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Time for Another Rate Dip?

October 17, 2017



The commercial will be right one of these days. Whether “one of these days” is tomorrow, next week, next year, or next decade, we can’t say. 

Lenders have warned repeatedly in print and radio ads over the past five years that higher interest rates will soon befall us. The rationale is predicated on historically low interest rates (which can’t last) and the Federal Reserve raising interest rates (which it has). 

Here we are in 2017 and mortgage rates, though not at historical lows, are still low by historical standards. Rates have trended higher in recent weeks, but the trend is best measured in basis points (one basis point being 1/100 of a percentage point), not full percentage points. 

Consumer price inflation continues to trend stubbornly low by Fed standards. The Fed is fixated on consumer price inflation continually rising 2% annually. Something it has yet to do. What’s more, few market participants expect a ramp-up in inflation. Rate remain low at the long end of the yield curve.

A quote of 4% on a 30-year fixed-rate mortgage is the prevalent quote across the country, according to Mortgage News Daily. Depending on the supply-demand paradigm, time of day, lender incentives, alignment of the stars, and what not, 3.875% will materialize. If recent past is prologue, 3.875% (and lower) could materialize more often. 

We’ve mentioned more than a few times that this lending market has been characterized by a repetitive cycle. The market has oscillated between peaks and valleys every few weeks or so: The December peak gave way to the January valley. Rates rose from the January valley to the March peak, which gave way to an April valley. Rates rose from the April valley to the May peak, which gave way…. You get the picture. 

The latest valley occurred in early September. The latest peak was last week. Rates have eased since. 

Does another valley loom?

We’ll give our best answer, as equivocating as it may be, it could: The stock market has been lackadaisical of late. Third-quarter earnings exceptions have ratcheted lower. Gold and silver prices have trended higher. (The opportunity cost of holding gold and silver falls when market participants expect falling interest rates.) 

The real question is to float or lock? We’re not alone in noticing the peak-and-valley cycles that have occurred this year. Borrowers who have anticipated another valley by floating have been disappointed not to see a robust bond-market rally, which would lead rates lower.

This isn’t to say that locking is the default position. All it takes is one slice of bad news — an earnings miss by a major corporation, a downgrade in GDP growth, another North Korea dust-up, a political scandal — and we could get that bond market rally that drops us into another valley. It’s not like it hasn’t happened before.

Buy Low, Sell High (Easier Said Than Done)

It sounds so simple: buy when others are selling, sell when others are buying. So simple, yet so few can do it. Contrarianism is contrary to most people’s nature. 

But it’s not contrary to everyone’s nature. Bloomberg ran a story this past week on investors buying flood-damaged Houston homes for forty cents on the dollar. Bloomberg goes on to tell us that such a contrarian strategy has paid off in the past. Buyers were able to take ownership of New York co-ops and office towers at a deep discount when the city was on the verge of bankruptcy in the mid-1970s. 

More recently, contrarian investors snapped up residential properties on the cheap after the 2008 financial crisis. We remember those days. Though despair filled the air, we continually implored people to focus on the full half of the glass. This, too, will pass, we reasoned, and so will the opportunity to buy real estate so cheaply. The housing market today has proved us right. 

The takeaway from  Bloomberg’s Houston story is to venture into areas where other people are afraid to venture. Instinctively, most of us want to remain with the herd and adhere to the trend. But if we can see things the way they could be and not as they are and act accordingly, a lot of money can be made. We expect a lot of money will be made by Houston’s intrepid real estate investors. 

The Difference between Loan Officers at Banks and Private Lenders

October 12, 2017


Homebuyers on the hunt for a mortgage in 2017 have more options at their disposal than ever before. As always, name-brand banks continue to dominate the conversation regarding home loans. But increasingly, new homeowners are finding it easier and more cost effective to finance their home purchases with the help of a private mortgage lender.

While they each share the same goal, private mortgage lenders differ from their big bank counterparts in a few key ways. Homeowners should familiarize themselves with the best private mortgage lenders before signing onto a loan. After all, closing that loan could very well mark the beginning of a years-long relationship.

How private lenders differ

At any financial institution, the person who reviews and approves mortgage applications is called a loan officer. But despite similar titles, there are some significant differences between a loan officer working at a typical bank and one at a private lender.

What does a loan officer do, and how do those duties differ depending on their institution? One of the biggest differentiators between the two can be seen in legally mandated licensing and registration requirements:

  • A loan officer working at a depository institution, like a bank or credit union, must be registered under the National Mortgaging Licensing System. Once approved under this federal system, the loan officer is authorized to conduct business in all 50 states.
  • Private lenders, however, are held to a different, arguably higher standard. Since they are considered “non-depository institutions,” loan officers at a private lending firm must not only be registered under the NMLS, but also must obtain a license in the state where they will operate.

