Homeowners are opening their favorite piggy bank again — their homes.
As home values rise faster than expected, that increased homeowner wealth suddenly seems more enticing.
Home equity lines of credit, known as HELOCs and often serving as second loans, allow homeowners to pull cash out of their homes when they need it. HELOC volume is now up 21 percent in the past two years, to the highest level since 2008, according to Moody’s. It is still nowhere near its housing boom level, when many people treated their homes like ATMs, but the trajectory is definitely pointing higher.
Borrowers are also putting smaller down payments on home loans now, starting with less home equity either to save cash or because they can’t afford anything more. To put it in perspective, before the last housing boom, the median down payment was just over 7 percent. It then dropped to 3 percent during the height of the boom, as lenders offered all kinds of “creative” loan products that required little to no down payment.
Homeowners are clearly leaning toward more leverage, but they are doing so in a far different environment than in 2006. Mortgage underwriting is far stricter, especially for home equity loans, and borrowers must prove their ability to repay loans, including all financial documentation. Home equity continues to rise steadily, according to the Federal Reserve Board, and it is still rising faster than borrowers are withdrawing it.
Cash out refinances are also making a big comeback as homeowners are able to take advantage of rising home values to refinance their current mortgage and taking equity out. These are mortgages that are in the first lien position. In these cases, the borrow is often also removing their monthly private mortgage insurance. Even with slightly higher mortgage rates than a year ago, their monthly mortgage payments are often times much lower given the absence of the monthly PMI component.
What Happened to Rates Last Week?
Mortgage backed securities (FNMA 3.50 MBS) lost -90 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
We had extremely strong domestic economic data and another week of the Fed pounding the airways trying to turn the markets around to pricing in a March rate hike. The difference being that after three weeks, it finally worked as the market moved from a 50% probability of a rate hike 2 weeks ago, to a 90% probability of a rate hike last week. The effect was a sell off in long bonds that are very rate sensitive which caused mortgage rates to rise.
Housing: The Case-Shiller Home Price Index (20 metro city) was a little higher than expected (5.6% vs est of 5.3%) but this data from December and is a small sample size. More weight is put on the Existing Home Sales median price than this report.
Consumer Confidence: The February reading was very strong (almost a 15 year high) with a 114.8 reading which was much stronger than January’s reading of 111.6 and the consensus estimates of 110.9.
Manufacturing: February’s Chicago PMI blew the doors off of estimates (57.4 vs est of 53.0). Any reading above 50 is good and this was a very hot reading.
January’s Richmond Fed Manufacturing Index also showed strength as the regional report was stronger than estimates (17 vs 10).
The national ISM Manufacturing Index for February was very hot. It came in at 57.7 which was much higher than the market forecasts of 55.7.
ISM Services: Yet another red-hot economic data point. ISM Non Manufacturing represents more than 2/3 of our economic engine and it was very high, coming in at 57.6 vs est of 56.5. Any reading above 50 is expansionary and a reading near 58 is fantastic.
The Talking Fed:
Philly Fed President Patrick Harker (voting member) said “I see three hikes as appropriate for 2017, assuming things stay on track.”
S.F. Fed President John Williams (non voting member) said “In my view, a rate increase is very much on the table for serious consideration at our March meeting,” and “We need to gradually ease our foot off the gas in order to avoid a ‘too hot’ economy that in the end isn’t sustainable.”
The Beige Book showed that the economy continues to expand at “a modest to moderate pace from early January through mid-February.” And was overall up-beat but noted that while Business Optimism continued to rise, it was at a lesser pace than the prior period. Overall, nothing in this report really shocked the market. It was not weak enough to reverse the rapidly building market sentiment that a March rate hike is in the cards….nor strong enough to “seal the deal.”
Federal Reserve Janet Yellen spoke in Chicago. You can read her prepared statement here
Overall, her them matched the recent bevy of “hawkish’ comments from Federal Reserve members. Here are some key highlights:
– Fed will raise rates this month if the economy holds up.
– Rates are likely to rise faster this year for the first time since she took the helm of the Fed.
– She sees no evidence the Fed has fallen behind the curve.
– Gradual removal of accommodation is likely to be appropriate.
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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