February 2 2015 Daily Market Update

Monday's bond market has opened in negative territory despite favorable economic data stocks showing losses also. The major stock indexes are starting the week in negative ground with the Dow down 58 points and the Nasdaq down 26 points. The bond market is currently down 15/32 (1.68%), but due to strength late Friday, we likely will see little change to this morning's mortgage rates if comparing to Friday's early pricing. However, I would not be surprised to see upward revisions to mortgage rates sometime today unless bonds move into positive ground.

This morning had two pieces of economic data that were relevant to the mortgage market. The first report was December's Personal Income and Outlays data at 8:30 AM ET. It showed a 0.3% increase in income and a 0.3% decline in spending. The income reading matched forecasts while the drop in spending was a little more than expected. Because consumer spending makes up a significant portion of the U.S. economy and slowing spending means weaker economic growth, we can consider this news neutral to slightly favorable for bonds and mortgage rates.

The Institute of Supply Management (ISM) posted their manufacturing index for January at 10:00 AM ET today. This index tracks manufacturer sentiment by rating surveyed trade executives' opinions of business conditions. It came in at 53.5, falling short of the 54.7 that was expected and down from December's revised 55.1. That means fewer surveyed manufacturing executives felt business improved during the month than did in December. This is a sign of manufacturing sector weakness, so we can consider the data good news for the bond and mortgage markets.

December's Factory Orders data at 10:00 AM ET is the only economic data we need to watch tomorrow. It is similar to last week's Durable Goods Orders release in giving us a measurement of manufacturing sector strength, but this data includes new orders for both durable and non-durable goods. It is not one of the more important reports we get each month, however, it can influence mortgage pricing if it varies greatly from forecasts. Analysts are expecting a 2.0% decline in new orders, indicating a softening manufacturing sector. The bond market would like to see a larger decline, meaning that manufacturing activity was weaker than many had thought.

Overall, Friday is easily the best candidate for most important day of the week due to the release of January's monthly Employment report. The calmest day will probably be Thursday. I am fully expecting to see another very active week for mortgage rates, so please maintain contact with your mortgage professional if still floating an interest rate and closing in the near future.

Housing boom floating-rate mortgages face years of payment hikes-Fitch: Interest-only loans facing largest increase

Roughly half of all the performing mortgages that support private-label residential mortgage-backed securitizations are facing payment hikes within the next five years, according to a new report from Fitch Ratings. That is, boom-time mortgages securitized, but not by Fannie Mae and Freddie Mac.
The payment increases will be driven by changes in interest rates, expiration of interest-only periods and loan modification rate resets. And those payment increases will lead to higher default rates, Fitch said in its report.
“Default risk rises with the magnitude of a payment increase,” Fitch said. “Fitch Ratings estimates that loans with the largest future payment increases are roughly three times more likely to default than comparable loans with no payment increase.”
At particular risk are interest-only loans originated at the height of the mortgage boom. “Interest-only loans face large payment increases as their IO periods come to an end and amortization begins,” Fitch said in its report.
“As a significant number of peak-vintage 10-year IOs approach their recast over the next three years, the addition of principal will more than double the total monthly payment of many loans,” Fitch’s report continued. “A unique blend of low interest rates and shorter amortization terms has produced historically high IO payment increases.”
According to Fitch’s data, there are approximately 230,000 performing, first lien IO mortgages backing private-label RMBS. Nearly all will reach the end of their IO periods within the next three years, at which point, their monthly payments will increase as the loans begin to amortize.
Also at risk of payment shock are borrowers who have hybrid adjustable-rate mortgages. “Nearly all remaining hybrid adjustable-rate mortgages within legacy U.S. RMBS have passed their initial fixed-rate periods, and their default risk will depend on the future of short-term interest rates,” Fitch said. “Fitch projects that most non-IO ARMs will see payment increases of less than 60%, even under a stressful interest rate assumption.”
Fitch’s report also stated that the prime jumbo sector has the most exposure to future payment increases, as over one-half of prime jumbo loans are non-modified ARMs and IOs, Fitch said.
“While the volume of upcoming IO recasts is lower than that of prior periods, there are two unique characteristics of today’s remaining IOs that have combined to create higher risk relative to prior recast waves,” Fitch said in its report.
“Prior to 2012, average payment increases of IOs at recast were below 50%, while recent and projected payment increases are significantly higher,” Fitch added. “This phenomenon can be explained by the differences in interest rates and amortization terms among recasting IOs over time. The rise in payment increases starting in 2012 coincided with a decline in interest rates.”
Borrowers who have already had their loan modified won’t be immune from future rate increases either, Fitch said. “Many, but not all, loans that had their interest rate reduced as part of a mod will experience future rate increases,” Fitch said. “These scheduled interest rate step-ups are not tied to future market rates and are generally modest increases.”
Fitch said that the future projected payment increases are not expected to have a material impact on existing ratings of current securitizations. “Because Fitch’s loss expectations anticipate future payment increases and default adjustments, its ratings already reflect the increased risk,” Fitch said.
Fitch said that it expects short-term interest rates to increase steadily over the next three years before reaching a plateau at 6%.

