Home affordability fell to the lowest level in seven years at the end of 2016, and the ingredients for a reversal are not there anytime soon.
It now takes 22.2 percent of median income to make the monthly principal and interest payment on the median priced home, according to a new report from Black Knight Financial Services, which based the measure on borrowers using a 30-year fixed mortgage. That monthly payment on the median-priced home increased 10 percent in the fourth quarter alone, thanks to a sharp jump in mortgage rates following the presidential election.
During the 2005-2006 housing bubble, it took nearly 36 percent of the median income to afford a home, as home prices and mortgage rates were higher.
But there is a stark difference between those days and today. Back then, most homebuyers were not using 30-year fixed loans. They were using all kinds of “creative” loan products with no money down and extremely low teaser rates. They also used negative amortization loans, which put payments off, adding to the balance of the loan. These loans caused the extreme bubble and the ensuing crash in the financial markets — precisely why many of these loans are illegal today.
“That’s why we always use a 30-year fixed rate for comparison. It lets you know if something in the mortgage market itself (other than rates) is causing a change in the affordability equilibrium,” noted Ben Graboske, executive vice president of Black Knight Data & Analytics. “Mortgage lending led to affordability getting out of whack back in 2006 due to mortgage programs increasing buying power and thus driving up home price when in reality, without those products, the affordability ratio (between home prices, incomes and interest rates) were nowhere near sustainable.”
Home prices rose steadily throughout last year with the annual gains increasing each month. In December, prices were 7.2 percent higher nationally compared from December 2015, according to a new report from CoreLogic.
“As of the end of 2016, the CoreLogic national index was 3.9 percent below the peak reached in April 2006,” said Frank Nothaft, chief economist for CoreLogic. “We expect our national index to rise 4.7 percent during 2017, which would put homes prices at a new nominal peak before the end of this year.”
While we are far from “bubble” territory, we can expect the trend of housing becoming a larger portion of wages.
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.50 MBS) lost -12 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
MBS traded in a very tight range and were under steady pressure. We would have seen even worse pricing for the week but traders were temporarily “parking” their cash in bonds over the long holiday weekend. We had fairly strong economic data and the Fed attempted to get the markets to price in a March rate hike.
Inflation?: We got another round of data that shows that inflation is showing up. The Core YOY (year over year) Consumer Price Index increased to 2.3% well above the Fed’s target rate of 2.0%. Eventhough the Fed is generally referring to the Core PCE for its inflation target, this is still a comprehensive report that is above 2.0%. The Headline CPI MOM (month over month) was double the market expectations (0.6% vs est of 0.3%) and the Core CPI MOM came in at 0.3% vs est of 0.2%.
The Atlanta Federal Reserve District Business Inflation Expectations came in at 2.0% also supporting inflation hitting the Feds’ target rate soon.
Retail Sales: The biggest report of the week was very robust. Retail Sales Ex-Autos jumped 0.8% which was double the market expectations of 0.4%. Plus December was revised upward significantly from 0.2% to 0.4%. When you look at the headline reading which includes Autos, Retail Sales came in four times higher than expectations (0.4% vs est of 0.1%), plus December was revised upward from 0.6% to 1.0%.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were lower than expected (239K vs est of 245K) and last week’s 234K reading was not a fluke but stood. The more closely watched 4 week moving average hit another historic low…hitting the lowest reading since this data has been tracked starting in 1973. It fell to 244,250.
Philly Fed: Their General Business Conditions Index Survey shot up dramatically, hitting 43.3 vs est of 17.5. Its the strongest reading since 1983 (when I was a Jr. in High School)…this is Reganesc.
The Talking Fed:
Federal Reserve Chair Janet Yellen you can read her testimony here gave her semi-annual testimony in front of the Senate Banking Committee and the House Financial Services Committee. She said that waiting too long to raise interest rates would be “unwise” as economic growth continues and inflation rises. Basically she put the markets on notice that the March meeting is indeed live.
The Fed’s number 2, Vice Chair Stanley Fischer said that they are nearing its dual goals and seems to be headed for its anticipated monetary policy path, which officials’ December projections (dot plot chart) put at three increases this year. He said “I don’t want to give you numbers on two or three, but this is consistent with what we had thought should be happening around now — that is that we’d be moving closer to the 2 percent inflation rate, and that the labor market would continue to strengthen.”
Boston Fed President Eric Rosengren said that while the Fed does track market expectations, they do not dictate what and when the Fed acts. He said “market skeptimism” about a rate hike in March is not warranted and should treat this as a live meeting.
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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