BY: MATTHEW GRAHAMMortgage Rates Are Headed Higher (Eventually)Decrease Font SizeTextIncrease Font SizeJun 26 2020, 4:44PM

The fates of the economy, the housing market, and interest rates remain closely intertwined with coronavirus.  The pandemic is clearly responsible for the record-setting drop in economic activity (including the housing market).

And it has clearly been the key source of motivation for both stocks and interest rates (which we can follow most objectively via 10yr Treasury yields).  A shorter-term chart shows how closely they’ve been following one another as they digest coronavirus updates.

As the initial panic of March and early April subsided, and people began returning to work, it was perfectly reasonable to expect markets and the economy to begin bouncing back (i.e. higher stocks and bond yields). 

That is arguably what happened in April and May.  We’ve even seen several areas of the economy experience their first corrective bounce, such as New Home Sales (note: this chart of New Home Sales looks nothing like the Existing Home Sales chart above because it constitutes a smaller portion of the market, and pertains exclusively to new construction).


But now the market is having second thoughts due to accelerating case counts (and hospitalizations) in several states.  Stocks and bond yields have been trending lower since topping out in early June.

The fate of this market correction will be decided by the course of the pandemic–especially the resurgence of cases in the U.S.  If more people can return to work without hospitals being overwhelmed, the less resistance there will be for interest rates and stocks to move higher.  In fact, it’s safe to say that WILLhappen.  The question is “when?”

There are other questions too.  Which parts of the market and the economy will bounce back sooner and better?  After all, we’ve already seen a pronounced difference between mortgage rates and the Treasury yields that typically follow the same trajectory.  

A US Treasury Note is a debt instrument just like a mortgage.  The 10yr US Treasury yield is a rate of return just like a mortgage rate.  Historically, the average 30yr fixed mortgage lasts less than 10 years before the home is sold or the mortgage is refinanced.  As such, 10yr Treasury yields should behave similarly to mortgage rates over time as both offer investors a fixed rate of return over a certain period of time.

But mortgage rates can deviate tremendously from Treasury yields on limited occasions.  The onset of the pandemic was just such an occasion.  At the time, mortgage rates weren’t even remotely capable of keeping up with Treasuries.  The unforeseen benefit is that mortgage rates have been able to move lowereven as Treasury yields suggested the opposite.

The gap between the two was much wider in April and May.  As the normal relationship slowly returns, mortgage rates will be less capable of defying marching orders from the broader bond market. 

In other words, if the market finds a reason for stocks and bond yields to move higher, mortgage rates are increasingly likely to follow.  

So will the market find that reason?  Again, we already know THAT it will.  We just don’t know WHEN it will.  That answer depends entirely on coronavirus.  What we DO know is that the bond market’s movement is similar to that seen during the financial crisis–something we didn’t expect to see again so quickly. 

That past example suggests some caution.  In early 2009, the economy hadn’t even bottomed out yet.  Few were expecting to see rates move higher in any sort of threatening way, but that’s exactly what they did.  This speaks to a certain market psychology that spontaneously finds a limit to how much lower rates can go and for how long. 

The chart above contains 10yr Treasury yields.  Mortgage rates wouldn’t move higher nearly as fast in this unpleasant scenario, but they would still move higher.  To be clear, this is not a prediction.  It is a fact. Rates will move higher.  We just don’t know when.  The point is to be ready to react when that happens.  What does readiness look like for you?

Alphabet Recovery By HSH MARKET TREND

June 26, 2020 — When the imposed economic collapse from the pandemic shutdown was in its early and middle stages, prognosticators had already started to try to describe the shape of the expected recovery using certain letters of the alphabet — usually “V”, “U” and “W”. While it’s way too soon to coalesce around one character or another, at least for the broad economy, it bears considering that the shape of the recovery will be very different for differing facets of the economy, and some may bear little relation to any known letters. 

Moreover, arguments can be made for about what constitutes a component of a letter; for example, retail sales plummeted by 8.2% in March and another 14.7% in April, then rebounded by 17.7% for May. Does this constitute a “V” shape, even if the percentage changes leave us only at about 92% of the sales level that existed in February… or is it more of an incomplete “V”? Or does it become a “U” if June sales are sufficient to complete the shape… but what if they falter, and there is no discernible letter whatsoever? 

This is just one example of thousands of national, regional and local economic components, and what kind of letter each may ultimately achieve (if any) is unclear at best. The reality is that it really doesn’t matter; while a rapid return to pre-pandemic levels would be wonderful, it bears remembering that the viral outbreak put a violent end to the longest economic expansion in history. Given the depths of the decline from the economic shutdown, it may be a very long time before the economy fully returns to reliably firing on all cylinders again. 

More important, then, would be steady progress, letter shapes or no. Certainly, it’s encouraging to see improvement as activity returns; however, it’s also important not to get lost even in sizable month-to-month gains and to realize that even outsized changes likely still mean a large gap to overcome to get back to where we so reliably were just a few months ago. 

Even as new and encouraging economic data covering May and June emerge, a surge in new cases of COVID-19 in a number of states over the past few weeks has raised concerns about the sustainability of the improvement. In turn, investors have expressed their concerns about a weaker climate by moving away from stocks and into relatively safer bonds and gold. The move into bonds pushes yields lower, and lower yields on bonds that influence mortgages likely means lower rates.