Moderation in the housing market is now in its 11th straight month, according to the latest home data index from Clear Capital.

National home price gains fell to 6.7% year-over-year and 1.0% quarter-over-quarter.
 Meanwhile Distressed Saturation fell to just 16.8% suggesting the shortage of lower priced inventory is the catalyst for stalling gains. National trends were echoed at the regional level, with the West seeing the strongest moderation across the country. In fact, for the first time since the start of the recovery three years ago, the West’s yearly rates of growth fell below 10%, a sure sign of more moderation to come over the next several months for the nation.
“Performing-only sale trends are a bellwether for what’s to come in 2015 ” said Dr. Alex Villacorta, vice president of research and analytics at Clear Capital. “Think of home price growth since the housing collapse as a bouncing ball, where each successive bounce causes some energy to be lost and eventually movement stalls. We see this on a few different levels. First, we see the delta between performing-only and all sales, including distressed sales, merging. This confirms markets are no longer driven as much by investor demand for discounted distressed assets.”
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Cash buyers competing for distressed and low-tier inventory helped to jump start the overall recovery, while supporting healthy price growth in this segment. At the height of the recovery in 2013, national prices including distressed sales (the all sale segment of the Clear Capital HDI) outperformed the performing-only sale segment of the market by 4.2 percentage points.
“Now the all sale segment is outperforming the performing-only sale segment by 3 percentage points. These segments’ rates of growth will likely continue to fall in line with each other as investor engagement dwindles—a result of fewer distressed sale opportunities. As this occurs, markets will be more reliant on performing-only sale demand and price growth,” Clear Capital’s report says.
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They also warn that improvements in the broader economic landscape have not instilled confidence in traditional homebuyers (first-time, move-up, second home owners). The general lack of demand in the performing-only segment, coupled with a dwindling supply of distressed inventory, leaves the future of home prices squarely in the hands of traditional homebuyers, who have yet to show any signs of re-engaging.
Performing-only sales are not yet strong enough to support recovery-sized market growth without distressed sales. It’s been a steady descent for national yearly rates of growth. They have dropped five percentage points from a high of 11.7% in December 2013.
“We see notable weakness in the performing-only sale segment, a sign that non investor buyers are not engaged enough to support the recovery. As markets continue to normalize, we’ll see reduced growth from the distressed segment, which is a good thing for the market overall as the legacy of the housing crisis fades in the rear-view,” Villacort said.  “Yet, should national rates of growth turn to losses as a result, non investor homebuyers will likely further disengage. Quarterly losses could snowball into yearly losses, and create a negative feedback loop. At this point, the market showing signs of weakness is a cause for concern.”
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While this is healthy for markets overall, the weakness of price growth in the performing-only segment is further cause for concern. Excluding distressed sales, performing-only national home price growth over the last year was just 4.4%, down from a recovery high of 7.2%. Even more concerning is the performing-only segment’s drop in quarterly growth to 0.6%, nearly cut in half over the last rolling quarter which saw quarterly rates of growth at 1.1%.
Reduced reliance on distressed sales and diminishing gains in the performing-only sale segment  could be too much for the recovery to overcome as we enter winter. The recovery is at a tipping point. Markets need non investor demand to ramp up, and homebuyer confidence restored. Should this turn into a negative feedback loop, the likelihood for quarterly price declines at the national level could turn into yearly price declines by the end of 2015.

