California home sales volume lays low

Posted by ft Editorial Staff | Feb 16, 2020 

36,200 new and resale home transactions closed escrow in California during December 2019. The number of homes sold was 20% higher than a year earlier. Of note, December 2018 experienced the lowest home sales volume since the Great Recession, therefore December 2019’s 20% year-over-year jump isn’t as impressive as it seems at first glance. December 2019’s year-over-year increase is a reversal of the long trend of falling year-over-year sales volume, which began in the second half of 2018. Despite December’s higher numbers, 2019 total home sales volume was 1% below 2018.

2019 ended with 437,500 home sales in California. This was 4,400 fewer home sales than took place in 2018, amounting to a 1% annual decrease. 2019’s slightly down performance follows a 4% decrease in 2018. For greater perspective, 2019’s 442,000 homes sales volume was 42% below peak sales volume experienced in 2005. 

Home sales volume will continue its year-over-year decrease in 2020, slowing the flow of agent fees. Rapidly rising prices and interest rates in 2018, along with uncertainty brought on by shifting economic policies, have discouraged potential homebuyers and derailed sales. Therefore, home sales volume won’t rise significantly until after home prices bottom with the next recession, expected in 2020-2021.

Updated February 16, 2020. Original copy posted March 2009.

Chart 1

Chart update 02/15/20

Dec 2019Nov 2019Dec 2018
Southern CA 19,40018,30015,800
Northern CA16,80016,40014,500
CA Total36,20034,70030,300

The above chart tracks the home sales volume of single family residences (SFRs) on a month-to-month basis. Sales volume includes the sale of all residential resales and new homes in California, including new homes sold directly by builders.

Home sales vary from month-to-month for a variety of reasons, most significant being homebuyer demand. This demand is influenced by several factors constantly at work in California’s homebuying market, including:

Seasonal differences in annual sales volume

It’s normal for home sales volume to rise in the first half of the year and fall after June, generally speaking.

Chart 2

Chart update 02/02/19

Chart 2 shows average home sales as experienced from 2011-2018. As depicted, the most homes are regularly sold each year in June. Another small increase takes place in December, as homebuyers seek to wrap up their financial activities before the end of the year.

Therefore, real estate professionals are not to worry when they hear of falling sales volume in the latter half of the year. This is a normal seasonal progression. What to watch for is year-over sales comparing a month or other period (such as year-to-date) this year with the same month or period last year.

A very long recovery for home sales volume

Annual real estate sales numbers since the Great Recession of 2008 suggest the upcoming years through 2017 will be characterized by the same continuing bumpy plateau in home sales volume we have experienced now for eight stagnating years. As a rule, current market action, whether up or down, is reflected first in sales volume, followed by prices, and both fluctuate from month to month mostly going in opposite directions or just standing still.

Chart 3

Chart update 02/16/20

201820172005 peak
NorCal 208,300211,500213,900398,200
SoCal 229,200230,400248,000355,700
Total 437,600442,000461,900753,900

To set the stage for a forward look, a review of sales volume in the recent past is helpful:

  • Mid-2005 saw sales volume peak for all types of real estate in California, with nearly 754,000 homes sold that year;
  • Nearly 30% fewer sales were recorded in 2006 than in 2005, while sales dropped an additional 30% in 2007;
  • sales bottomed in 2008 and were artificially inflated in 2009 due to subsidy-induced purchases and speculators jumping on the momentum, but remained 40% below 2005;
  • 2010 saw a decline from the year earlier in both sales volume and prices;
  • 2011 increased slightly in sales volume while decreasing in sales prices, a normal price adjustment condition;
  • 2012 saw sales volume increase marginally and home prices jump significantly by year’s end, supported primarily by massive speculation;
  • 2013 home sales volume stagnated, while home prices continued to increase rapidly, not a good sign for the immediate future; and
  • 2014 saw home sales volume decrease throughout the year, ending the year 7% below 2013.
  • 2015 ended 9% higher than 2014 — in other words, just about level with 2013. [See Chart 4]
  • 2016 and 2017 sales volume continued a flat trend in sales which began in 2015; and
  • 2018 saw sales volume decrease rapidly in the fourth quarter, ending the year 4% below 2017.

Chart 4

Chart update 02/16/20

Dec 2019Dec 2018Dec 2017
Home sales volume

California home sales continue their year-over-year decline in 2020, ending the year 1% lower year-to-date (YTD). This continues a consistent decline in year-over-year sales volume that began in mid-2018.

Sales volume ended 2018 4.3% below 2017, amounting to 19,900 fewer sales. In contrast, 2017 home sales volume ended the year with just 3,800 more sales than in 2016. This is an increase of less than 1%. The previous year, 2016, also saw a minuscule increase over 2015.