Mortgage rates are already at record lows, and this is helping to drive demand for housing, even if its a bit hard to see at the moment. Sales of existing homes dropped 9.7% in May, sliding to a 3.91 million annualized rate of sale, and coupled with declines over the two prior months, sales of existing homes have fallen by about 26% since February. The hard drop in sales means that the ratio of inventory relative to sales rose to its highest level in a good long while, but even the current 4.8 months of supply remains well below optimal levels. Before you start to think that the inventory situation has improved much, consider that the 1.55 million homes for sale in May was still almost 19% below the same month a year ago. A lack of buyers in the market also quelled the outsized increases in home prices, which had been running quite hot, but eased to a gain of just 2.3% in May compared to a year ago. 

Of course, May’s existing home sales represent activity in the market in March and April, when the pandemic shutdown was at its most intense, so sales and prices will likely revive in the next couple of months. What’s unclear is the degree that both demand and supply remain tempered by millions of folks on unemployment, seeing reduced hours and incomes or in mortgage payment forbearance programs. 

Sales of new homes are recorded differently, and are perhaps more reflective of demand closer to today, even as they lag by a month. In May, sales of new homes rose by a stout 16.6% from a downwardly-revised 580,000 units sold in April. At 676,000 (annualized) homes sold during the month, it’ll take another 14.5% jump just to return us to where we began the year, but the resumption of activity here is solid. The flare in demand was such to pull the supply of homes down to a 5.6-month level (318K actual units built and ready for sale), a figure low enough that should see builders stepping up the pace of new construction into the summer. Renewed demand allowed the price of a new home to rise again after a three-month skid, and prices of a newly-built home were 5.6% higher this May than last. 

How much follow-through to the uptick in new home sales (and what will eventually show as a rebound in existing homes sales) remains to be seen. Record low mortgage rates are fine, but underwriting conditions for mortgages remain tight. As well, demand at the margins may be crimped from high levels of unemployment, as these benefits can’t generally be counted as income for the purposes of qualifying for a mortgage. Those collecting unemployment benefits won’t be able to buy homes any time soon, and folks who already own their homes won’t be able to refinance, either. Even with record-low rates in the market, applications for new mortgages declined by 8.7% in the week of June 19; the Mortgage Bankers Association noted that apps for purchase-money mortgages fell by 3%, breaking a nine-week string of increases, while apps for refinance dropped 11.7% for the week. 

Although it’ll be another month until we get the first report for the second quarter, the nation’s Gross Domestic Product was already in retreat in the first quarter of 2020, and the final look at Q1 GDP put the decline at a full 5% for the period. The second quarter figure will be much worse, but how much worse remains to be seen, as the data for June is yet to come. To be fair, the current estimated run rate for second quarter GDP is improving, but the Atlanta Fed’s GDPNow model currently puts the figure at an unbelievable -39.5% for the quarter so far. A few weeks ago, this figure was nearly -55%, and even if we see steady improvement as the June data are incorporated into the model the number will still continue to be awful. 

Perhaps the key to a faster, “V”-shaped recovery is getting folks off the unemployment rolls and back to work quickly. Unfortunately, this beneficial process seems to have largely stalled in the last couple of weeks. Although initial claims for unemployment assistance are still declining, over the last two weeks the declines have been statistically insignificant, with a reduction in new claims of 26,000 in the week of June 13 and just 60,000 in the week of June 20 bringing the number to 1.48 million new applications for assistance filed. This figure is still 2.5 times the pre-pandemic record for initial claims. As well, ongoing benefits are being paid to some 19.5 million folks in the latest data week for that series (thru June 13) and this figure continues to decline as businesses open up again, if slowly. Expanded unemployment benefits that run until at least the end of July may or may not be creating a deterrent to a faster return to work. Certainly, a slow sales environment and social-distancing protocols are likely keeping the worker recall rate damped, too. 

After two very lean months, manufacturers no doubt welcomed the 15.8% increase in orders for durable goods in May. The 15.8% increase for the month took back only a portion of March and April declines and orders also remain well below year-ago comparisons, but the gains were solid. Automotive and aircraft orders powered the top-line gain, but even the measure of sales that is a proxy for wide-ranging spending by businesses posted a smart 2.3% increase for the month and orders were generally up for all classes of durable goods for the month. 

Two more looks at regional manufacturing for June both told similar tales. Local reports from the Federal Reserve Banks of Richmond and Kansas City both staged rebounds for the month that were good enough to bring them up to a par level, if nothing else. The Richmond Fed’s barometer rose by 27 points in June, landing at 0 for the month, not far from where it was pre-pandemic. Over the last two months, the headline figure here has gained 53 points, and the measure of new orders move to +5.0, its first positive value since January. The rise in orders wasn’t enough to stanch the decline in employment, which dipped for a fourth consecutive month, but the -5.0 was the smallest decline of the bunch. Meanwhile, in the 10th Federal Reserve district, the Kansas City Fed saw a 20-point rise in their gauge, a move good enough to make it to a +1 for the June. The measure of new orders here rose 32 points to +7, the best figure since February, but like the Richmond region, that gain wasn’t enough to move employment to the positive side of the ledger, but the -6 for June was also the smallest decline of the last four months. 

The Federal Reserve Bank of Chicago’s National Activity Index sported a record high reading for May of 2.61, the highest single monthly value ever recorded in a series that dates to 1967. Using a par value of 0, this amalgam of some 85 economic indicators seeks to show whether the economy is performing above or below its “potential”, or natural ability to grow without becoming imbalanced. This is thought to be a GDP rate of perhaps 2.4% or so, and the record-high value means that the economy performed at an robust pace for May. Taken as a part of a trend, though, the picture isn’t quite as rosy, as a moving three-month reference improved but only to -6.65, so while progress is being made, there remains a long run just to get back to par for a quarter at this point. 