10 Reasons Why People Don't Get A Mortgage

Want to know why mortgage applications continue at historic lows? Well, as it turns out, there are many reasons why homeownership continues to drop.
Even while there is still a widespread preference for homeownership in America, 35% of households still rent, and of them, 20% report no intentions to buy, according to a report from Rachel Bogardus Drew, a post-doctoral fellow with the Harvard Joint Center for Housing Studies.
And when looking at the latest numbers, the U.S. Census Bureau’s third-quarter homeownership report found that the national vacancy rate hovered around 7.4% for rental housing and 1.8% for homeowner housing, barely moving from the second quarter’s results.
So why aren’t people wanting to own a home?
“We know from my prior research that some demographic groups are less likely to expect to own in the future, including whites, older renters, those with lower incomes, and those without families,” Drew said.
“Yet regression analyses based on demographic variables alone can account for only about 10% of the variation in renters’ future tenure plans. Thus we must consider some attitudinal factors when seeking to understand what drives intentions to rent for the long term,” she added.
The chart below lists the 10 main reasons people either don't want or can't get a mortgage.
(Source HJCHS; click to enlarge)

Drew explained that the results show a third of renters, or 10% of all households, rent because of lifestyle and personal preferences. However, more than half of lifetime renters see their tenure as constrained, either by their own financial circumstances or by macroeconomic conditions.
And looking toward future trends, renters and unlikely to change their plans anytime soon due to tight mortgage lending, home prices rising and sluggish income growth.

This is why California is in the middle of another housing crisis-Affordability and mortgage lending issues abound

Decades from now, when history writes the story of the Millennials, they may well be remembered as the first generation for whom using smartphones and social media was as natural as taking a breath. Yet unless things change, there’s a good possibility they’ll also be known as the generation that couldn’t afford to buy or rent a home.
It’s ironic that when the first Millennials were born, their Baby Boomer parents couldn’t afford a home either. Looking back to October 1981, interest rates on a 30-year, fixed-rate mortgage exceeded 18%. It wasn’t until rates fell below 10% in 1986, and to the 7% range in the early 2000s, that affordability ceased to be a major impediment to homeownership.
Today, California’s housing affordability problem is back – only this time it is fueled by rising home prices and lack of access to capital rather than double-digit interest rates.
On Nov. 14, the California Association of Realtors will convene economists, policymakers, and practitioners for “The Real Estate Summit: Partnering for Change in California.” The summit will explore the issue of housing affordability, as well as California’s infrastructure, foreign investment, consumer trends, housing finance, and policy implications.
So how serious is the problem?
CAR’s Housing Affordability Index – which tracks the percentage of households that can afford a median-priced, single-family detached home assuming current interest rates and 20% down – fell from 33% in the first quarter of 2014 to 30% in the second quarter, a 26% decline from a peak of 56% in early 2012. While home buyers needed to earn an annual income of $56,320 to purchase the median-priced house two years ago, today they need an additional $37,270, or $93,590 total annually, to qualify.
The reasons behind the decline in affordability are many:  slower-than-expected economic growth, incomes that haven’t kept pace with rising home prices or rents, pent-up demand, lack of supply, tighter lending criteria in response to new mortgage regulations from Congress, and indecision about the future of Fannie Mae and Freddie Mac, to name a few.
What the numbers don’t reveal is the impact the problem is having on individuals and families. Nationally, more than half of adults surveyed say they’ve taken a second job, postponed retirement contributions, run up credit cards, or moved to a cheaper neighborhood in order to cover their rent or mortgage over the past three years, according to the MacArthur Foundation. Another study reports that 45% of college-educated Millennials have moved back in with their parents because they can’t find a job or the one they have doesn’t cover student loans and a place to live.
A lack of new home construction is likely to cause further affordability issues unless housing starts increase in line with local job gains, according to the National Association of Realtors. Its analysis found that too few homes are being constructed in relation to local job market conditions, and that lack of construction has “hamstrung” supply and slowed home sales.
Here in California, it has been estimated that the post-recovery real estate market could easily absorb 250,000 new units of owner-occupied or rental housing – a need that isn’t even close to being fulfilled.
What's the key reason?
Many small builders continue to experience limited access to credit and rising construction costs. Despite strong demand, the number of single-family housing permits issued in August 2014 declined by nearly 21% from the same month in 2013, while the number of multifamily permits was down almost 24% year over year.
There are some who believe California’s housing affordability problem will work itself out as the economy improves and consumer expectations align with real estate market realities.