Sales volume is not expected to languish until the years following 2021, due to:

  • fewer participating first-time homebuyers than normal;
  • lower homeowner turnover to buy an upgrade or relocate due to continued negative equity and delayed retirement;
  • reduced home inventory across the state; and
  • static turnover in rental occupancies.

Much of these disadvantages are due to the jobs recovery which has been dragged out for eight years now, a confidence issue, and is pronounced by wage increases below the rate of consumer inflation. California finally regained all jobs lost in the 2008 recession in mid-2014, but has yet to return to pre-recession employment levels after considering the 1.1 million working-aged population increase. At the current recovery pace this will occur in 2019.

Short sales, real estate owned (REOproperty resales and speculators have contributed to sales volume distortion over the past few years. Conventional positive-equity resales by owner-occupants were the exception, sometimes reminiscently called standard sales as opposed to short sales. As prices rise, move-up homeowners will return to the market to sell and concurrently buy a more suitable replacement home.

Further, as of Q3 2017, 3.2% of California mortgaged homeowners were still underwater. Thus, turnover by this chunk of owners is restricted.  These homeowners cannot sell and relocate to purchase another home because their homes are worth less than the debt encumbering them. To rid themselves of the home and the debt, they have to endure damaged credit resulting from a short sale or foreclosure. The desire to avoid this embarrassment takes most of these 3.2% homeowners out of the home buying market for years.

Home sales in the coming years

The forward trend in California home sales is mixed for both buyers and seller. Homebuyer income is going further and doing more than anytime during the past 15 years due to increased borrowing capacity brought on by low interest rates (even though they rose mid-2013 to cut back funding by 10% from one year prior, but dropped to fuel sales in 2015). In fact, the Buyer Purchasing Power Index (BPPI) went negative in June 2013 and bounced back to zero in September 2014 – this momentarily stalled home price expectations.

In December 2015, the Federal Reserve (the Fed) committed itself to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994 midway through those recoveries). This upward rate move by the Fed (and the bond market) will instantly be reflected in ARM rates, and eventually trickle into higher mortgage rates, likely around mid-2016. Higher FRM rates will promptly trend real estate sales volume down and some 9-12 months beyond prices will slip. As prices start to decrease, expect the short-term rate to decline in the 2017-2018 period which will slow and put an end any downward turn in real estate sales volume and the economy.

first tuesday forecasts home sales volume will return to 2006 levels around 2020-2021. The peak sales volume last seen in 2004, inflated by speculator acquisitions and excessive mortgage money, is unlikely to return for decades, when interest rates cyclically peak.

Relocating Baby Boomers going into retirement later this decade will be the primary propelling force in both selling homes and buying replacements beginning around 2019. Their Generation Y (Gen Y) children will add to the sales volume at the same time as they find jobs at better pay levels and become first-time homebuyers. Gen Y influence will peak in sales volume at the end of this decade as they complete their shift from renting to owning.

Once Californians feel the effects of two or three years of healthy employment growth, their confidence about the future will improve. They will once again be willing to invest in the economy since the expectations for tomorrow are projections based on yesterday’s most recent experience. Only then will occupying homebuyers – end users – return in sufficient numbers for sales volume to swell significantly.

In 2018, sales volume will begin to pick up in earnest, peaking in 2019-2021. Employment and labor force participation will have reached beyond its 2007 peak, and grow quickly. Then, California will once again see home prices jump beyond the rate of consumer inflation. Mortgage lenders with an eye for excess profits will then begin to loosen their lending standards to whatever extent federal regulators permit or lawyers divine. The memory of the grim mid-2000s will be politely pushed aside, and mistakes will be repeated by all participants – lenders, builders, brokers and buyers.

Favorable market conditions now at work

Several favorable market factors currently support increasing sales volume:

  1. A steady 3% annual increase in the number of new jobs;
  2. A more reasonable (though still rising) price trend as we start 2016;
  3. Slowly rising consumer confidence and spending; and
  4. the recapitalization of the private mortgage insurers to eventually replace (or fully compete with) government guarantees of home mortgages.

Trends to be concerned about

However, many unfavorable market conditions restrain the rise of home sales volume:

  1. the weakest homebuyer demographics in 15 years;
  2. failed savings for a down paymentas high rents squeeze potential first-time homebuyers out of saving;
  3. buyer borrowing power no longer enlarging the funds they can borrow as interest rates inevitably rise, reducing funding for purchase-assist financing and dampening property prices;
  4. the public’s increasingly anti-business and pessimistic attitude about American economics, wealth inequality and national politics no matter the outcomes; and
  5. tightened loan standards as lenders are forced to apply forgotten fundamentals of sound mortgage lending practices (20% down payment on non-FHA/private mortgage insured loans, lower income ratios, risk-free credit scores and full documentation of income, funds and collateral value).