Personal income growth has been distorted over the last couple of months from government stimulus payments and varying fiscal supports. For May, overall incomes declines by 4.2%, but the report was mostly positive, believe it or not. A drop in “transfer payments” (stimulus checks and more) from a 90% increase in April to a -17.2% decline dragged the headline number down, but items like wages and business-owner incomes both turns positive after a couple of months in the red, but investment returns remained damped. Also kicking higher after a couple of subdued months was personal consumption expenditures, which gained 8.2% for the month. Less income and more outgo for the period meant that the nation’s rate of savings eased from 32.2% for April to 23.2% for May, so folks are still banking funds at an elevated clip. These cash hordes should help power at least some spending as we move deeper into summer, and that should in turn provide at least some lift to a wide range of beleaguered businesses. 

Consumer moods continue to gradually improve after the coronavirus pandemic shock of earlier this year. The University of Michigan survey covering Consumer Sentiment saw a 5.8-point gain in June, moving the gauge to a value of 78.1 for the month. Assessments of both present and expected conditions moved up, rising 4.8 points and 6.4 points, respectively and all three references moved to their best levels since March. Still, there’s a long way to go to get sentiment readings back to pre-pandemic levels — some 20 to 30 points, depending on which measure you choose to review. 

The good news we’re seeing really is good news, even if it falls short of completing any alphabet letter you might choose. Although you may find yourself or friends or colleagues in one camp or the other, we’re trying not to be too pessimistic nor optimistic but rather realistic about the economic situation in which we all find ourselves. As far as the alphabet goes, as long as we don’t find ourselves operating in an “L” shaped economy — the plummet in activity followed by a long, flat line — we will eventually return to an economy where we don’t care about letters and shapes. Hope for “V”, expect “U” and probably “W”, too, as we move into the third quarter. 

A quiet start to the week is followed by a big first-of-the-month blast of data and then a holiday to end it. A flat-to-slightly downward trajectory for interest rates for this week will likely give us slightly lower mortgage rates for next week, with perhaps a decline of a couple of basis points in the averaged offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday. If we’re right, Americans will ring in the Independence Day holiday with new record low rates.

Mortgage Rates Hold Ground Near Lows. Can it Continue? Jun 22 2020


Mortgage rates held their ground today, with the average lender in roughly the same shape as they were on Friday.  Incidentally, that’s great shape!  When it comes to the best-case scenario conventional 30yr fixed quote, rates are still very close to the all-time lows seen two weeks ago.  Scenarios with additional risk factors (jumbo balances, lower credit, lower equity or investment properties), the landscape is far more varied.  For those scenarios, rates are much farther away from all-time lows.  

Will rates be able to remain at these levels or perhaps even set new all-time lows?  More and more, this depends entirely on the course of a potential “2nd wave” of coronavirus impacts.  This seems to be far more of an issue for some states than others right now.  If we see resurgences in states that had already clearly turned the proverbial corner, the reaction in financial markets would be more pronounced. 

Simply put, if too many people end up dead or in the hospital due to COVID-19, interest rates would likely stay low or even improve.  The opposite logic doesn’t perfectly apply.  Rates can avoid a massive spike even if coronavirus numbers gradually improve.

Fannie Mae tightens requirements on self-employed borrowers

HomeNon Primeby Ryan Smith02 Jun 2020

Most Read

Fannie Mae is adding requirements to qualify self-employed borrowers, potentially widening the pool of prospective buyers who will need to turn to non-QM loans to finance a home.

As the COVID-19 outbreak impacts businesses, Fannie Mae has announced that it will require additional documentation to qualify self-employed borrowers. While lenders are “encouraged” to apply the new requirements to loans currently in process, they must be applied to loans with applications dates on or after June 11. The additional requirements will be in force “until further notice,” Fannie Mae said in a letter to lenders.

“Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for use in qualifying the borrower,” Fannie Mae said in the letter. “However, the lender is required to determine if the borrower’s income is stable and has a reasonable expectation of continuance.”

Lenders will be required to obtain the following additional documentation for self-employed borrowers:

  • An audited year-to-date profit-and-loss statement reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application, or
  • An unaudited year-to-date profit-and-loss statement signed by the borrower reporting business revenue, expenses, and net income up to and including the most recent month preceding the loan application, and two business depository account statements no older than the latest two months represented on the profit-and-loss statement

“Lenders must review the profit and loss statement, and business depository accounts if required, and other relevant factors to determine the extent to which a business has been impacted by COVID-19,” Fannie Mae said in the letter.

BY: MATTHEW GRAHAMThe Great Debate For Rates, Housing, And The MarketDecrease Font SizeTextIncrease Font SizeJun 19 2020, 4:32PM

Coronavirus hit markets with unprecedented force in March. Stock prices and bond yields sank.  When the outlook grew less dire, markets began moving back in the other direction.  As quarantine measures ease, fear surrounding a second wave of COVID-19 is pushing back on the recovery in markets.

Let’s quantify the fear using daily COVID-19 case counts in several key states.  

There’s no question that these trends are alarming at face value, but the implications can vary quite a bit due to increased testing.  We can get a clearer sense of the risks by looking at hospitalization data. 

For example, the seemingly dire situation in California looks quite different based on LA County hospitalizations.  Numbers remain elevated, but they’re not rising nearly as fast as case counts.

In Texas and Arizona, however, hospitalizations confirm the negative trends.

