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 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.”
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.”
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, ARMuse 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.
January 31, 2020 — Although the spreading coronavirus probably doesn’t meet the classic definition of a pandemic just yet, that’s less the case for investor psyches, where concerns about the impacts of the spreading disease have caused widespread selloffs of riskier assets such as equities this week. In turn, those funds have been flowing strongly into safe-haven investments such as Treasury and other sovereign bonds (and to a lesser degree, Mortgage-Backed Securities), driving yields and mortgage rates down in kind.
It’s still too early to know the full impact, but it seems likely that there will be at least some economic slowing in some economies around the globe, but where and how much have yet to play out. While unfortunate in many ways on a broad scale — not the least of which for those who have been or will be directly impacted — it is fortunate for American mortgage shoppers, who are seeing rates again approaching multi-year lows. This week’s average rate for a conforming 30-year FRM is only 20 basis points above (what were then) 60+ year lows achieved back in 2012, and although rates may not fall that far, the economic conditions in which they are occurring (a record-long expansion, near-full employment, rising incomes) means that there is a chance that more folks will be in a position to take advantage of them.
Or at least they would, if interest rates hadn’t been for the most part within about a percentage point of these rate for the past few years. Incrementally lower rates should mean incremental increases in refinance activity, and may, but there have been an awful lot of refinances at rates near enough to today’s levels over that time as to have tempered any pent-up demand. Still, we should see a boost in activity, even above the 7.5% increase in applications for refinance mortgages reported by the Mortgage Bankers Association of America in the week ending January 24… and rates have moved lower this week again.
Can lower rates help create more home sales? Yes… but since there is a dearth of homes available to buy on the market (inventory levels of existing homes were at about a 20-year low in December, according to the National Association of Realtors) so a ramp up in sales seems unlikely. In fact, the Realtors reported that their Pending Home Sales Index dropped by 4.9% in December, with the decline attributed to a lack of homes for sale and a spike in home prices toward the end of 2019 that has again crimped affordability.
Some potential borrowers may look to new construction instead, where supply is less of an issue, but prices tend to be higher to start with and homes may be being built in places that are less optimal, such as away from transportation options or a long distance to a center-city job. Sales of new homes eased a little in December, falling by 0.4% to 694,000 (annualized) units sold. Unlike existing homes, there is a 5.7 month supply of newly-constructed units available (a five-month high, and close to optimal), and median prices of new homes sold have waxed and waned from month to month but are just 0.5% higher this December than they were last December. As such, the relative improvement in affordability produced by lower mortgage rates is largely preserved and may make the stretch to a new home possible for somewhat more potential homebuyers. As with refinances, applications for purchase-money mortgages rose last week, gaining 5.3%.
The Federal Reserve met this week to discuss the current domestic and global economic climate and consider if adjustments in monetary policy should be made. This meeting was not accompanied by updated projections from Fed members about their expectations for growth, inflation and the level of interest rates, so all there was to go on was the statement that closed the meeting. It was essentially a repeat of the mid-December missive, with the only notable a change in language one that characterized consumer spending as “moderate” from December’s “strong”. In the press conference that happened after the meeting, Fed Chair Jay Powell expressed concerns about the spreading virus’ effects on economic activity, but noted that “[the Fed is] very carefully monitoring the situation” even as “there are signs and reasons to expect” that global growth will improve as the year progresses. If growth does slow measurably as a result of the outbreak, the odds would increase that the Fed would again cut short-term rates, but for the moment the most likely course remains one where rates are held are present levels for a fair bit of time.
Given the challenges of various trade-and-tariff wars and any number of other items that might impact the economy, the U.S. remains in pretty good shape. The initial estimate of Gross Domestic Product growth in the fourth quarter of 2019 was almost exactly what it was in the third at a 2.1% rate. While subject yet to two subsequent revisions the last three quarters have featured steady economic growth of just about 2% or so, a pretty remarkable string. As has been the case, price pressures are nowhere to be seen, as the quarterly measure of core Personal Consumption Expenditures (the Fed’s preferred measure of inflation) actually decelerated from 2.1% in the third quarter to just 1.3% in the fourth.
