Home Equity Returns in a Big Way


Nearly a million U.S. homeowners came up from underwater on their home loans in the third quarter, finally owing less than their homes are worth. The nation’s overall negative home equity rate fell to 13.4 percent of homeowners with a mortgage, down a full percentage point from the second quarter and from 16.9 percent a year ago, according to Zillow, the Seattle-based real estate firm. Historically, the typical negative equity rate is lower than 5 percent.

Fast-rising home prices are behind the gains. Home value gains widened in October, up 6.8 percent from October 2014. The gains had been contracting in the first half of this year. Recent price gains have reduced negative equity by a collective $60 billion in just three months. While the increase in home equity is sizable and the improvement since the worst of the housing crash dramatic, the negative equity crisis is far from over. More borrowers will now be able to refinance, but an inordinately large number are still stuck in place.

This is still one of the key reasons why inventory levels are so tight.

Housing markets with higher rates of negative equity will have fewer homes for sale, as homeowners are stuck in place. Negative equity is concentrated in lower-priced homes, so this especially hurts the first-time buyer looking to purchase those homes. The supply of homes for sale is very tight nationwide, but it is especially tight at the entry level.

What Happened to Rates Last Week?


Mortgage backed securities (FNMA 3.50 MBS) lost -13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. But the devil is in the details as MBS attempted to rally and then sold off in dramatic fashion, falling -114 BPS from Wednesday’s highs to Thursday’s lows.

We had a very big week with a lot of economic data that hit. But the long bond market focused on two areas: Central Bank action and our Jobs report on Friday. As you can see by the chart above, MBS sold off in a major way in direct response to Central Bank action (described below) and then found a bottom and rebounded after our Jobs data on Friday.

Central Bank-Palooza:

European Central Bank (ECB): Was supposed to deliver with their monetary bazooka but instead used a pea-shooter. The ECB left their key interest unchanged at 0.5% but did lower their deposit rate down to -0.3% (which was widely expected, the market was hoping for a surprise of deeper cuts in the core rate).
During the following press conference, President Draghi announced that they would keep their 60 billion euro asset purchase program in place (not increasing the monthly purchase amount, nor changing the product mix)but would extend the program out to March 2017 or beyond.
This was very disappointing to bond traders that were told by the ECB that they would use their “bazooka”. As a result, MBS came under pressure as many traders were simply caught on the wrong side of the trade. We might have seen a rally if they moved their asset purchase program from 60 to 80 billion euros..but that didn’t happen.

Yellen is Yelling: She testified before the Joint Economic Committee in DC. The bond market focused more on her responses to the sea of inane questions more than her prepared remarks. Two quotes are worth mentioning: “To simply provide jobs for those who are newly entering the labor force probably requires under 100,000 jobs per month,” with anything above that helping “absorb” those who are unemployed, discouraged or had dropped out of the labor market.
And Job creation has been averaging around 200,000 a month this year, a figure Yellen said was “quite a bit” above the number needed to continue absorbing slack in the labor market.
She also said the United States may be “close to the point at which we should be raising”
This caused many to speculate that the Fed is getting ready to raise rates.

Jobs, Jobs, Jobs: We had a very strong report, but does it actually solidify anything with the Fed? Non-Farm Payrolls are got all the attention in the media with a stronger than expected reading of 211K (vs est of 190K to 200K) and perhaps more importantly, October and September were revised upward a combined 35K.

Average Hourly Earnings matched market expectations of 0.2% but more importantly, on a YOY basis pulled back from 2.5% down to 2.3%. And this has the most weight with the Fed and bond traders alike. It effectively stopped our two day sell off and caused MBS to move back towards positive territory as it leaves the door open for the Fed NOT to raise rates.

The Participation Rate ticked upward from 62.4% to 62.5%, so it increased for the second straight month albeit by a small amount. The Unemployment Rate remained at 5.0%, as expected. The Unemployment Rate is really driven by the Participation Rate so it is good that it remained at 5.0%.

What to Watch Out For This Week:


The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets. Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

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