This data raises more questions than it answers, and it’s at the heart of why markets are entering a highly uncertain time.  Simply put, panic and defensiveness were absolutely the right calls in March.  And some level of optimism was clearly warranted after that. In other words, it made sense to see stocks and bond yields tank in March and then move higher.

But now what?  After attempting to run higher in early June, both stocks and bonds fell abruptly 2 weeks ago.  This coincided with a ramp up in concerns about a second wave of COVID-19 impacts. Are we standing on the brink of a market reversal or merely trying to find the right balance between economic reopenings and public health risk?  

To whatever extent markets trade the “2nd wave” narrative, we could see stocks and bonds try to move below the dotted lines in the chart above.  No matter where they go, they’re increasingly likely to take cues from each other (i.e. stock prices and bond yields moving in the same direction). This is easiest to see over shorter periods of time.

And no reference to stock/bond correlation would be complete without a reminder that one should neverexpect this relationship to play out in the longer term:

Financial markets are one thing, but how about the housing and mortgage markets?  This week brought data on new home construction as well as builder confidence.  The numbers speak to optimism about the future while still conveying the ill effects of the present.

Specifically, “Housing Starts” which measure the actual ground-breaking phase of construction, are still noticeably depressed relative to previous levels.  Meanwhile, Building Permits bounced back in grand fashion (up 14.4% in May and April’s 21% loss was revised to only a 5.7% loss).  Neither are back to pre-covid levels, but permits are close.

It’s no surprise, then, to find that builder confidence soared in the National Association of Home Builder’s latest survey.  Notably, this survey data was collected well after the Housing Starts data in the chart above.  As such, it may suggest a stronger bounce in construction next month.

Are builders participating in reality or is this false hope?  If the weekly mortgage application data from the Mortgage Bankers Association is any indication, optimism is justified.  Purchase applications were as high as they’ve been since late 2008!  

The chart above brings another question into focus: how much of the strength in the housing market is due to mortgage rates holding near all-time lows?  Unequivocally, rates are helping housing numbers reach higher than they otherwise would be, but keep in mind, mortgages are much harder to get for certain scenarios right now.  Beyond that, the home shopping process has challenges of its own that are keeping some would-be buyers sidelined for a bit longer. 

The takeaway is that the bounce back in housing numbers is just like the bounce back in many other sectors of the economy.  Things got bad enough that there was simply plenty of room for improvement. 

No one is saying “everything’s fine now… back to business as usual!”  Rather, many things are just quite a bit better than they were–so much so that we’re now in a position to debate whether the recovery narrative continues or cools off.  That’s a debate that will remain open as long as COVID-19 numbers are pushing back on states’ lifting of quarantine measures.

Summer Starts On A Low Note


June 19, 2020 –As we wend our way out of perhaps the strangest and most difficult spring in memory into what will likely be an odd summer, at least two significant issues will keep things from settling into the usual doldrums: The shape, strength and durability of the rebound in economic activity, and whether or not the spread of coronavirus can be managed, and if so, to what degree.

There are other issues that continue to drive things, too, not the least of which is politics, as it is an election year, but also social tensions that threaten to again boil over at any time. 

This time of year is supposed to be full of events and celebrations; in May, it’s typically Moms and proms (long since canceled due to COVID-19) and in June it’s Dads and grads (also coronavirus distorted into drive-in or even remote functions). Weddings and parties and more, all kicked down the road at the very least, so this period feels rather quieter than usual.

As might have been expected, the reopening of state economies in May has resulted in an upsurge in new cases of coronavirus in a number of states, particularly those where enforcement of even basic protective measures such as wearing a mask in a closed space has been lax. Some would say “told you so!”, and new concerns about a “second wave” for the outbreak have appeared. Truth be told, it’s not a second wave, but more like a component of the first; a second wave may come in the fall. Regardless, concerns about the respread of disease have damped investor moods anew in recent days, tempering the level of enthusiasm that might have been seen given signs of a rebounding economy.

What’s happening with home prices? Which markets have recovered… and which still lag behind? Check out the fresh update to HSH’s Home Price Recovery Index, covering price changes in 100 metropolitan areas — and see our Home Value Estimator tool to reckon changes in your market during your ownership period! 

Among data pointing to a recovery was a stout increase in retail sales for May. After posting the largest monthly decline on record in April of 14.7%, sales reversed course hard last month, rising 17.7%, the largest gain on record. Even so-called “core” retail sales (which leave out high-ticket items like autos and erratic sales at gasoline stations) sported a 12.4% lift, so it is clear that as things open that people are looking to spend. Some of this boost is “catch up”, of sorts; for example, sales at apparel retailers rose by 188% as folks ventured out to buy summer clothing en masse. Such a spurt also likely reflects increases in disposable income from expanded unemployment benefits and CARES-Act stimulus checks and savings from both. While such a strong gain is not likely to be repeated, retailers are no doubt tying to attract as many shoppers as they can and welcome the chance to try to fill in the revenue hole of the last few months. There remains a ways to go, too, since even with the improvement, sales this May were still some 6.1% below year-ago levels (and “core” -3.9% year-over-year).

A couple of looks at regional manufacturing activity also found rapid improvement on a month-to-month basis. The Federal Reserve Banks of Philadelphia and New York chimed in with their local reports for June this week, and the resumption in activity for both the third and second Fed districts was quite clear. In the New York region, the Fed’s headline indicator rose 29.4 points to land at just -0.2 for June; although activity is still declining, it is only barely declining, and the figure is within shouting distance of where it was when we turned the year. Sub-indexes covering new orders (-0.6) and employment (-3.5) are also greatly improved over where they were in April and May and have a chance to turn positive as New York continues its phased reopening. 

