America’s housing market is heating up again, fortifying the finances of current homeowners and frustrating potential first-time buyers.
After hitting bottom in 2012, home prices took off dramatically before leveling off a bit in mid-2014. In the last two months, though, they turned higher again. The amount of equity homeowners now have — the value outside their mortgage debt — has doubled in the last five years, according to CoreLogic.
The latest read on September home prices showed a 6.3 percent annual gain, a touch bigger than August and a clear sign that prices are heating up again after cooling through much of spring and summer.
“Home-equity wealth has doubled during the last five years to $13 trillion, largely because of the recovery in home prices,” said Frank Nothaft, chief economist for CoreLogic. “Nationwide during the past year, the average gain in housing wealth was about $11,000 per homeowner, but with wide geographic variation.”
Homeowners today show more wealth on paper, but they are not extracting it at nearly the rate they did during the last housing boom. Near-record-low mortgage rates have certainly prompted thousands of borrowers to refinance and lower their monthly payments, but a very small share have extracted cash in these refinances and home equity lines of credit (HELOC).
So homeowners get richer, and those trying to become homeowners have to face not just higher prices, but a severe lack of homes for sale, especially at the entry level. There is clearly demand, just not enough supply.
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.00 MBS) gained +15 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
From a technical/charting perspective, our benchmark MBS was “sandwiched” between our 10 day and 200 day moving averages. MBS made several runs below our 200 day support level but pulled back above it every time.
It was Central Bank Palooza last week with all three (Bank of England, Bank of Japan and our Federal Reserve) deciding to stand pat on any rate or policy changes. We also had our Big Jobs Friday but neither event really had an impact on interest rates as were channel locked.
The Federal Reserve Open Market Committee (FOMC) voted to keep rates the same. This was widely expected, but there were a few subtle changes from their last meeting.
First, there were two dissenting votes (meaning two voting members wanted to raise rates). They were Mester and George. However, last time there were actually three dissenting votes. Mester, George and Rosengren. This time around, Rosengren moved his vote over to the other side.
Some key take-aways from their policy statement:
Their key statement of the day: “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen”
They replaced their September statement of “Inflation is expected to remain low for the near term” with “Inflation is expected to rise to 2 percent over the medium term” which is a slightly “hawkish” shift.
The Fed also changed the language to the phrase that “Market-based measures of inflation compensation remain low” and replaced it with “…have moved up but remain low.”
Big Jobs Friday: Overall a very solid jobs report but not to the degree that it was a shock to the system.
Tale of the tape: The following are the key areas of interest.
Non-Farm Payrolls for October were lower than expected (161K vs est of 175K).
But there were major revisions to the prior months and most likely we will see this 161K revised next month as well.
August was revised from 167K to 176K, September was revised from 156K to 191K.
The rolling 3 month average last month (as released and prior to revisions) was 192K per month, the new rolling 3 month average is 176K which is a nice level considering that labor slack is tightening.
Average Hourly Earnings were higher than expected (0.4% vs est of 0.3%) and more importantly the YOY reading shot up to 2.8% which is the fastest pace in 8 years. This is certainly reflective of higher wage jobs (mostly in the services industry) being added.
The Unemployment Rate fell to 4.9% which matched expectations and while its below the important psychological mark of 5.0%, the Participation Rate fell from 62.9% to 62.8% (more people unemployed but not seeking employment) which causes the Unemployment Rate to fall.
Average Hourly Work Week remained unchanged at 34.4 hours.
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.