The report that covers personal income and spending for December was pretty mild on both accounts. Personal incomes rose by 0.2% for the month, a bit of a falloff from November, while spending kicked up a little bit, rising by 0.4% for the period. Of course, more income than outgo meant less for savings, and the nation’s savings rate was trimmed back by 0.2% to 7.6% for the month. The monthly PCE component as tracked here was both a little warmer and more steady than was the quarterly measure in the GDP report, running at a 1.6% annual rate for the month, a figure fairly level when compared to recent months.
For inflation to start to flare, we’ll probably need to see something stronger in the growth of wages at least as a catalyst. In the fourth quarter of 2019, the cost of keeping an employee on the books as tracked by the Employment Cost index (a measure that includes wages and benefits) rose by 0.7%, another quarterly value that falls within a very tight range that has persisted for some time. Within the report, the measure of wages eased from the third quarter’s 0.9% rise, sliding back to 0.7%, a value now seen in four of the last five quarters. Benefit costs have settled a bit over the last year, and sported just a 0.5% increase in the fourth quarter of 2019. On an annual basis, overall compensation costs to businesses rose 2.7%; wages have risen 2.9% and benefit costs 2.2%, a set of fairly modest-to-moderate values and one that doesn’t suggest that we’ll see surging inflation anytime soon.
Orders for durable goods spiked by 2.4% in December, a welcome flare, but the gains were concentrated solely in the transportation space (planes, trains and automobiles) and military-related orders. Absent those narrow contributions, orders for goods intended to last three years or more declined, with the proxy for business-related spending posting a 0.9% decline for the month, so capital investment remains temperate at best. Still, there may be bright spots for factory activity; for example, the manufacturing gauge as maintained by the Federal Reserve Bank of Richmond rebounded smartly in January, rising 25 points from -5 in December to 20 in January. In the report, the new-order tracking component posted a value of 13, a mirror image of the -13 in December and the fastest for new orders since last February, while the employment metric also kicked up 13 points to land at 20, also good enough to be the best since early 2019. A national review of manufacturing will come next week from the Institute for Supply Management and we could see a slight improvement in what will likely continue to be a sub-par trend for a time yet.
The steady, moderate pace of economic growth continues to be viewed favorably by consumers, and their optimism and spending power continue to drive the economy forward. As measured by the Conference Board, consumer confidence rose by 3.6 points in January, with the 131.6 value posted by this gauge the highest in five months’ time. Present conditions were viewed most favorably, with this component rising 4.8 points to 175.3 for the month, but even expectations for the future moved higher, gaining 2.5 points to stand at 102.5 to start 2020. Spending plans for autos slipped a little, but those for homes and major appliances nudged higher.
As tracked by the University of Michigan survey of consumers, consumer sentiment also pressed upward in January, if perhaps in a less pronounced manner. The headline sentiment barometer rose by 0.7 points to 99.8 for the month, but that modest gain was sufficient to put the overall measure at an 8-month high. The components that contributed to the move were less balanced than for the confidence gauge, with current conditions in January rated slightly less favorably than those in December, so there was a 1.1 point fall in this segment. Hopes for the future did manage a bump, though, and the 1.6-point gain left the expectations portion of the gauge at 90.5 for the month, the highest in six months. Overall, consumers remain happy and resilient despite all manner of challenges that face them, from spreading disease to presidential impeachment politics. Good for them, and for us, as there could be a slower, more challenging economic period ahead if the virus cannot be better contained and managed.
