of getting approved for a loan, individuals should seek to reduce their debt-to-income ratio and pay down any outstanding debts. This can give a quick boost to a person’s credit score in the month before a lender makes a decision about a loan. If it’s within their budget, individuals who make a larger down payment also increase their chances of approval and getting a lower interest rate from lenders, according to Nerd Wallet.

Housing Starts Recover; Home Builders Are Unimpressed

July 24, 2017


Home-builder sentiment has turned a bit dour of late. The housing market index — an indicator of home-builder sentiment — dropped to 64 in July. This is the lowest reading since November.  Sentiment has trended lower since peaking in March.

The latest sentiment report cited high lumber costs… as one reason for the tempering optimism. (This is one of many reasons why the tariff on Canadian lumber is bad economics.) It also cited moderating buyer traffic. 

Builders still have reason to see the cup as half full, though.  Starts picked up since last month. Starts posted at 1.215 million on an annualized rate in June. Single-family starts rose to 849,000 on an annualized rate. These numbers were higher than most analysts had expected. 

Better yet, permits point to starts trending even higher. Permits were up 7.4% for June compared with May. Year over year, starts are up 5.1%. Construction activity remains brisk.  

Perhaps builders have tempered their optimism because they have had a good run for so long. The iShares Dow Jones US Home Construction Fund, a fund of publicly traded home builder stocks, has doubled since 2012. 

But the longer you’re into the run, the harder it is to maintain the pace: materials, land, and qualified workers become more difficult to secure on the margin. Costs rise, and these costs weigh on operating margins and profits.  The sky is never the limit. 

But neither is Hades. We don’t see housing (and home building) trending toward the downside. The market is still strong, though we wouldn’t be surprised if it’s less strong going forward than it has been in recent years. 

Housing has been the one constant (constant good) in the economy for the past five years. There are no signs it will relinquish its standing in the near or distant future.  We see it that way, and so do most home builders. Home-builder optimism has dropped in recent months, but home builders are still mostly optimistic, and rightly so.


Mortgage Rates Pullback; Is More on the Way?

We still think the long-term trend will be up, even if the ascent adheres to only a slight grade. 

We refer to mortgage rates.  With the Federal Reserve determined to raise the federal funds rate multiple times, lending rates across the spectrum — type and time — have to rise. At least that’s the way the dynamic has generally worked in the past.

The short term is a different story. Mortgage rates have drifted lower over the past week. This is no surprise given Fed Chair Janet Yellen’s soft comments on the Fed’s strategy of raising interest rates: The Fed targets minute incremental increases delivered over an expansive amount of time. 

The yield on the 10-year U.S. Treasury note is down 10 basis points over the past week. Quotes on a prime 30-year conventional mortgage aren’t down quite that much (at least not in most markets), but they are down. 

We noted last week that pullbacks this year have offered an opportunity to lock in a mortgage rate. But you don’t want to lock too soon if you think more pullback is in store. If patterns are examined, and if they replicate, more pullback could be in store. 

Mortgage rates rose from mid-April to mid-May, but they subsequently rolled over into late June. Quotes on a prime 30-year loan were down to 4%, and below that depending on when someone sought a quote. Before April, we saw rates run-up into March and then pullback into mid-April.  (The cycle also occurred in January.) 

This recent pullback has been subdued compared to previous cycles.  With recent economic data being subdued, rates have little impetus to reverse in the immediate future. In other words, we see comparatively less risk involved in floating a mortgage rate today compared with last week. We say, “comparatively less risk” but not no risk. 

Fannie Mae to Ease Mortgage Standards

July 20, 2017


Fannie Mae, the government-sponsored lending institution, is one of the biggest players in the U.S. mortgage market. That’s why a recent announcement reported by The Washington Post is good news for some borrowers or current homeowners. Starting July 29, Fannie Mae will ease its mortgage application standards, allowing borrowers with a higher debt-to-income ratio to earn approval for a loan. 

What is debt-to-income ratio?

The debt-to-income ratio is a metric commonly used as part of a loan application. It tabulates a person’s total outstanding debt per month from other forms of credit and compares that to their monthly income. Fannie Mae will now approve borrowers with a DTI as high as 50, raising that ceiling from 45. This means that a borrower could be paying about half his or her monthly income just to debt payments without exclusion by Fannie Mae.