30-Year Auction Prices At Lowest Yield On Record

by Tyler DurdenThu, 02/13/2020

One day after a solid 10Y auction, moments ago the US Treasury closed off the week’s coupon issuance with a bang, when it sold $19 billion in 30Y bonds with a bang, thanks to a high yield of 2.061%, which not only stopped through the When Issued 2.068% (the third consecutive stop through), but more importantly, with the yield sliding sharply from last month’s 2.341%, it was the lowest 30Y auction yield on record! And because stocks are trading at all time highs, it only makes “sense” that the 30Y should also price at the lowest yield on record.

The internals were solid as well, with the Bid to Cover dipping modestly from 2.54 to 2.43, which was still above the 2.32 six auction average. And with Indirect demand fading modestly from 63.0% in January to 61.5%, Directs were allotted 19.4%, leaving Dealers holding 19.1%, modestly below the recent average of 21.8%.

The beast of an auction sent yields across the curve sharply lower, and since we live in a world in which the lower rates slide, the highest stocks rise, we can only assume that as bond yields plumb ever lower record levels, stocks will eventually rise to infinity especially since fundamentals no longer matter.

If Not For Coronavirus… By HSH.COM

February 7, 2020 — If not for the current and expected effects of the still-spreading coronavirus, odds favor that we would be talking about rising rather than falling interest rates. Consider where the economic and political climate is compared to just a couple of months ago; new trade deals are in place, at least putting us at a state of detente with China and getting a working playing field in place for trade flows with Mexico and Canada. The presidential impeachment process and theater show has come to completion. Brexit has actually happened. The Federal Reserve has put monetary policy on a stationary platform for the foreseeable future. Prospects for global growth are said to be improving.

However, all has taken a back seat to concerns about the personal and economic impacts of trying to contain coronavirus. Quarantines, travel bans, store closures, trade-route interruptions and more do seem certain to have some impact on growth in the not-too-distant future, and that even with China injecting billions of new liquidity into financial markets and banks this week to help offset the drag from prevention measures.

Without this dark cloud hanging over the global economy, investors would more likely be focused on the fresh emerging economic data. Frankly, the latest news is actually pretty good, at least good enough to help reverse the hard sell-off in stocks last week to return to mostly gains this week. So far, that reversal has seen bond yields also reverse course, bouncing smartly off lows, but there’s not yet been much follow-through to mortgage rates.

So what’s the good news? To start with, for the first month since last July, the factory sector is no longer contracting. While one month is by no means a trend, the Institute for Supply Management’s barometer that tracks manufacturing moved up by 3.1 points to 50.9 for January, a move good enough to move the needle from contraction to expansion. In the report, measures of new orders bumped 4.4 points to a modest (but positive) 52, but employment remained pretty soft at 46.6, and that included a 1.4-point gain. In the ISM series, 50 is considered a breakeven value, with figures above this level denoting growth. If at least for a month, factories are back online and contributing a bit toward growth; however, given headwinds, readings of barely-to-mildly positive are about all that should be expected for a time yet.

The ISM’s twin survey covering non-manufacturing (service) business activity also had good things to say. The January reading moved up by 0.6 points, pushing the headline value to a moderate 55.5 for the month, the highest figure since last August. The sub-measure covering new orders for services rose by 0.9 points to lift to 56.2, while the employment tracker settled back with a 1.7-point decline to 53.1 for the month. The moderately-expanding economy is already near what is considered to be full employment, so it’s not unreasonable to see business adding workers at a more measured pace.

Meanwhile, the employment report for January was nothing short of stellar. Although some hiring was probably “borrowed” for future months due to unusually warm weather, the 225,000 new hires that took place last month would still have been very solid even if jobs in weather-affected industries were only normal. Not only did more people get jobs last month but they did so at higher wages, as average hourly earnings rose by 7 cents an hour, good enough to push the year-over-year gain to 3.1%, a level solidly above the rate of inflation. As such, “real” wages are improving, and that in turn is good news for consumer spending (and, if sustained, could have some effect on helping inflation get closer to the Fed’s 2 percent target). While the “official” unemployment rate ticked up a tenth of percentage point to 3.6%, just above a 50-year low, this was due to more people being pulled into the workforce, and at the moment, the labor force participation rate is 63.4%, the highest reading for the expansion to date.

Not only are more people working, they are also actually increasing their productivity a bit. Output per worker rose by a more-than-expected 1.4% in the fourth quarter and the overall yearlong rise in productivity for 2019 was the best since 2010, if still only a historically moderate level. Still, the increase helped push down the cost of labor per unit produced to just 1.4% from 2.5% in the third quarter, and higher productivity could allow businesses to pay workers a little bit more without undue effect on final prices or eating into profit margins. That’s both important for improving the nation’s standard of living and for stock prices, so regular gains in productivity are something we’d like to see continue even if business investment in new tools and technology has been soft for a time now.

