Is Four in Store?

The yield on the 10-year U.S. Treasury note hovers just above 3% as we write. It hasn’t hovered this high since December 2013. Rate quotes on a prime 30-year fixed-rate conventional mortgage hover between 4.625% and 4.75%. They haven’t hovered this high in four years.

Jamie Dimon, chairman and CEO of JPMorgan Chase, believes that we’re not done yet. He sees a 4% yield on the 10-year note. Dimon didn’t say when the 4% yield will materialize. We assume (usually not a good thing to do) he means within the next year to 18 months.

Interestingly enough, the 3% yield on the 10-year note that prevailed in 2013 didn’t ratchet up to 4%. It ratcheted down to 2%. In late January 2015, the yield even briefly dropped to 1.7%. A well-timed call to a mortgage lender could have elicited a 3.625% rate quote on a prime 30-year fixed-rate mortgage.

No two epochs are alike, of course. Consumer-price inflation was dormant back then. It would remain dormant over the subsequent four years. The Federal Reserve also had the range on the federal funds rate set at 0%-to-0.25%. The effective rate was only 10 basis points.

Today, consumer-price inflation has emerged. It runs slightly above the Fed’s 2% annualized goal. The range on the fed funds rate has risen, through a series of 25-basis-point increases, to 1.5%-to-1.75%. The effective rate is 1.7%. The range will likely be increased another 25 basis points next month. It will likely be increased another 25 basis points after that.

Given the market dynamics today, Dimon is likely more right than wrong. A 3% yield giving way to a sub-2% yield on the 10-year U.S. Treasury note is highly unlikely. That being the case, a return to sub-4% rate quotes on a 30-year conventional mortgage is equally unlikely.

The good news is a growing economy can handle it. Like Dimon, we believe the economy, including housing, can absorb rising interest rates. A 4% yield on the 10-year note is nothing to worry about, with one caveat. The yield curve must remain normal. It’s normal when each successive yield on U.S. Treasury securities is higher than the previous yield.

If we see yields on short-term Treasury securities rise above yields on long-term Treasury securities, we might worry. At the least, we’ll contemplate the possibilities. When the yield curve inverts, short-term yields rise above long-term yields, a recession usually appears within the next 24 months.

The yield on the 10-year note is 44 basis points higher than the yield on the two-year note. The spread was 54 basis points at the start of the year. It was 100 basis points a year ago. We’re not worried, but we would like to see a little more distance separate the two securities.

Hooray for Falling Prices!
Recent data from Trulia show that home prices really don’t rise all the time.

Indeed, the data show that the median price of a home listing in six of the 100 largest markets remains unchanged or has dropped year over year. The median list price is up less than a percentage point in four other markets.

San Antonio reported the largest decline in the median list price, with a 5.4% decline. Denver, one of the hottest markets post-bubble burst, has seen only a 0.9% increase in the median list price.

The median number is a dividing number: half the listings are above and half are below the median price. It doesn’t mean every listed home in San Antonio has dropped 5.4% or that every listed home in Denver has risen 0.9%.

Trulia correctly notes that the drop in the median list price can be the result of a healthy event, such as more home builders building lower-priced homes. The normalization of a market would be another healthy event. For instance, the median list price for a home in Honolulu is down 1.4% year over year, but it is up 18% over the past two years.

Many market watchers reflexively believe that higher is better: Rising prices are a sign of a healthy market. That’s not always the case, particularly when prices relentlessly rise above historical norms. When that occurs, demand is eventually exhausted. A market correct, frequently unpleasant, will follow exhausted demand.

More of the Same for Mortgage Rates

The latest meeting of Federal Reserve officials came and went on Wednesday. The meeting came and went as anticipated. Fed officials held the range on the federal funds rate – an influential overnight lending rate – at 1.5%-to-1.75%.

Credit-market participants reacted with the expected yawn. Yields on U.S. Treasury securities (and other quality debt instruments) barely budged.

No one should be surprised the market response was universal indifference. That which is anticipated rarely elicits action. Everyone anticipated the Fed to maintain the range on the fed funds rate. The Fed followed the script.

Everyone also anticipates the Fed to lift the range on the fed funds rate when officials convene again in June. Everyone expects the range to rise to 1.75%-to-2%. So when the Fed lifts the range next month, expect the market response to be similarly muted.