According to The Post, the DTI ceiling is “the No. 1 reason that mortgage applicants nationwide get rejected.” With this change, Fannie Mae is most likely hoping to expand mortgage eligibility to younger homebuyers, who generally have lower incomes and higher debt loads. After all, student loans now constitute the largest share of consumer debt held in the U.S. besides housing debt, according to the Federal Reserve.

The National Association of Realtors also pointed out that the new DTI benchmark will change how monthly mortgage payments are determined. A maximum DTI of 50 brings Fannie Mae in line with the standards of other public lenders like Freddie Mac and the FHA. In fact, NAR noted that FHA loans may be approved to borrowers with a DTI over 50 in some cases. Private lending institutions are not allowed to approve any applicant with a DTI above 43.

Restrictions still apply

It’s important to note that Fannie, Freddie and the FHA do not directly approve applications or extend loans. Rather, as the Post pointed out, they work to either guarantee mortgages against default or purchase large numbers of loans in what’s known as securitization. Therefore, these new lending requirements are expected to open up the prospect of an affordable mortgage to more U.S. borrowers.

Still, applicants will need to pass muster in several other underwriting factors, some of which remain fairly strict. Fannie Mae’s underwriting is mostly done through an algorithm, which accepts or rejects loans based on down payment amount, credit scores, loan-to-value ratio and many other metrics. The Post remarked that Fannie and Freddie each have higher credit score requirements than FHA loans – only borrowers with a FICO score in the mid-600s or higher can expect to be approved. The FHA, on the other hand, allows borrowers with FICO scores under 600, with the caveat that they must pay mortgage insurance, resulting in higher monthly payments.

All in all, Fannie Mae’s underwriting change is good news for the average homeowner but doesn’t mean mortgage applications will be a cakewalk from now on, either. Borrowers should work with a trusted lender to understand everything that goes into the application process.

July 17, 2017



Mortgage rates have held steady for the past week. That said, they’ve held steady near a three-month high.

Much of the recent inertia is attributed to the moment. Federal Reserve Chair Janet Yellen gave testimony before Congress this past week. Market watchers parsed every word. Because Yellen knew they would parse every word, she was careful to say as much as she could without saying much of anything (such are the tendencies of central bankers).

Yellen did confirm that additional federal fund rate increases are likely in order, but this is common knowledge. The goal with the fed funds rates is to maintain a neutral rate of interest. This means that the Fed attempts to set the fed funds rate to where it’s neither expansive nor recessive.

In Yellen’s opinion, the neutral rate, guided by the fed funds rate, will need to rise gradually over the next few years. She also opines that because the neutral rate is low by historical standards, the fed funds rate won’t need to rise much to maintain a neutral rate. 

It sounds neat, tidy, and doable. The fact is, though, that the Fed is really groping in the dark. You can’t know what a change in the federal funds rate will do to the neutral interest (an unobserved rate at the present) until it has been done. It’s no easier to divine a neutral interest rate by committee than it is to divine the neutral corn price in Iowa by committee. But this is what the Fed is charged to do. Fed officials understand the difficulty in delivering on their charge.

So what’s all this mean to us?

Market participants believe the Fed is moving in a more dovish direction. This is evinced by Yellen’s testimony. As she talked, her talking was more cautious than expected. The yield on the 10-year U.S. Treasury note drifted lower. Mortgage rates remained in a narrow band, though they have drifted lower (albeit slightly). 

The key for us is Yellen’s stance on the “neutral” interest rate. The Fed continues to anticipate that the longer-run neutral-inducing level of the federal funds rate is likely to remain below levels that prevailed in previous decades. This suggests to us that mortgage rates will remain below levels that prevailed in previous decades. 

But it doesn’t mean mortgage rates will remain below levels that prevailed in previous years. Yes, we’ve seen quotes on the prime 30-year fixed rate mortgage dip to 4%, but they’ve subsequently moved higher. The dips were lock-in opportunities.

We think that dynamic will continue.  But we think it will continue to with dips occurring on a rising (albeit slightly rising) rate trend. With the Fed and other central banks cautiously exploring higher levels of interest rates, we think that locking on the dips remains a sound strategy. But don’t be surprised if the dips occur on a rising plane. 