S&P Case-Shiller: Home price growth continues to slow-Gains drop below 6% as Sunbelt reports worst returns since 2012

Home price growth continues to slow, according to the latest S&P/Case-Shiller Home Price Indices for August 2014.
The 10-City Composite gained 5.5% year-over- year and the 20-City 5.6%, both down from the 6.7% reported for July. The National Index gained 5.1% annually in August compared to 5.6% in July.
On a monthly basis, the National Index and Composite Indices showed a slight increase of 0.2% for the month of August.
Detroit, of all places, led the cities with the gain of 0.8%, followed by Dallas, Denver and Las Vegas at 0.5%. Gains in those cities were offset by a decline of 0.4% in San Francisco followed by declines of 0.1% in Charlotte and San Diego.
“After several months in a row of slowing home value growth, it’s fair to say now the market has officially turned a corner and entered a new phase of the recovery. We’re transitioning away from a period of hot and bothered market activity, characterized by low inventory and rapid price growth, onto a more slow and steady trajectory, which is great news,” said Zillow Chief Economist Dr. Stan Humphries. “In housing, boring is better. As appreciation cools and more inventory comes on line, buyers will start to gain a more competitive advantage, after years of sellers being in the driver’s seat. More sedate home value growth, coupled with interest rates that remain incredibly low, will also help housing stay affordable, which is critical to drawing in the next generation of younger, first-time buyers that had been sitting on the sidelines.”
Click the chart to enlarge

The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20- City Composite Home Price Indices.
“Homeowners may be disappointed to see home prices slow their monthly gains, but the sky is not falling,” said Quicken Loans vice president Bill Banfield. “Nationally, home prices are still making healthy yearly gains to grow household equity and throw a lifeline to those that may still be underwater.”
The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 5.1% annual gain in August 2014. The 10- and 20- City Composites posted year-over-year increases of 5.5% and 5.6%.
“The deceleration in home prices continues,” says David Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “The Sun Belt region reported its worst annual returns since 2012, led by weakness in all three California cities -- Los Angeles, San Francisco and San Diego. Despite the weaker year-over-year numbers, home prices are still showing an overall increase, as the National Index increased for its eighth consecutive month.
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“The large extent of slower increases is seen in the annual figures with all 20 cities; the two composites and the national index all revealing lower numbers than last month. The 10- and 20-City Composites gained 5.5% and 5.6% annually with prices nationally rising at a slower pace of 5.1%. Las Vegas continues to see a sharp deceleration in their annual home prices with a 10.1% annual return, down just below three percent from last month. Miami is now leading the cities with a 10.5% year-over-year return. San Francisco, which has shown double-digit annual gains since November 2012, posted an annual return of 9.0% in August.
“Despite softer price data, other housing data perked up. September figures for housing starts, permits and sales of existing homes were all up. New home sales and builders’ confidence were weaker. Continued labor market gains, low interest rates and slower increases in home prices should support further improvements in housing,” Blitzer said.
All cities except Cleveland saw their annual gains decelerate. Las Vegas showed the most weakness in its year-over-year return; it went from 12.8% in July to 10.1% in August. As a result, Las Vegas lost its leadership position as it moved to second place behind Miami with a 10.5% year-over-year gain. San Francisco posted 9.0% in August, down from its double-digit return of 10.5% in July.
All cities except Boston and Detroit posted lower monthly returns in August compared their returns reported for July. San Francisco showed its largest decline since February 2012; it was the only city that showed a negative monthly return two months in a row from -0.3% in July to -0.4% in August.

Foreclosure inventory lowest since February 2008

At 1.76% of active mortgages, the nation’s inventory of loans in foreclosure is now at its lowest point since February 2008, according to the September report from the Data and Analytics division of Black Knight Financial Services.
That equates to 893,000 loans in the foreclosure process, a decline of 435,000 from last year.
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Mortgage delinquencies reversed last month’s increase, dropping 3.9% - or 117,000 loans - nearly erasing August’s increase.
Total non-current inventory (30 or more days past due or in foreclosure) declined by 117,000 (almost 400K since last year).
Foreclosure starts rose nearly 12% in September, with 91,000 new (or repeat) foreclosure actions.
The inventory of seriously delinquent loans (those 90 or more days past due) declined by 25,000, reaching its lowest point August 2008.
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September’s monthly prepayment rate (historically a good indicator of refi activity) declined by almost a full percentage point.
Looking at the states with the highest and lowest share of non-current inventory, Minnesota entered the top 5 best performing states, knocking out Alaska.
Additionally, Florida, which showed the best rate of improvement over the past 6 months, is now at the bottom of the 5 states with the highest share of non-current loans.