Words can speak louder than actions, though. The event itself, the holding or raising of the fed funds rate, will elicit indifference. The press conference following the event can move markets. A Fed official, being human, can say something that was off script and unanticipated.

No such luck this time. Fed officials held to form. Here again, everything was anticipated.

Fed chairman Jerome Powell was broadly optimistic about the U.S. economy, but he noted a few risks. (There are always a few risks.) The trade dispute China was highest among the risks. Powell mentioned that consumer-price inflation was finally running at the Fed’s designated 2% annualized rate. Wage-price inflation was a concern given low employment. Employers might need to funnel more dollars into wages to entice scarce employees. More wage-price inflation can lead to more consumer-price inflation.

As for us, it was business as usual. Quotes on mortgage rates were equally muted compared to yields on most debt instruments. Quotes on prime 30-year fixed-rate conventional mortgages continue to hold the 4.625%-to-4.75% range established last month.

Given that U.S. GDP growth was underwhelming in the first quarter, mortgage quotes should hold the range for at least the near future.

A pre-summer lull appears to have descended upon us. With what we know and with what credit-market participants anticipate, mortgage-rate volatility should remain dormant. Borrowers might be able to pick up a few basis points on a short-term float. But is the reward worth the risk? We can’t say. It’s a coin flip.

We mentioned last week why it’s worthwhile to monitor the yield curve, which has flattened over the past month. The spread between the two-year note and the 10-year note has narrowed to 50 basis points. The spread between the 10-year note and 30-year bond has narrowed to 20 basis points.

A flattening yield curve is no big deal; an inverting yield curve is. If short-term yields rise above long-term yields, take note. Inverted yield curves have preceded nine of the past 10 recessions.

Still Stuck in Purgatory

The NAR’s Pending Home Sales Index showed only marginal improvement in March. The latest reading suggests that we shouldn’t see much change in existing-home sales over the next month or two. No surprise here: low inventory driving relentless price appreciation continues to constrain sales growth in many markets.

Home inventory is unlikely to receive a boost from new construction. Bureau of Economic Analysis data show single-family-home investment running at $280 billion on an annualized rate. The number sounds big in isolation. Relatively speaking, it’s not so big. It’s roughly 1.4% of GDP, at the low end of historical percentages.

Single-family-investment is low. It’s low enough to be below the bottom of previous recessions as a percent of GDP. Home builders have had troubled getting into gear. They have been plagued with accelerating land, labor, material, and regulatory costs. That’s unlikely to change any time soon.

Many market watchers are concerned rising interest rates, including rising mortgage rates, will eventually trip up housing. We’re not one of them. The consumer market is healthy enough to absorb higher mortgage rates. The issue is more fundamental: More inventory for sale and more housing supply, in general, are needed. Until that occurs, little will change on the sales front for the foreseeable future.

Low Inventory Continues to Influence Housing Market

As more data and insight into the housing market comes out, it’s clear that 2017 was an earth-shattering year for residential real estate. According to a report from Zillow based on home sales data from the prior year, there has not been a year on record in which homes sold faster. Based on Zillow’s data from its proprietary listing service, the average home was on the market for just 81 days, including closing. During June 2017, the hottest month of the year for home sales, median listing times were as low as 73 days nationally. In certain markets, that number went even lower: Los Angeles clocked a median sales time of 59 days in May, while San Francisco homes tended to sell in just 41 days around the same time.

Housing inventory is not only selling faster – it has tended to fetch higher prices, too. Another Zillow report found that around 25 percent of homes sold for more than their list price in 2017. For comparison, only 18 percent of home sales in 2012 went for more than the initial asking price. On average, Zillow found that listings that sold for above their sticker prices garnered an additional 3 percent – a sizeable takeaway for sellers and a hefty additional expense for buyers.

More Americans continue to enter the housing market, but inventory remains a concern. According to Lawrence Yun, Chief Economist of the National Association of Realtors, the market continues to favor sellers as low inventory pushes prices higher, and reduces the time required to sell.

“Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar,” Yun said in the latest report on existing home sales data. Research from the NAR indicates that in March, the U.S. market for existing homes had only 3.4 months worth of inventory available. That would be almost half of the six months of stock that economists generally consider equally beneficial for buyers and sellers.