A rise in the nation’s imbalance of trade also suggests some economic pickup in the U.S. and perhaps a bit elsewhere, too. The difference in value of inbound and outbound trade flows rose by $5.2 billion in December, with the gap between the two expanding to $48.9 billion. Exports rose by $1.5 billion to the highest nominal level since last May, and so it looks as though trading partners are starting again to pick up some goods from us. Imports, though, bounced $6.7 billion higher, and as we are a nation of net imports this is signaling at least a little pick up in economic activity here. Depending upon your leanings, the fact that the U.S. was a net exporter of petroleum products for a fourth straight month (best string since the 1970s) may be a good thing or a bad thing, but it was a positive for trade and contributes to GDP growth.

With more people working and incomes rising, consumer spending should continue to move higher. Some of the benefits of sustained employment and income gains can be seen in sales of new cars and trucks; AutoData reported that an annualized 17 million units were sold in January, up about 100K from December and part of a string of solid sales that have been expected to peter out for about the last year or two now. Although down from peak levels seen in 2016, sales of new cars and trucks are still very solid, especially given the fairly strong sales levels over a stretch of years helping to sate pent-up demand and tighter financing conditions for marginal borrowers over the last year or two. That sales haven’t tailed off is a good thing, as it helps to keep wide-ranging supply chains busy while other facets of manufacturing look to recover from a long soft patch.

Factory orders in December reflect this mix of strength and softness. Overall, orders placed to factories rose a nice 1.8% for the month, the largest monthly gain since August of 2018. However, the details weren’t as encouraging; while orders for durable goods rose by 2.4% (rebounding from a November dip) and those for non-durable goods moved 1.1% higher for the month, the measure which serves as a proxy for wide-ranging outlays by businesses (no defense spending or aircraft included) showed a decline of 0.8% for the month, so the increase in factory orders was likely concentrated to a very narrow slice of the economy. Still, more factories working more does carry beneficial effects, even if they would be better spread out on a wider basis for the best economic effect.

Inventory levels at the nation’s wholesaling firms were depleted by 0.2% in December, and that may ultimately help factories see more orders. Wholesalers reported that holdings of durable goods declined by 0.3% and those of non-durables held steady during the period. However, the decline in holdings would have been stronger except that sales also declined by 0.7% for the month, so the level of goods on hand relative to sales failed to move. At a current 1.36 months, this ratio has been holding nearly steady since last May, so there will of course still only be cautious replenishment of stockpiles.

Spending on new construction projects eased by 0.2% in December, dragged down a bit by softness in the commercial/industrial/retail and public-works sectors. Spending on new residential projects powered forward by 1.4%, a sixth consecutive month of increases, while commercial outlays declined by 1.8% in December after a -0.5% fall in November and public-project spending fell by 0.4%, erasing some of the 1% gain month prior. Despite routine ups and downs, construction spending was 5% higher this December than in December 2018, so the trend is at least moving in the right direction.

Although the outplacement firm of Challenger, Gray and Christmas recorded 67,735 announced job reductions in January — the most since February 2019 — the solid job market likely means that folks affected by layoffs should be able to locate other positions fairly quickly. Some may not even apply for unemployment assistance; even if they do, the number of people placing initial applications for unemployment benefits would probably only tick higher. As we are currently very close to cyclical (and 50+ year) lows with just 202,000 new requests placed in the week ending February 1 it would take a sustained surge of benefit-seekers to significantly change the trend here and cause alarm.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Jan 31Jan 03Feb 01
6-Mo. TCM1.57%1.58%2.49%
1-Yr. TCM1.50%1.57%2.58%
3-Yr. TCM1.38%1.59%2.51%
5-Yr. TCM1.41%1.66%2.51%
10-Yr. TCM1.59%1.88%2.70%
Federal Cost of Funds1.955%1.998%0.968%
FHLB 11th District COF1.036%1.035%0.639%
Freddie Mac 30-yr FRM3.51%3.64%4.41%
Historical ARM Index Data

With mortgage rates declining since the turn of the year, interest in both buying and refinancing homes has been solid. However, as we’ve discussed on a number of occasions, low and still-declining mortgage rates are fostering demand that is not being met by new supply of homes available to buy. In turn, not only are home sales tempered and will struggle to grow but prices of homes for sale are pressed higher… which in turn erases some of the improvement in affordability that lower rates bring. It’s not a fortuitous cycle at the moment, at least for existing home sales, but new home sales (where supply is more elastic) should benefit. Folks looking to refinance already have homes and so are of course unaffected, and have been coming out replace older mortgages with new in solid numbers since the holidays faded into the rearview mirror. In the week ending January 31, the Mortgage Bankers Association of America reported that applications for mortgages rose by 5%, driven there by a 15.3% in applications for refinancing but pulled back to earth by a 9.5% decline in those to purchase homes.