This additional license requirement means private lenders must undergo at least 20 hours of state-mandated coursework, as well as at least eight hours of continuing education per year. The course requirements vary by state but usually include extensive coverage of federal and state lending laws, ethics courses and other technical training.



The Normal Rate of Interest over History

October 9, 2017


Is the current interest-rate environment a unique environment? 

The answer, in short, is no.

Sydney Homer and Richard Sylla show in their magnum opus A History of Interest Rates that interest rates can remain remarkably sedate (at high or low levels) over a long period. At other times, they can remain remarkably volatile. Over the thousands of years of interest-rate history, it’s all been seen before. 

Homer and Sylla show that real estate loans in ancient Greece held an 8%-to-12% range for two consecutive centuries before the range moved down to 6.67%-to-10% for the subsequent two centuries. In London in the 18th century, the average mortgage rate ranged between 4% and 4.75%.

On our side of the Atlantic, the rate on a mortgage for a borrower of high credit standing was 5.1% in 1900. For most of the first 65 years of the 20thcentury, mortgage rates ranged between 5% and 6%.

Then interest rates (including mortgage rates) began trending significantly higher in the 1970s.

The range in rates has been quite wide over the past 36 years. Quotes as high as 18.375% on a 30-year mortgage were the norm in 1981. Quotes as low as 3.5% occurred last year.  A range of 3.875%-to-4.25% has been the norm for the past year. 

Could market volatility return, with volatility marked by a rising trend? 

Here we are in 2017 with a Federal Reserve determined to raise interest rates and tighten the money supply. We can lean on recent history to gauge a potential outcome.

The Federal Reserve shifted to a policy of increasing the federal funds target rate in 2004. The rate was increased in measured steps to 3% from 1%. The yield on the 10-year U.S. Treasury note barely budged, though, averaging 4.5%.  Over the same time, the rate on a 30-year fixed-rate mortgage ranged between 5.5% and 6%. 

The Fed has taken a similarly measured approach over the past 12 months. Rates on long-term credits have responded similarly, as well: They rose slightly on rumor, but then have drifted lower after the news. 

We’d bet on rates remaining sedate, but we wouldn’t bet the farm. History shows that it wouldn’t be abnormal for the rate range we have today to hold. Then again, history also shows that it wouldn’t be abnormal for rates to be quoted 10 percentage points higher a decade from now. 

The environment we have today isn’t unique, but neither is it necessarily permanent. 

It’s All Relative

Housing-market proponents are on guard against President Trump’s tax-reform plans. The plans include doubling the standard income-tax deduction to $24,000 for a married couple and eliminating deductions for state and local taxes. 

If the plans come to fruition, the mortgage-interest-rate deduction (MID) would become less valuable relative to the new standard deduction. Fewer people would itemize, so fewer people would use the MID. The reduced value of the MID benefit will reduce the incentive to buy a home. This is what many MID proponents claim. 

The NAR has been most vocal for maintaining the higher relative value of the MID. The NAHB, which frequently stands with the NAR, has taken a slightly different tack. The NAHB has backed away from the MID campaign and has lobbied more for other incentives, such as homebuyer tax credits, remodeling tax credits, and the exclusion of all capital gains from income taxes. 

Our preference would be to maintain the MID at its high relative value. But if it losses its relative value, we’re not overly worried. Buyers still have a strong incentive to own a home.  

Rarely do any of us do anything for monetary gain alone. The economic analysis downplays the satisfaction of homeownership. Most people prefer to own than to rent; most people prefer to live in a neighborhood of owners than renters. This is based on a psychic benefit, not a monetary one.

The psychic benefit of homeownership is a stronger incentive than many housing proponents acknowledge. What’s more, the psychic benefit is frequently a stronger motivator than the monetary benefit. The numbers matter, to be sure, but so does human nature.  We shouldn’t overlook that.

Fed to Shrink Balance Sheet

September 28, 2017


Federal Reserve officials wrapped up their latest meeting (which occurs every six weeks) and announced what most market watchers expected them to announce: The Fed will shrink its massive balance sheet. The balance sheet holds mostly Treasury securities and mortgage-backed securities (MBS) — roughly $4.5 trillion of them. 

The Fed’s new policy has widespread ramifications. The Fed’s balance sheet correlates positively with base money supply. The larger the balance sheet, the more money the Fed has injected into the economy.

Here’s how it works: Primary dealers (mostly investment banks) buy Treasury securities and MBS and then turn around and sell them to the Fed. The Fed pays with newly minted money. Fed demand for the securities and the influx of new money work to keep interest rates low. 

