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Housing Affordability Tightens

By Taff Weinstein at

Housing Affordability Tightens

Housing Affordability Tightens:

The newly released Spring 2018 Housing and Mortgage Market Review compiled by Arch MI shows that national housing affordability declined by 5% in the first quarter of 2018. This is due to slightly higher mortgage rates, rising home prices and historically low inventory levels. And If interest rates and home prices rise by year-end in the ballpark of what most analysts are forecasting, monthly mortgage payments on a new home purchase could increase another 10–15 percent. That would make 2018 one of the worst full-year deteriorations in affordability for the past 25 years.

Researchers looked at the median-priced home, now $250,000, and estimated price gains this year of 5 percent in addition to mortgage rates going from 4 percent to 5 percent on the 30-year fixed. Other studies that factor in median income also show decreasing affordability because home prices are rising far faster than income growth.

"A strong U.S. economy combined with a housing shortage in many markets means that there is little hope of any price drop for buyers. Whether someone is looking to upgrade or purchase their first home, the window to buy before rates jump again is probably closing fast." said Ralph DeFranco, global chief economist-mortgage services at Arch Capital Services.

However, For the U.S. overall, even if affordability were to deteriorate as forecasted, affordability would still be reasonable by historic norms. That is because the percentage of pre-tax income needed to buy a typical home in 2019 would still be similar to the historical average during 1987–2004. Thus, nationally at least, even with higher rates and home prices, affordability will just revert to historical norms.

Source: Arch MI Spring 2018 Housing and Mortgage Market Review

What Happened to Rates Last Week?


Mortgage backed securities (FNMA 4.00 MBS) lost -32 basis points (BPS) from last Friday's close which caused fixed mortgage rates to move higher for the week.

Overview: The bond market was under pressure (higher rates) due to inflationary data (CPI 2.4%) and several major bond funds (most notably PIMCO) recommending lightening up on bond holdings. Global military and geo-political concerns kept MBS from selling off even more.

Jobs, Jobs, Jobs: The February Job Openings and Labor Turn Over Survey (JOLTS) continues to show over 6 million unfilled jobs which shows that employers are having major issues finding qualified workers to fill the open positions.

Consumer Sentiment: The Preliminary April reading was a miss to the downside (97.8 vs est of 100.6). This will be revised but it shows a pullback in sentiment from our recent historic highs.

PIMCO says Sell: The world's largest bond fund, PIMCO, said that it's time to take profits....now. Dan Ivascyn, the man who replaced Bill Gross as CIO, and the man responsible for allocating hundreds of billions in client funds, said that geopolitical tensions and rising interest rates have created a “much more fragile situation”.
Inflation Nation: The March Consumer Price Price Index matched market expectations but did show an increase in the pace of inflation for consumers and we saw a rare "two handle" on the Core YOY number. Headline CPI YOY hit 2.4% vs est of 2.4% but that is up from Feb's pace of 2.2%. The Core CPI YOY hit 2.1% which matched estimates but it was a hotter pace than Feb's rate of 1.8%.

The Talking Fed: The Minutes from last month's FOMC meeting where released you can read them here.
Overall, the Minutes reveal that the Fed is shifting away from accommodative policies. Here are some of the highlights:
- Recent fiscal policy changes (tax reform) could lead to a greater expansion in economic activity over the next few years than the staff had previously projected.
- A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.
- Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.
- Many participants stated that recent readings from indicators on inflation and inflation expectations increased their confidence that inflation would rise to the Committee’s 2 percent objective in coming months and then stabilize around that level; others suggested that downside risks to inflation were subsiding.
- Regarding wage growth at the national level, several participants noted a modest increase, but most still described the pace of wage gains as moderate; a few participants cited this fact as suggesting that there was room for the labor market to strengthen somewhat further.
- Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy.

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