While fixed mortgage rates are just a stone’s throw from historic (65+ year) lows, borrowers or regulators looking to see if highly-regulated banks are loosening underwriting criteria won’t find much by way of that. The latest Senior Loan Officer Opinion Survey from the Federal Reserve covering the fourth quarter of 2019 saw more than 90 percent of respondents reporting unchanged underwriting criteria for conventional, government, QM, non-QM and other loan designations. At best, there was a slight easing overall for GSE-eligible, government-backed and QM products. Overall, while the price of money may be getting easier, accessing that cheaper funding is still a traditionally-rigorous process.

With concerns about the coronavirus causing markets to wax and wane, it’s hard to get a good read on where mortgage rates will head next week. The influential 10-year Treasury yield moved from a panic-level 1.51% about a week ago to as high as 1.65% this week and closed Friday right in the middle of those two levels. That said, mortgage yields haven’t (yet) bounced much up from the levels they dropped to in the last week of January and are holding pretty stable over the last few days, so there seems to be a bit of a mixed bag in the market at the moment. With this in mind, we’ll hedge a bit, and think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday will be steady around present levels with perhaps a slight upward bias.

Visualizing The 700-Year Fall Of Interest Rates

by Tyler Durden 02/08/2020

How far can interest rates fall?

Currently, many sovereign rates sit in negative territory, and, as Visual Capitalist’s Dorothy Neufeld notesthere is an unprecedented $13 trillion in negative-yielding debt. 

This new interest rate climate has many observers wondering where the bottom truly lies.

Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.

The Evidence on Falling Rates

Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.

Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.

Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.

The average real rate between 2000-2018 stands at 1.3%.

Current Theories

Why have interest rates been trending downward for so long?

Here are the three prevailing theories as to why they’re dropping:

1. Productivity Growth

Since 1970, productivity growth has slowed. A nation’s productive capacity is determined by a number of factors, including labor force participation and economic output.

If total economic output shrinks, real rates will decline too, theory suggests. Lower productivity growth leads to lower wage growth expectations.

In addition, lower productivity growth means less business investment, therefore a lower demand for capital. This in turn causes the lower interest rates.

2. Demographics

Demographics impact interest rates on a number of levels. The aging population—paired with declining fertility levels—result in higher savings rates, longer life expectancies, and lower labor force participation rates.

In the U.S., baby boomers are retiring at a pace of 10,000 people per day, and other advanced economies are also seeing comparable growth in retirees. Theory suggests that this creates downward pressure on real interest rates, as the number of people in the workforce declines.

3. Economic Growth

Dampened economic growth can also have a negative impact on future earnings, pushing down the real interest rate in the process. Since 1961, GDP growth among OECD countries has dropped from 4.3% to 3% in 2018.

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Larry Summers referred to this sloping trend since the 1970s as “secular stagnation” during an International Monetary Fund conference in 2013.

Secular stagnation occurs when the economy is faced with persistently lagging economic health. One possible way to address a declining interest rate conundrum, Summers has suggested, is through expansionary government spending.

Bond Yields Declining

According to the report, another trend has coincided with falling interest rates: declining bond yields.

Since the 1300s, global nominal bonds yields have dropped from over 14% to around 2%.

The graph illustrates how real interest rates and bond yields appear to slope across a similar trend line. While it may seem remarkable that interest rates keep falling, this phenomenon shows that a broader trend may be occurring—across centuries, asset classes, and fiscal regimes.

In fact, the historical record would imply that we will see ever new record lows in real rates in future business cycles in the 2020s/30s

-Paul Schmelzing

Although this may be fortunate for debt-seekers, it can create challenges for fixed income investors—who may seek alternatives strategies with higher yield potential instead.

Mortgage Rates Surprisingly Resilient After Jobs Report By: MATHEW GRAHAM Feb 7 2020

Mortgage rates completely defied the odds.  They even defied convention.  Specifically, they managed to move appreciably lower even though today’s big jobs report basically told them not to.  

This is a big deal for several reasons. The jobs report is historically the most important economic report on any given month as far as interest rates are concerned.  Granted, it’s had a bit less impact than normal recently due to the persistently strong readings (i.e. solid job creation is old news), but rates have nonetheless been willing to move in a logical direction when the reports have been much stronger or weaker than normal.