Now the Fed is ready to reverse course.

After massively expanding its balance sheet (and the base money supply) following the 2008 financial crisis, the Fed seeks to shrink its balance sheet (and the base money supply) to more normal levels. The Fed had long ago ceased expanding its balance sheet with new purchases. The modus until now has been simply to reinvest the proceeds from maturing Treasury securities and MBS into newly issued Treasury securities and MBS, thus holding the base money supply high but steady. 

Going forward, the Fed plans to retain more of the money received from maturing Treasury securities and MBS. This will reduce the Fed’s demand for Treasury securities and MBS. It will also reduce the money supply. Lower demand and reduced money supply could keep interest rates on a rising trajectory. 

Interest rates rose into the Fed’s meeting last week. Market participants anticipated the Fed’s plans, and anticipation was manifest in rising interest rates.

But how quickly will rates go up?

Not quickly at all.

The Fed’s plan is to start with a $10 billion roll off in October, which will increase quarterly until it reaches $50 billion by October 2018. Considering the Fed’s balance sheet holds $4.5 trillion of securities, we’re looking at a slow, multi-year reversing process.

Fed Chair Janet Yellen was also quick to hedge. Yellen mentioned that “policy is not on a preset course.” In other words, if conditions warrant, the Fed could quickly reverse course.

There is an old saying pertinent to financial markets: “Buy the rumor, sell the news.” Act one way on rumor, act the other way when the rumor is confirmed. If past is prologue, mortgage rates could dip again in the coming weeks as more market participants act the other way.


Blame It on Harvey?

Home builder sentiment eased in September after rallying in August. Most of the easing occurred in the South, which was impacted by two hurricanes.

Sentiment was down despite home starts rising nationwide in August. Single-family starts were up 1.6% to 851,000 units on an annualized rate. Starts should show more growth once the water subsides in Texas and Florida. Additional building will occur to replace lost homes.

As for existing homes, sales were down 1.7% in August. Hurricane Harvey was to blame. Overall sales were dragged down by a decline in sales in the South. No surprise here: Buying and selling will always take a backseat to surviving.  

Of course, there’s more to current existing-home sales than hurricanes. Lack of inventory continues to bog down sales in many markets. But some reprieve has occurred on pricing: The median price of an existing home actually fell 1.8% to $253,500 in August.  

The good news is that this too shall pass (hurricane season). The housing market remains healthy. Near-term Interest-rate uncertainty and immediate weather won’t change that. We still expect housing to lead the economy (as it has) into 2018. 

Rates Ascend, but Stocks and Median Incomes Look Strong

September 18, 2017


We’ve counseled borrowers to lock on the dips in recent months. The latest dip was deeper and more prolonged than most, but it was still a dip. It has become less of one this past week.

Many investors have cycled out of the haven investments — namely U.S. Treasury securities — and cycled into riskier investments, namely stocks. Treasury prices are down, stock prices are up. This means Treasury yields are up as well. The yield on the 10-year U.S. Treasury note is up 10 basis points in the past week. Mortgage rates have been up nearly as much. 

Despite the rise, opportunities still exist to lock a 30-year fixed-rate conventional mortgage below 4% on a best-case scenario. The opportunity, though, has become less prevalent in recent days. The opportunity could become even less prevalent in subsequent days.

Across the Atlantic, consumer-price inflation made a surprise appearance. Inflation in Great Britain spiked to 2.9% on an annualized rate. The unexpectedly high inflation number stoked speculation the Bank of England may raise interest rates sooner than later. 

Because markets are interdependent, it’s hardly beyond the realm of possibilities that the same surprise could occur on our side of the Atlantic. We noted last week that inflation may not be manifest in consumer prices, but it has been manifest in investment and asset prices. It’s just a matter of time before inflation manifests in consumer prices. When it will manifest is anyone’s guess. Because it’s anyone’s guess, borrowers assume a risk for waiting. 

Why the focus on inflation?

Few factors influence the long-end of the credit yield curve as much as consumer-price inflation. Even if we get only a whiff that a change is in the air, long-term interest rates will be the first to experience it. Rates can spike higher with little warning. 

As for the here and now, quite a few prescient borrowers have exploited the latest dip. Mortgage purchase applications rose 11%, according to the latest weekly data provided by the Mortgage Bankers Association. The increase lifts the year-over-year gain to 7%. 

The MBA also tells us that credit availability is again on the rise. The MBA’s Mortgage Credit Availability Index increased 0.7% to 180.2 in August. The purse strings aren’t quite as loose as they were this past spring, but they’re close enough.


Good News: Middle-Class Rising

So much for the meme on the stagnating middle class. 