Housing: The One Sector That Continues to Perform

Many sectors of the economy have moved in fits and spurts since the last recession, but not housing. Most data — from prices, to construction, to sales — point to one direction for housing, and that’s up.

That said, Black Knight’s latest Mortgage Monitor report shows one segment of the housing market is down (which actually supports upward momentum). Delinquencies, at 4.62% of outstanding mortgages, are as low as they’ve been in years.

Black Knight goes on to tell us that underwater mortgages are also down 35% over the past year. The number of underwater borrowers has dropped to 1.8 million. This is the first time this population has fallen below two million since 2006.

Black Knights reveals more good news that rides on something that is up — rising home prices. Only 750,000 borrowers owed more than their homes were worth. Negative equity remains well below 2005 levels. Today, only 750,000 borrowers owed more than their homes were worth. 

When you look at the data over the past five years, you’d be hard-pressed to find a sector of the economy that has outperformed housing. (We argue none has.) What’s more, we don’t see a sector challenging housing this year, and likely beyond. The trend will remain our friend, and the occasional flare-up in lending rates is unlikely to change that. 

It’s Cheaper to buy a Home Than to Rent

July 13, 2017


The answer to that age-old real estate question – rent vs. buy – might actually be quite clear for many throughout the U.S. Based on new data and studies, in many major American cities, apartment dwellers might be missing out on a fantastic financial opportunity by sitting on the sidelines rather than buying. That’s true due to a confluence of economic factors.

Survey says

A recent study of home prices from Trulia found that in the nation’s 100 biggest metropolitan areas, homeowners always came out ahead of renters after seven years. Taking into account average mortgage payments, home values and monthly rent, Trulia found that on average, homeowners spent 33 percent less than renters in terms of housing expenses. That’s assuming a 30-year fixed-rate mortgage at 4.1 percent interest, a 20 percent down payment and applicable tax deductions.

Of course, this effect was more pronounced in some cities. Owners came out ahead of renters by as much as 50 percent in Baton Rouge, Louisiana, for example, but only 3.5 percent in San Jose, California. Other cities that finished near the top of the list include Philadelphia, New Orleans and Columbia, South Carolina. In these cities, according to the Home Buying Institute, buying is basically “a no-brainer.”

Much of this phenomenon is due to low interest rates on home loans, which keep borrowing costs down for homeowners. As home values continue to climb, that investment in a home begins to pay off in the form of equity. By the time homeowners sells their house, they could be looking at a sizeable profit, or at least breaking even, at the end of the day.

Note of caution

However, there are caveats to this data, as CNBC pointed out. Primarily, some critics argue that buying only beats renting if buyers can find a home that’s actually affordable. This is becoming harder as demand for housing continues to surpass supply. Based on data from the National Association of Realtors, CNBC reported that home listings in April fell to 9 percent less than the same time last year. Even more challenging for buyers, CNBC noted that the most affordable segment of the housing market is also the hardest to buy into.

Ultimately, the choice to buy or to rent might depend more on individual financial situations. But if you can manage it, chances are you will come out on top.


The U.S. Dep of Treasury yield curve, and what it means for housing.

July 10, 2017


Commentary on the yield curve has been amplified in recent weeks.

The yield curve is the slope of the plot of yields on U.S. Treasury securities of various maturities. The plots cover the one-month Treasury bill to the 30-year Treasury bond (11 plots in total).

So why has the commentary been amplified, and does it matter? 

Market watchers monitor the slope of the yield curve as an economic indicator. The yield curve normally slopes upward — each successive maturity is higher than the next. This makes sense. Investors usually demand more compensation to commit their money for 30 years than for three months

That said, the slope is an important indicator. The slope of the yield curve has historically borne a consistent relationship with economic activity. The yield curve has predicted all U.S. recessions except one since 1950. When the yield curve flattens, or inverts (short-term rates higher than long-term rates), a recession looms and so does a bear market.

Today, the yield curve is normal, though it’s less normal than it has been in the recent past. A flattening has occurred. When the yield curve flattens or inverts, market watchers worry. They worry because market participants anticipate slow growth and Federal Reserve interest-rate cuts. The prospect of both events tends to drop yields on the long-end of the yield curve. 

The spread between two and 30-year Treasury yields — one of the most-watched measures of the yield curve — fell to a 10-year low of 137 basis points two weeks ago. This is down from more than 200 basis points at the end of last year.