So why didn’t they do that today? The bottom line is that the US jobs market is not a big risk, nor a big driver of growth for the global economy.  China, on the other hand, is front and center at the moment, and experts agree the Chinese economy will take a big hit from coronavirus-related issues.  There was some hope earlier in the week that the markets had turned a corner with respect to the outbreak, but today proved that uncertainty continues to be the safest bet.  Long story short, when investors are defending against uncertainty, they often buy bonds.  This, in turn, pushes rates lower.

It remains to be seen if this is just defensive positioning ahead of a weekend or if we’re about to see another deterioration in the coronavirus outlook next week.  In the meantime, long-term low mortgage rates will enjoy some more staying power.

Loan Originator Perspective

Bonds rallied Friday, despite a relatively robust NFP jobs report.  While it’s far too early to pronounce this a trend, it’s refreshing to see rates near their recent lows.  I don’t know how much more room there is for further drops, so will still be conservative on locking.  One in the hand beats two in the bush. – Ted Rood, Senior Originator

Today’s Most Prevalent Rates For Top Tier Scenarios 

  • 30YR FIXED – 3.375 – 3.5%
  • FHA/VA – 3.125 -3.25%
  • 15 YEAR FIXED – 3.125-3.25% 
  • 5 YEAR ARMS –  3.25-3.75% depending on the lender

Ongoing Lock/Float Considerations 

  • 2019 was the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections 

  • Fed policy and the US/China trade war have been key players (and more recently, the coronavirus outbreak).  Major updates on either front could cause a volatile reaction in rates.  

  • The Fed and the bond market (which dictates rates) will be watching economic data closely, both at home and abroad, as well as updates on other factors like trade and viral epidemics. The stronger the data the more rates could rise, while weaker data will lead to new long-term lows.  

BY: MATTHEW GRAHAM MBS RECAP: Bonds Take a Break From Recent Drama. Feb 6 2020, 4:40PM

The bond market took a break from the past 3 days of weakness today.  There weren’t any significant economic reports or news events (not as far as the market was concerned anyway), including any material changes to the coronavirus outlook.

This offered a good opportunity to reflect on the nature of the coronavirus response.  Simply put, traders were never expecting a dire fate for the human race as a new disease Thanos-snaps half global population.  Rather, they were pricing in a very logical adjustment to global economic output based on the decreased commerce that’s already been well-established.  In addition to that adjustment, there’s likely some measure of additional caution built into bond trading levels, and it’s that caution (i.e. those drops in yields) that are most susceptible to quick reversal as the coronavirus outlook improves.

For everything else, there’s economic data!  Because, again, even the coronavirus trade is mostly a function of economic expectations.  With that in mind, tomorrow’s NFP doesn’t really fit in the current paradigm for a few reasons.  It is based on data collected well before the coronavirus panic began.  It focuses on employment in the US (not the first place we’d see coronavirus impacts).  And the US labor market isn’t particularly a hot button anyway (not at the moment, at least).

Nonetheless, the established track record of the jobs report is such that we still have to give it due respect as a potential market mover–especially on a day where the bond market just leveled off near an important inflection point.  



2019-nCoV, the coronavirus that was first diagnosed in Wuhan, China has spread throughout Asia. There have currently been a dozen patients diagnosed in the United States. According to a 5-5-2020 article in CNBC Markets, “China says a total of 28,018 cases have been confirmed and 563 people have died in the country”. Over 3,800 people are considered to still be in critical condition.

The coronavirus has caused extreme volatility in Asia’s financial markets and has increased volatility in the US markets as well. The fear in world markets is that the virus could spread to the point of crippling world economies. Many businesses in China have been shut down while the Chinese government tries to get a handle on containing the virus.

US Treasuries have always been seen as a safe haven investment for worldwide investors. Treasuries have rallied significantly over the past few weeks, which has caused yields to come down further. The benchmark US 10 Year Treasury (US10Y) hit a low of 1.50% on Friday, January 31, 2020. The benchmark bond closed today at 1.64%.

Most lenders use the US10Y as a benchmark to set rates on their loans. It is not surprising that interest rates have continued their downward trend over the past few weeks, following the decline in the yield on treasuries. News on the coronavirus should be closely monitored until the outbreak is contained and fears of a widespread pandemic are alleviated.

For years banks have asked for 20% down on a mortgage, but cash-strapped Americans are buying homes with less. Liz Knueven Feb 2, 2020, 7:15 AM

  • For many would-be homebuyers, saving a 20% down payment for a mortgage can be a big barrier to homeownership. Consequently, more people are buying homes by putting less money down.
  • Putting a full 20% down on mortgage ensures you won’t pay private mortgage insurance and will most likely get the lowest available interest rate.
  • Some real-estate agents, however, say the benefits of making a smaller down payment outweigh the consequences — it can help homeowners build wealth and equity sooner rather than later.

Putting 20% down on a home purchase is daunting, and rightfully so.