Just next door, the Philadelphia Fed’s report was not only improved, but even impressive. In a stunning shift, the headline indicator stormed higher by 70.6 points to land at a positive 27.5, with new orders rising by 42.4 points from -25.7 to +16.7, and while employment didn’t make it out of the red, it did rise smartly, gaining 11 points but landing at -4.3 for the month. Other regional reports come next week, and we’ll get a better sense if the June pickup in activity was only localized or perhaps more widespread.

As manufacturing started to pick up a bit in May, it helped lift overall Industrial Production out of the doldrums. Significant declines in March and especially April gave way to a 1.4% increase for May, pushed higher by a 3.8% increase in manufacturing output, which should take back a bit of the previous two month’s declines. Production would have been stronger but was dragged backward by sagging mining production, which fell by 6.1%; this was a fourth consecutive fall, largely caused by depressed oil prices (which have since rebounded) and slack utility output (-2.3%) from so many places being closed during the month. Utility output should pick up again quickly as things re-open. With the increase, the percentage of industrial shop floors in active use edged up by 0.8% to just 64.8%, so there is plenty of unused capacity available to ramp up production if or when demand returns in force. 

By all indications, the housing market weathered the COVID-19 shutdowns fairly well. If not for the hard economic stop and now continuing disruption, we were probably looking at the best spring housing market in a while, as mortgage rates were already near historic lows and the record-long string of job and income gains were helping to create plenty of demand. That said, with the disruption to incomes and more, a number of folks will not be participating in the housing market for a while at least. However, there seems to be plenty of pent-up and delayed demand for homes to buy, as even with still-rising home prices, the repeated call of “record low mortgage rates” continues to bring potential buyers into the market. What’s less clear is if that demand will be met by supply, as inventories of existing homes for sale remain razor thin.

This means improving opportunities for the new construction market, and reflective of this was an improvement in moods of home builders in June. The National Association of Home Builders Housing Market Index (HMI) moved back onto the positive side of the ledger, climbing 21 points to a value of 58 for the month. Sales of single-family homes also rose 21 points to 63, a value considered to be very strong, if not robust; the measure covering expected demand in the coming six-month period flared 22 points higher to 68, also fairly robust, but traffic at model homes and showrooms remained sub-par even with a 22-point leap. At 43, is it seven points below the breakeven level of 50, but it may be that social distancing is still keeping some potential buyers away from physical locations at the moment. 

Still, builders will likely be cautious for a time, and at last blush, they had more than an ample supply of already-built stock to sell before they might need to start a faster pace of construction. Housing starts did rise in May, by a reasonable 4.3% to a 974,000 annualized rate of home construction, but this was rather below consensus expectations. Single family starts edged higher by just 0.1% to 675,000 units, but multifamily starts managed a 15% jump. Optimism about tomorrow’s new home market was evident, too, as permits for future construction leapt by 14.4% to 1.220 million (annualized) units. Although all these figures remain far below where they were pre-pandemic, they are moving in the right direction again, and that’s a positive thing. 

Of course, building and permitting are one thing; selling is another. We’ll find out about sales of both new and existing homes in May next week; given the builder’s demeanor, it’s likely that new construction sales picked up to a greater degree than will existing sales. Part of that is due to the way the data are gathered; existing homes are tallied as sold when the deed changes hands, while new home sales are based on the date the contract is signed, so one reflects demand conditions 45-60 days prior (March-April, during the worst of the crisis so far) versus actual demand for new houses in the month of May (when things had begun to re-open in a number of locales). 

Demand for purchase-money mortgages continues to rise, though, and that can’t all be attributed to new-house purchases. The Mortgage Bankers Association reported that in the week ending June 12, mortgage applications overall rose by 8%, powered by a 3.5% increase in applications for purchase mortgages. This continued a nine-week string of gains that has now moved the purchase index to an 11-year high, according to the trade group. Homeowners have begun to notice that mortgage rates have touched record lows again and again in recent weeks, and applications for refinances popped up by another 10.3% in the latest week. 

Rising mortgage applications certainly indicate plenty of demand, but what’s not clear is the success rate of applicants — that is, how many actually make it through to an actual closing. Given somewhat more rigid underwriting standards in place in recent weeks due to mortgage market disruption, economic turmoil and lenders looking to meter inbound demand, this number is likely considerably higher than it had been just a few months ago. As well, we don’t know how many of these applicants that are turned down at one outlet are reapplying at another lender in hopes of finding a greater level of accommodation, so applications for mortgage credit might also appear somewhat higher than they actually are. One borrower, multiple applications. 

That economic activity resumed in May after an awful April was reflected in the latest measure of Leading Economic Indicators from the Conference Board. At a value of 2.8, the May reading was 0.5 points higher than forecast and pretty strong, but the top-line figure may be masking underlying weakness since the biggest component was May’s unexpected and significant increase in hiring. Other inputs into the indicator remained pretty subdued. Still, improvement is improvement, regardless of the source, and the stronger-than-expected bump may actually provide a little economic momentum into June if not beyond. Certainly, the economy needs all the boost it can get; even with improved data for May supporting GDP growth, the current estimated run rate for second quarter GDP is a truly bleak -45.5%, according to the Atlanta Fed’s GDPNow tracking tool. While that’s better than the -54 and change of just a few weeks ago, it’s only marginally improved at best.