Still, that’s not here yet, but concerns are enough to continue to put downward pressure on interest rates and mortgage rates. A large selloff in major stock indices here on Friday will no doubt see overseas market start the next trading week on a sour note, and the downward pressure on rates will continue. Despite a largely positive economic climate, the effects of the spreading pandemic has already blown out the bottom of out most recent Two-Month Forecast, and that seems like a trend that will continue next week. We think by the time Freddie Mac reports next Thursday morning that another handful of basis points will be shaved off the average offered rate for a conforming 30-year fixed-rate mortgage, putting us closer to historic lows again. A couple of basis point fall would put us on full par with last September; a 4 to 9 basis point decline drops us back October 2016 levels… 11 sees us at July 16… but a dozen or more and we’re back at 7-year lows.
Real GDP increased at a seasonally adjusted annual rate of 2.1% in the fourth quarter (Briefing.com consensus 1.8%), which was unchanged from the third quarter.
The GDP Price Deflator was up just 1.4% (Briefing.com consensus 1.8%) after increasing 1.8% in the third quarter.
PCE growth was 1.8% in Q4 and contributed 1.2 percentage points to the change in real GDP.
Gross private domestic investment was down 6.1% in Q4. Nonresidential investment was down 1.5% and residential investment was up 5.8%. The change in private inventories subtracted 1.09 percentage points from the change in real GDP.
Exports were up 1.4% in Q4 while imports were down 8.7%. Net exports contributed 1.48 percentage points to the change in real GDP.
Government spending was up 2.7% in Q4 and added 0.47 percentage points to the change in real GDP.
Personal consumption expenditure growth was a bit disappointing at 1.8% for the fourth quarter, yet the key takeaway from the report was that real final sales of domestic product, which excludes the change in inventories, was up a solid 3.2% — the highest growth rate since Q2 2018 and above the prior 10-quarter average of 2.5%.
All in all, the Advance Q4 GDP estimate painted a picture of an economy running at a moderate growth pace with subdued inflation.
Mortgage rates improved again today as the market continued to react to updates on the coronavirus outbreak. For top tier scenarios, the average lender is now offering rates not seen since 2016, with the slight exception of a few hours during the beginning of September 2019. Even then, today’s rates at least match Sept 2019’s rates on average. In other words, today is tied for the lowest levels in more than 3 years.
To reiterate yesterday’s message: the persistent availability of such low rates depends on a few factors. The biggest among those at the moment is the evolution of the coronavirus outbreak. It’s definitely been responsible for the quick bump toward this week’s low levels, but the trade-off is that rates should experience quick upward pressure as soon as epidemiologists can confirm light at the end of the tunnel.
There’s some risk that we’re already seeing the first potential turning point this afternoon as the World Health Organization officially declared coronavirus to be a public health emergency. That sounds like a bad thing, but it actually signals an intensification of efforts and resources to contain the virus. The market reacted accordingly with bonds weakening (weaker bonds imply upward pressure on rates). Fortunately, the weakness hasn’t spilled over from US Treasuries to mortgage rates yet, but that may not be the case tomorrow. At the very least, risks of a bounce are elevated relative to where they have been so far this week.
Loan Originator Perspective
Bond yields neared last September’s multi-year lows today, as Wuhan virus concerns continued to inform trading. My pricing is best it’s been since September, and I took the opportunity to lock several loans. We “may” improve from here, but feels like we’ve seen the bulk of any imminent improvement. Risk averse clients should look hard at locking, if within 45 days of closing. – Ted Rood, Senior Originator
Today’s Most Prevalent Rates For Top Tier Scenarios
30YR FIXED – 3.5 -3.625%
FHA/VA – 3.25 – 3.75%
15 YEAR FIXED – 3.25 – 3.375%
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. 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 trade war updates. The stronger the data and trade relations, the more rates could rise, while weaker data and trade wars will lead to new long-term lows.
In addition to the economic data and the trade war, other factors can certainly emerge and cause rate volatility for better or worse (Wuhan Virus, for example)
Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders. The rates generally assume little-to-no origination or discount except as noted when applicable. Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.