For many young Americans struggling with student-loan payments, higher rent costs, and relatively stagnant salaries, saving a fifth of a home’s value to get a mortgage simply isn’t on the radar.

Would-be homebuyers are finding it can take years to save a full 20% down payment, especially for anyone living near a big city, where real-estate prices are soaring. According to data from the rental-listing site HotPads, a typical renter in Los Angeles will need nine years and 10 months to save for a full 20% down payment for the median home price of $717,000, assuming they’re saving a generous 20% of their income.

And for many millennials in particular, it’s just not feasible. A survey of 1,000 Americans planning to buy a home in 2020 by the real-estate listing site Clever found that 70% of millennials planned to put down less than 20%. Twenty-seven percent planned to put down less than 10% on their home purchase. Survey data from the National Association of Realtors found that 76% of Americans who bought a home in December put down less than 20%.

These days, the practice of putting down less than 20% to secure a mortgage is becoming more common, and real-estate agents say it’s a practical way to get into the market.

Buyers traditionally put 20% down to lower their interest rate and skirt insurance

The 20% figure comes from the minimum payment most lenders require to avoid paying private mortgage insurance, an extra monthly payment that can cost 0.3% to 1.2% of the loan’s principal balance. Banks charge PMI to borrowers who put down less than 20% to get some protection should the borrower stop making mortgage payments.

But Christian Morrison, a real-estate agent with Keller Williams in South Dakota, says that in areas where homes are increasing in value quickly, paying a small amount of PMI each month might be worth it while your home value climbs.

“I had a client that bought a house at the beginning of 2018 and they didn’t put any money down,” Morrison said, explaining that the client used a state program in South Dakota allowing people to buy a home without making a down payment. “They had to have PMI on it, which cost them an extra $86 a month.”

“At the end of 2019, they went back to the bank to see what the equity stake was at the moment,” Morrison continued. “And due to appreciation, their loan-to-value was 76%.” Loan-to-value ratios compare the size of your loan to the total value of the home, and generally, loans with loan-to-value ratios below 80% don’t require private mortgage insurance.

Once a mortgage’s value reaches 78%, private mortgage insurance is automatically canceled. You can request for it to be canceled sooner, however, once your loan-to-value ratio reaches 80%.

In this buyer’s scenario, the market helped the person reach 20% equity in just under two years. In a market that’s growing, Morrison says, PMI can be gone rather quickly. When the home’s value increases, the loan-to-value ratio decreases, making your loan eligible for PMI removal.

As for interest rates when you put down less than 20%, they may be slightly higher — Morrison says he typically sees interest rates for clients making low or no down payments increase by about 0.25%. That percentage can vary by state, however. It is also possible to refinance down the road to get a new interest rate on your mortgage, though you’ll have to have an appraisal and pay closing costs to complete the process.

You can buy a house with less than 20% down, and it’s not uncommon

Morrison bought his first home in 2019, at age 24. “I put 5% down on my house, which cost $157,700,” he told Business Insider. His down payment totaled about $7,800.

Putting 5% allowed him to start building equity sooner rather than later. “Where I live in the Black Hills, our appreciation is starting to jump up,” he said. “We’re starting to speed up to the point where if you don’t have a down payment, your interest rate may be a quarter percent higher, but you’re going to gain so much equity in that time. It’s either wait six months to a year and save up the money, or pay a little bit higher interest rate and gain a lot in equity.”

In his personal homebuying strategy, it worked. “My house was $157,000, and it’s already worth $185,000,” Morrison said.

In Morrison’s professional experience, he estimates that 90% to 95% of his clients have paid down payments of less than 20%.

In other parts of the US, especially in more expensive areas, it’s becoming common to make a smaller down payment. “I think 10% is, if not the new standard, it’s acceptable,” said Corrie Watterson, a realtor in Seattle. “Even if you’re below that, if you have a conventional loan at 3% down, it’s likely not going to impact the quality, price, or location of the home you can afford.”

Focus on the monthly payment, not the down payment

For those wanting to get the lowest interest rate possible, and make their offer stand out as much as possible, 20% down is still something to aspire to.

“Everybody likes to put down 20% if they can,” Watterson said. “It helps distinguish their offer from other offers in a multiple-offer situation. The smaller the loan, the less uncertainty, if you have a finance contingency, that the loan could potentially fall through somewhere between the offer being accepted and closing.”

But to Watterson, the down payment isn’t the main consideration when thinking about buying a home. “The most important thing is making sure that you feel confident that you can make your monthly mortgage payment, however much you put down,” she says.

Note that PMI does increase your monthly payments — for someone with a typical good credit score between 720 and 759, ValuePenguinreports that your private mortgage insurance will cost 0.5% to 0.41% of your home’s value each year. But PMI payments aren’t forever. As you build equity, you will be able to stop making them.