With varying support programs in place and yet-ongoing issues managing the number of claims in many states it’s a little difficult to know what’s actually happening with the labor market at the moment. In the week ending June 13, initial claims edged downward to 1.508 million new applications processed, a figure that is the lowest of the pandemic period to date, but one that remains very high by any historical reference. Continuing claims being paid also barely edged downward, from 20.6 million to 20.5 in the latest available data week (June 6). Has the once-rapid improvement in the labor market stalled? Is the still-elevated initial claims figure indicative of truly new claims, or are these folks who tried to apply weeks or even months ago finally getting in the systems? The answer isn’t really clear. What is clear is that we will need to see a faster rate of improvement in the weeks ahead for both initial and ongoing claims if the economy is to get on its feet for the third quarter. 

Mortgage rates set a new record low this week, something we wrote about expecting just a few weeks ago. Time was when new record lows would have seen 40-point headlines and lots of discussion in the media and beyond, but we have set new records a number of times in just the last 10 years, so that story is a bit old, as it were. As well, most consumers also know that a new record doesn’t necessarily mean a meaningful change in rates; after all, it’s not as though rates were 4% yesterday and 3% today. While of course a milestone, the difference between the record of a few weeks ago and the one set this week is measured in hundredths of a percentage point — two, in fact — a technical record, but not a meaningful one.

In addition, the record applies to just one facet of the mortgage market — a conforming fixed-rate loan made to an excellent credit quality borrower with a significant downpayment, full income and asset documentation and more. For other borrowers with lesser or differing credentials, rates may or may not be at record lows, and for some, credit simply isn’t available regardless of price. For these borrowers, 40-point headlines of “record low mortgage rates” can be pretty meaningless. Still, benchmarks are what they are and what we have to go by, so the reference still has value, even if in reality such new records are being set because the economic climate is quite awful and inflation benign.

The downdraft in mortgage rates from last week to this appears to have paused, at least for the moment. After barely catching up from a refinance blast pre-shutdown, activity in mortgages has been steady to now increasing again, and the economic picture is mixed to a bit better of late. That suggests a flat mortgage rate environment as we head into next week, and we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday morning will be mostly steady, perhaps increasing by a basis point or two if there is any movement. 

Mortgage Rates Edging Higher So Far This Week Jun 16 2020 By Matthew Graham

Mortgage rates moved higher for the 3rd straight business day.  That said, last Friday is better described as being a “2nd consecutive day of all-time lows.”  Even yesterday, the average lender was able to quote rates under 3% for top tier conventional 30yr fixed scenarios.  Today’s upward pressure was a bit more noticeable as markets cheered a Retail Sales report that was much stronger than expected.  In general, stronger data is good for stocks and bad for bonds (and when bonds are weaker, rates move higher).

There’s a particular concern to be aware of in the world of mortgage rates–especially for those who are counting on additional improvements.  Simply put, the underlying bond market hasn’t really been making  a case for additional improvement.  If anything, the case is for gradually higher rates.  It’s only because mortgage rates were late to the low rate party (relative to Treasuries) that they’ve been able to hit all-time lows so recently.  Treasuries, meanwhile, are already sounding the alarm by trending slightly higher in yield for at least 6 weeks.

None of the above means that rates can’t or won’t hit another all-time low in the near or distant future–just that the prevailing trends make it decreasingly likely for the time being.  A significant deterioration in economic data or the coronavirus outlook could change things. Conversely a significant improvement in either of those factors could serve to accelerate a rising rate trend.

Mortgage Rates Slightly Higher, But Still Near All-Time Lows Jun 15 2020 BY: MATTHEW GRAHAM

Mortgage rates were slightly higher today for the average lender.  Additionally, some lenders bumped rates a bit in the middle of the day in response to weakness in the bond market.  That weakness is increasingly tied to broad movement playing out across markets as they respond to coronavirus implications. 

With several states seeing rising numbers of cases, stocks and rates (via the bond market) moved lower in unison in pre-market trading.  This is what allowed mortgage rates to begin the day relatively close to last week’s all-time lows.  As the day progressed, thetrend shifted toward modestly higher rates and higher stock prices (i.e. risk tolerance improved after investors began the day cautiously).

The Federal Reserve announced a start to its corporate bond buying program.  While this has no direct bearing on mortgage bonds or mortgage rates, it fueled the same trading sentiment that had investors moving out of bonds and into stocks as risk tolerance improved.

Although we can see a clear connection between coronavirus news (and well as Fed policy changes) and logical outcomes in the market, we can’t know how that news will evolve in the near term.  In short, there’s no way to predict the future for rates, unfortunately!  What we CAN say is that when rates have poked around all-time lows for a few days, they haven’t tended to improve upon those levels significantly without moving in the other direction for at least a week or two.  To be sure, the average lender doesn’t have a ton of incentive to drop rates very quickly given that top tier scenarios are increasingly seeing rates under 3%

Just When You Thought We Were Done Talking About All-Time Lows Jun 12 2020


Mortgage rates plunged well into new all-time lows this week, which is a striking turn of events given the vastlydifferent outlook at the end of last week.

Specifically, a series of strong economic reports led to significant losses in the bond market (bond losses = higher rates) and gains in stocks. The unspoken warning was that rates had been too complacent in the face of a potential economic rebound.  

Now this week, markets are singing a different tune. Recently strong economic data was great to see, but with coronavirus numbers spiking in several states, the sustainability of the economic improvement is in question.

Sentiment shifted on both sides of the market with stocks giving signals that their recent gains may have been a bit too euphoric. The result was the biggest sell-off since March. 