The U.S. Census Bureau reports that America’s middle class had its highest-earnings year ever in 2016. 
The Census Bureau reports that median household income rose to $59,039. The previous high was $58,655 in 1999. (The figures are presented in inflation-adjusted, not nominal, dollars.) The Census Bureau chalks up the rise in earnings to more people finding full-time jobs, or better-paying jobs, last year.

Stagnation was (and is) unlikely even without rising wages. We’re continually better off because our wages continually buy more for less. Thanks to Moore’s Law, we frequently pay less for superior quality.

For example, purchasing a television demanded 127.8 hours of work from the average worker in 1959. The average worker in 2013 could purchase a television with only 20.7 hours of work, according to data from the American Enterprise Institute. And let’s not overlook quality. The 2013 television far exceeds the quality and features of the 1959 television. We’re all getting a bigger bang for our bucks. What’s more, we’re all getting a bigger bang, even if the bucks are held constant. 

The good news is that the bucks aren’t held constant. The latest Census Bureau data prove that the middle-class wages are rising. We’re confident that the rise will propel housing forward. After all, less money as a percentage of income spent on reoccurring consumer goods, means more money available to spend on higher-priced durable goods. Owner-occupied homes are a higher-priced durable good.

What are Mortgage Points?

September 14, 2017


The mortgage process is complicated, and some of the terms used can be confusing. One term that is often found in a home loan application or a mortgage refinance alongside the discussion of interest rates is “points,” also called “discount points.” These points are a way of describing how you will pay off your mortgage and what sort of discounts you will be afforded by your lender. They come in several different varieties. 

What are points?
In their simplest form, points are equal to 1 percent of the total loan amount. This means that, on a loan of $200,000, one point would equal $2,000. Points are typically paid to the lender upon closing of the loan, and a lender can choose to charge a borrower one or more points. Two or three points are the typical amount.

What kind of points are there?
Points come in two basic varieties:

  • Origination points. These are used to pay loan officers for costs related to closing on a loan. They are not tax-deductible, but can be waived by the lender at its discretion. 
  • Discount points. Discount points are essentially prepaid interest fees, meaning that the more points paid on a loan, the lower the interest rate will be. Discount points are tax deducible. 

Should I pay points?
Answering whether or not a buyer should pay points can be tricky, but it largely boils down to how long you plan to stay in the home. While paying more points may be a high upfront cost, the lower interest rate can save you money that can well exceed what you paid in points in the long run. However, if you are thinking of selling after a few years, the higher interest may end up costing you less.

Why Use a Real Estate Agent?

September 7, 2017


Buying a home, and even selling one, are often expensive ordeals, so it makes sense that we want to keep costs as low as possible. Some look to trim their budgets by taking a second look at some expenses like contracting a real estate agent – but is this really worth it?

According to the facts available, it’s clear that using an agent to help buy or sell tends to pay off, even in a home market that’s easier to search through.

Whether working as a buying agent or helping you sell your home, real estate agents do come with a number of tools and expertise that the average homeowner wouldn’t have access to otherwise. explained some of the biggest advantagesgained by working with a trusted professional:

  • Experience and insider knowledge: Buying or selling a home is an extremely complex affair, with plenty of technical terms and legal hoops to jump through. One of an agent’s primary goals is helping their clients navigate this minefield of jargon and regulations.
  • More search tools: Agents specialize in taking their customer’s exact needs for a new home or from a new buyer, and tailor their search accordingly. While a variety of online tools help non-professionals do the same, doing a really thorough search for a new home still takes a significant amount of time for the average person.

Bidding wars: In the last few years, the housing market has been heating up, to the point that it’s white hot in some parts of the U.S. In these areas, sellers can expect to juggle multiple offers while buyers need to think strategically and act quickly. Without an agent handling these negotiations, both buyers and sellers can expect to be left in the dust.

How to work with an agent

Clearly, there is a lot of value in bringing on a real estate agent to help you with your next home deal. But there are a few things buyers and sellers can do to help their agent succeed, according to The Balance.

First, it’s not a bad idea to take time to search for the right agent to fit your needs. You will obviously want someone with local expertise, but there are several other desirable qualities worth looking for. To figure out who is the best fit, schedule a brief interview with a few agents to get a better sense of their experience.

Another often overlooked tip for either buyers or sellers: Take the open house seriously. For sellers especially, it’s crucial that schedules for viewings are rock solid, and that the house is in perfect shape for potential buyers. If you’re on the buy side yourself, punctuality is equally important, but so is attitude. Let your agent do most of the technical talking and focus on how the home looks and feels.

Real estate agents are there to help buyers and sellers succeed. Don’t overlook this advice when it’s time to enter the housing market on either side of the equation.

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