In Watterson’s experience, a lower down payment has become a way for many to get into homeownership and start building equity, despite the higher costs.

“Equity is still the major component of wealth for Americans who aren’t already wealthy,” Watterson said. “As long as you’re sure you can pay that potentially higher monthly payment at 3% down, at 10% down — versus 20% down — I do encourage my clients to consider it.”

Gathering Risks Have Treasury Yields Headed for Recession Zone Emily Barrett Bloomberg February 1, 2020

 The world’s largest bond market looks set for yet another bout of fear-induced trading next week, and this one could drive yields back to the panicky lows reached a few months ago.

The rising toll and rapid spread of the Wuhan coronavirus has strengthened demand for safe assets, sending Treasuries back to levels last seen when investors were fixated on recession risks. The yield curve re-inverted this week. The benchmark 10-year is close to slipping below 1.5% for the first time since early September, while the 30-year dipped below 2% on Friday.

It may not take a lot to rush through these levels, but a lot is certainly on the way. China’s stock market will open under duress as authorities struggle to contain the coronavirus. On the political front, attention turns from U.S. President Donald Trump’s impeachment trial to the Iowa caucuses and the popularity of the Democratic Party’s progressive wing. Hopes that a report will show a recovery at U.S. factories are looking dicey. And that’s just Monday.

“What we’re seeing in bond markets right now is reflective of global economic concern as opposed to necessarily U.S. economic concern,” said Lauren Goodwin, multi-sector portfolio strategist at New York Life Insurance Co. She reckons that more poor manufacturing data could hurt confidence in U.S. growth and tip yields lower.

Possibly the best chance for yields to climb out of the ditch comes midweek with the Treasury’s quarterly refunding announcement, which will lay out the government’s upcoming debt sales. The Treasury Department is likely to keep borrowing at least at its current record high for another quarter. The market is looking for details on the new 20-year bond, and given that this issue is coming unexpectedly soon, investors will also be on alert for other surprises.

Then there’s the expectation that Friday’s payrolls data will reflect another month of robust job gains. The labor market remains a pretty solid foundation for the view that the U.S. economy can continue humming along without further help from the Federal Reserve this year. Chairman Jerome Powell revisited this stance following policy makers’ meeting this week, even as money-market traders warmed up to the idea that there could be more than one Fed rate cut in 2020.

But unless economic data deliver a terrible shock in the days ahead, says Eaton Vance portfolio manager Eric Stein, the market is more likely to focus on the unfolding health crisis than to somewhat-stale reports on the state of the economy. Fed Vice Chairman Richard Clarida described the outbreak as a “wild card” for the U.S. economic outlook on Bloomberg Television Friday.

“What could force the Fed to make a monetary policy move? A little bit stronger or weaker data, probably not,” Stein said. “A big thing like the coronavirus, if it turns out really bad? Yes.”

Current market rates

Posted by  ft Editorial Staff | Jan 31, 2020 

The average 30-year fixed rate mortgage (FRM) rate decreased to 3.51% in the week ending January 31, 2020. The 15-year FRM rate also declined to 3.00%. FRM rates rose significantly in 2018, but fell back in 2019, now well below a year earlier. The long-term rising trend has briefly stalled as the Federal Reserve (the Fed) drops interest rates as we head into the coming recession, expected by the end of 2020. In response, expect interest rates to remain low for the next several months.

Rising interest rates discouraged homebuyers and decreased their purchasing power in 2018, causing sales volume and prices to slip going into 2019. Now begun, the downward trajectory for prices and sales volume will continue in 2020, not to recover until after the next recession is over, in 2021-2023.

FRM rates are tied to the bond market, tending to move in tandem with the 10-year Treasury Note (T-Note) rate. Bond market investors are feeling discouraged in light of the slowing economy and instability emanating from the federal government. This has led them to accept lower yields in return for the safety of treasuries, which in turn has kept FRM rates down in recent weeks. FRM rates will remain low over the next two-to-three years.

The spread between the 10-year T-Note and 30-year FRM rate is 1.97%, above the historical difference of 1.5%. The higher margins seen through much of 2018-2019 signify that mortgage lenders, uncertain of the market’s future, are padding their risk premiums. 

The average monthly rate on ARMs was 3.30% in January 2020, far above its low point of 2.49% experienced in May 2013. The average ARM rate is higher than the average 15-year FRM rate and only slightly lower than the average 30-year FRM rate, making these riskier mortgage products less appealing. As interest rates fell back in 2019, the spread between the ARM and FRM rates diminished. Therefore, ARM use will remain low over the next couple of years, as the Fed will work to keep interest rates on FRMs low as the economy slows and a recession arrives, projected to hit by late-2020.