Conversely, the bond market had its best week since March, and again, when the bond market is doing well, rates are falling.  The 10yr Treasury yield moved all the way back into the range it had so abruptly departed last week.

The news was even better for mortgage rates, which hit new all-time lows by Thursday afternoon.  Considering the chart above shows gradual upward movement in 10yr Treasury yields over the past few months, how is it that mortgage rates continue hitting record lows?

Simply put, mortgages never improved as quickly as Treasuries on the way down.  So even if Treasury yields remain flat to slightly higher, mortgage rates have some room left to close some of this gap.

The mortgage market received another vote of confidence this week from the Fed.  Although the Fed was already buying huge amounts of Treasuries and mortgage-backed bonds, they were doing so on an “emergency” basis.  That meant the amount had been changing every week (and generally declining).  The fewer bonds purchased by the Fed, the worse it could be for rates.

With this week’s announcement, the Fed officially committed to buy at least as much as they have been buying, thus providing certainty about demand in the bond market.  This move wasn’t necessarily unexpected, but the confirmation was worth something–especially for the mortgage bond market which tends to play second fiddle to Treasuries as far as the Fed is concerned. 

In separate news, the Fed also released a quarterly update to its economic forecasts.  They now see the Fed Funds Rate remaining at 0% through 2022.  At first glance, some mortgage shoppers might think this has a bearing on mortgage rates, but it is almost completely unrelated.

The Fed Funds Rate applies to overnight loans between large financial institutions.  Mortgage rates are based on mortgage-backed bonds which tend to have life spans measured in years instead of hours.  The low Fed Funds Rate will keep the shortest-term rates near 0%, but longer-term rates will continue to fluctuate based on the economic outlook, inflation, and the supply/demand equation (which is greatly benefited by the Fed’s bond buying commitment).  

As for the road ahead, everyone would like to know if we’ll continue deeper into all-time low mortgage rates.  After all, the answer to that question looked very different last week.  

Notably, the x-factor was a shift in the coronavirus narrative.  As states gradually reopen, it’s safe to assume that markets will continue to take major cues from covid-19 numbers and the resulting impact on the economy.  The better it goes, the more upward pressure we might see on rates.  The worse it goes, the greater the possibility of a return to all-time lows.

There is an important caveat here.  The benefit of waiting to lock a rate for those in a position to do so is arguably too small to take the risk.  Each time we hit all-time lows, the incremental improvements get smaller and smaller, and the risks increase for a bigger-picture bounce.

Market Reality Check


June 12, 2020 — Aside from actual figures, facts and data, optimism and pessimism, ebullience and fear are key drivers of how investors place their bets. Of course, in a time of programmatic trading, a cynic might note that its how machines are placing their bets, even though they should have no emotional component to their decision-making.

In recent weeks, stock values have reflected views from both sides of the camp; first, as the coronavirus pandemic took hold, the view was that the end of the apocalypse was nigh, and selling everything and stuffing dollars in mattresses was all the rage. A few short weeks later (and after unprecedented Fed intervention and trillions of fiscal support from the federal government) markets seemed to be acting as though there was no health or economic calamity to be seen.

A dose of reality hit the market this week, as rising concerns about new incidence of infection in places where social restrictions has been eased began to seep in, exacerbated perhaps by widespread protests in the wake of the killing of George Floyd, and with renewed concern about the prospects for another widespread outbreak in the coming fall. To this resurgent worry came a fairly dour outlook from the Federal Reserve, who completed a two-day meeting this week.

Without any reference to some of the “green shoots” that investors have been focused on (and are a contributing factor in the stock rally in recent weeks), in the statement that closed the meeting the Fed said that “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” 

Unlike the March meeting, where the practice was skipped, this meeting featured a new release of the Summary of Economic Projections from Fed members. Before the outbreak there was discussion that this means of displaying member thinking about the prospects for growth, unemployment, inflation and the likely path of monetary policy over time would be discontinued, as it had arguably outlived its usefulness as a communication tool. It appears that with the pandemic distorting markets gain that the release may continue to have value in helping convey the central bank’s collective thinking and its implication on future policy moves.

The SEP revealed a set of member thoughts that, at a minimum, could be described as concerned. As to be expected, the near-term outlook for this year was quite dark, with a projected 6.5% decline in GDP growth, an unemployment rate expected to average 9.3% and inflation retreating smartly. With this set of beliefs, the federal funds rate would unsurprisingly remain pegged near zero.

However, in the member’s views, the future appeared quite dim as well, as least from their expectation to continue and emergency-level interest rate stance for at least two and a half more years, if not beyond. This view was held despite expecting a relatively robust 5% increase in GDP in 2021, and another 3.5% gain in 20202. Over that time, the median rate for unemployment next year was expected to be a still-high 6.5% and 5.5% in 2022, with no long-run expectation to return to the 50-year-best 3.5% the U.S. enjoyed as recently as February. Inflation would of course be this year but expected to close in on the Fed’s preferred 2 percent rate for core PCE over the next two years. As such, even as overall conditions were expected to improve measurably from today’s terrible levels, Fed members didn’t feel confident enough in their outlooks to expect to be lifting interest rates at all. Of the three-year period comprising 51 separate data points, there were only two — in 2022 — that expected any change to short-term rates at all.

From this, the Fed does not appear to be expecting any kind of “V” shaped recovery. In a comment in his post-meeting press conference, Fed Chair Jay Powell was clear: “We have to be honest that it’s a long road.” 