At the same time, the difference between two and 10-year Treasury yields, another popular measure, has fallen to 80 basis points. This is close to the nine-year low of 75 basis points touched last summer.

The yield curve has flattened, to be sure, but mostly due to the Federal Reserve raising interest rates at the short-end of the yield curve. Meanwhile, longer-term government bond yields have fallen, reflecting ebbing expectations for growth and inflation. 

Frightening stuff? Not really. We worry less than most yield-curve watchers.

Although the yield curve has flattened, we see little evidence of market stress. We say that because spread yields on U.S. Treasury, investment-grade bonds, and high-yield bonds remain normal. Besides, the yield curve’s behavior is hardly without precedent. During most Fed hiking cycles, the yield curve has flattened

At this point, we have time before we need to worry about an impending recession or bear market. As long as the yield curve doesn’t invert, and it’s still far from inverting, everything should be fine.

Home Prices Continue to Grow

July 3, 2017



Bloomberg had an odd take on the latest S&P/Case-Shiller Home Price Index. It called the year-over-year price gains for April a “disappointment.” How disappointing was the April reading? Home prices in the 20-city metropolitan index were up 5.7%.

Case-Shiller showed year-over-year price gains at 6% in the previous two months, but 5.7% is still strong growth. We hardly view it as disappointing. 

Home prices continue to show real gains when you consider that consumer-price inflation runs at less than 2% annually. So in real terms, we’re looking at real gains of up to 4%. To be sure, consumer-price inflation could be running higher than 2% in many of the cities Case-Shiller follows. At the same time, home prices could be running at a higher rate than the aggregated index number Case-Shiller offers. 

For example, Seattle could be experiencing consumer-price inflation double the national average, but if you’re a Seattle homeowner, you’re likely sitting in high cotton. Home prices are up 12.9% in the Seattle metropolitan area over the past year. Your home is putting additional distance between the asset side and liability side of your balance sheet. 

When home prices rise relentlessly, as they have in many markets for the past five years, is it still worth buying a home?

Prior to the 2007-2008 meltdown in financial markets and home prices, the consensus opinion was to buy no matter what. Get in the game, because home prices had always trended higher. There had not been a meaningful broad-based market correction since the Great Depreciation. Home prices had trended higher for 70 years. 

The problem with this blanket advice is that home prices are determined in local markets. The national numbers — which we frequently report (like Case-Shiller) — can continually trend higher. This doesn’t mean, though, that the price trend holds for any local market. In any local market, prices could easily ebb and flow, even if the national number continually flows (trends higher). Yes, Case-Shiller can continually trend higher, but that doesn’t mean any local market must follow suit. 

Back in 2009/2010/2011, few people were pounding the table harder than we were. So many homes in so many local markets were screaming values. With the Federal Reserve determined to inject enough liquidity to elevate prices, we felt assured a recovery was on its way and that it would occur sooner than later. Such has been the case.

At this point, we see a fairly valued market at the national level. At a more micro level, some local markets are overvalued, some are undervalued.

As opposed to Bloomberg, though, we wouldn’t be disappointed if home-price appreciation decelerated at the national level.  For one, we think a deceleration in price appreciation would draw in more supply and more demand. Both sides would feel less compelled to hold out. Secondly, it would temper talk about another housing bubble, which we don’t think we are in, though we have heard more talk of lately.

Will Weak Sales Lead Us Into Summer? 

An odd spring could portend an odd summer. 

Home sales during the spring months generally underwhelmed most market watchers. The good news is that we saw an uptick in May sales. The bad news is that the latest pending home sales data suggest a trend might be hard to sustain. The Pending Home Sales Index dropped for a third-consecutive month in May.  

What were the issues impeding contract signings? The usual — falling inventory and rising home prices. 

Rising mortgage rates in recent weeks may or may not help the sales cause. Over the past couple weeks, rates have been on the rise. The yield on the 10-Year U.S. Treasury note is at a two-week high, and so are quotes on many mortgage offerings. It appears that long-term rates are on the rise on news that the European Central Bank could follow the Federal Reserve’s lead and move to raise interest rates. 

The prospect of rising mortgage rates could get people to act: Buy now or risk paying more later. Or it could motivate potential buyers to hunker in on the sidelines. Our instincts suggest that we could see more of the latter than the former. Recent application activity backs our contention.

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