Adding a dim Fed outlook to a series of increasing worries took the wind out of the stock market, which dropped a bit on Wednesday after the meeting closed but fell precipitously on Thursday before finding its feet again on Friday. As far as bond yields were concerned, the more pessimistic outlook chopped off the spike in yields that had accompanied some better news last week, including a surprisingly-strong hiring report and diminishing unemployment claims. Already trending down, the influential yield for the 10-year U.S. Treasury shed another 10 basis points or so, closing the week nearly a 20 basis points below where it began. The early-week drift down helped curtail our expected increase in mortgage rates for the week, and the late-week decline should help set the stage for next week’s move.

Aside from the Fed meeting, which was the big market-moving event of the week, there was a little bit of economic data for investors to consider, including several pieces of inflation data. The twin reports covering Producer and Consumer Price Indexes for May were released, and although inflation was soft for the month, it certainly still exists. The overall headline figure for Producer prices rose by 0.4%, breaking a three-month string of declines. Propping up costs were often transient items such as food and energy, and so the core measure which excludes them was unchanged for the month. Over the last year, overall producer prices are declining at a 0.8% clip, while “core” PPI managed to hold onto a meager 0.2% increase.

As measured by the CPI, consumer prices told much the same tale. Helped by a fifth consecutive monthly decline in energy costs (likely ending soon), the overall Consumer Price Index declined by 0.1%, it’s third straight fall. That modest fall belies surging prices for food, which popped 1.5% in April (an 18% annual clip) and rose another 0.7% in May. Supply-chain issues for foods still persist and sales are few and far between at grocers at the moment, but the situation is likely to continue to gradually improve, and as it does, price pressures may ease a bit. That said, upstream costs for personal safety and such at manufacturing plants and in factories and fields don’t just disappear, and these will likely keep upward pressure on prices for some time. That’s the bad news; the good news is that CPI-measured inflation is just 0.2% over the last year, and prices as measured at the “core” declined by 0.1% in May and are in a cooling pattern too, running at just an 1.2% annual rate in May (down from as high as 2.4% as recently as February). 

Prices of imported goods broke a three-month string of declines in May, rising a full 1%. That bump came due to a resurgence in oil prices, which not only recovered from a mid-April spike to below zero but have climbed back to about pre-pandemic levels. Outside of that influence, import costs rose a meager 0.1% for the month. The aggregate cost of goods leaving the U.S. for other shores also kicked higher, rising 0.5% and also ending a trifecta of declines. Even with a the upturn, there’s no inflation to be found in either inbound or outbound goods, though, as import prices in May were some 6% lower than at this time a year ago, a decline matched by export costs, too.

Inventory levels at the nation’s wholesaling firms expanded by 0.3% in April. Even with upstream production and delivery issues that were rampant during the month, new goods continued to trickle in. However, with retail establishments everywhere shut down by choice or government mandate, orders for goods cratered for a second month, dropping 16.9% overall. That slump in demand saw the ratio of inventory on hand relative to sales balloon to 1.65 months, the highest-ever reading in the series. With lots of goods available and slack demand from retailers continuing, this suggests that new orders to manufacturers will likely to be slow to improve, and that in turn will contribute to what is expected to be an already slow recovery.

The news on the labor front continues its very gradual improvement. In the week ending June 6, 1.542 million new claims for unemployment assistance were filed across the U.S., the lowest number since mid-March and less than 25% of the peak. That’s good news, but with the slow rate of decline it may be a month or more before we get back to a level that matches the pre-pandemic weekly record in the mid-600,000 range. Declining initial claims means that fewer folks are still losing jobs; as well, some of the current elevation may be from backlogs still being worked through for folks who lost employment months ago. Encouraging, too, is the slow fall of folks receiving continuing support, a sign that at least some formerly laid-off are returning to work.

While people looking to buy houses have been in the market for much of the spring despite challenges, homeowners really haven’t much paid attention to opportunities to refinance. That was, at least until the week ending June 5; overall applications for new mortgages rose 9.3%, according to the Mortgage Bankers Association, where a two-month string of rising applications for purchase-money mortgages (+5.3% in the latest week) was finally joined by an pick up in applications for refinancing, which posted an 11.4% jump. Mortgage rates haven’t really moved around much of late, and certainly underwriting standards haven’t loosened appreciably, but perhaps the news that rates were again holding near all-time lows finally got some notice by homeowners.

Consumer moods continued a modest rebound in early June. According to the University of Michigan survey, Consumer Sentiment gained 6.6 points from its final May value, landing at 78.9 in the preliminary review. Current conditions were gauged a bit more favorably and rose by 5.5 points to 87.8, while expectations for the future improved a bit more with a 7.2-point rise leaving the outlook component at 73.1 for the interim period. All measures were near record highs just a few months back, and we’ll need months and months of steady improvement to get us back there. Still, it’s a start. 

While there’s no scheduled market-moving event for next week, we will get some clues as to how manufacturing is doing in a couple regions of the country, and will also get some sense of what’s happening in the new home market. We’ll also see if consumer spent some of their stimulus funds in May as things began re-opening; it would be hard for retail sales not to rebound at least a little after April’s unprecedented decline. We’ll also get a look at a couple of other items, too, and it would be hard not to consider any improvement anywhere to be relative “green shoots”, but even those only start to fill in the economic hole caused by the pandemic. 

With investors a bit more chastened this week, and influential yields re-settling, mortgage rates are poised to settle back, too. We think that by the time next Thursday morning rolls around, the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will retreat by six basis points, or perhaps even a tick more. Anything more than six would set a new record low. Refinance, anyone?