Inventory Squeezes First-Time Buyers
The NAR’s report also warns that such market conditions may be wearing down first-time homebuyers in particular. This share of buyers comprised 34 percent of the homebuying market in 2017, but that proportion has slipped in the first months of the New Year.

“[Real estate agents] in several markets note that entry-level homes for first-timers are hard to come by, which is contributing to their underperforming share of overall sales to start the year,” according to NAR President Elizabeth Mendenhall. “Even with the expected uptick in new listings in coming months, buyers in most markets will likely have to act fast on any available listing that checks all their boxes.”

Home sales continue to post strong results in many local markets, proving that buyers in many places are not being totally priced out of homeownership. As prices are expected to moderate through 2018, it stands to reason that affordability will improve slightly and first-time buyers will see an opportunity to make a move.

A New Home on The Range

The Long-term has arrived sooner than expected.

We have said repeatedly this year that the trend in mortgage rates will be higher over the long term. We offered this opinion last week: “Odds are that mortgage rates will rise longer term. Predicting with accuracy when the short term will give way to the ‘longer term’ is never a sure bet.”

Indeed, it’s never a sure bet. It turns out the short-term was shorter than we expected.

Mortgage rates have moved meaningfully higher over the past few days. They’ve moved high enough to establish a new range. The old range of a 4.5%-to-4.625% rate on a prime 30-year fixed-rate mortgage (at the national level) has given way to a 4.625%-to-4.75% range. No one should be surprised above the move north, though.

The yield on the 10-year U.S. Treasury note made for the heavens over the past week. The yield jumped nearly 20 basis points over just a few trading days. The yield hovers around 3% as we write. The 10-year note hasn’t offered so high a yield since the waning days of December 2013.

It’s all circular, really: Yields on mortgage-backed securities (MBS) take their cue from the yield on the 10-year Treasury note. Long-term mortgage rates take their cue from yields on MBS. Mortgage rates had no choice but to establish a higher range.

A combination of factors has served as fuel for the interest-rate rise.

Another Federal Reserve interest-rate hike is one. More market participants are gaming for four increases before the year is over. Most were gaming for three at the start of the year. The next increase will likely occur in June.

Consumer-price inflation shows increasing signs of moving to a higher range. According to the Federal Reserve’s Underlying Inflation Gauge (UIG), the 12-month inflation growth was 3.13% in March. That’s the highest rate recorded in nearly 12 years. The last time the UIG was this high was in July 2006, when it was at 3.2%

Wage inflation, which has remained mostly subdued since the last recession, also has market participants on edge. The unemployment rate at 4.1% is low; demand for labor (qualified labor, to be specific) is high. Something has to give on either the wage or demand fronts. Most market watchers expect it to give on the wage front.

Companies continue to make money at an elevated rate. FactSet reports that 17% of S&P 500 companies have reported first-quarter financial results. Eighty percent of the reporting companies reported a positive earnings surprise (above the consensus estimate). S&P 500 earnings are expected to grow 18.3% year-over-year for the quarter. That’s the highest annual increase since 2011.

It’s all good for the U.S. economy, which means it’s mostly bad for the interest-rate trend. With the information we have today, we see little reason not to expect quotes of 5% or higher on a 30-year conventional mortgage by the end of the year.

Sales Up, But for How Long?
Both existing and new homes posted monthly sales gains for March.

Existing-home sales rose 1.1% to post at 5.6 million on an annualized rate for the month. This was the second-consecutive increase, but it still leaves sales down compared to a year ago. Sales are down 1.2% compared with the year-ago period.

It’s common knowledge why sales-grow lags – lack of inventory. The number of existing homes increased slightly in March, but it’s still down 7.2% compared with a year ago. At the current sales pace, only 3.6-months supply is on the market.

Sales of new homes were surprisingly spry in March. Sales were up 4% to post at 694,000 on an annualized rate. Through the first quarter of 2018, new-home sales are running 10.3% higher than a year ago.

The surge is less impressive, though, when the composition of the trend is considered. The increase was overwhelmingly driven by sales in the red-hot West, which were up 28.3%. Sales were also concentrated at a higher price point. Sixty percent of sales were for homes priced $300,000 or above. Two years ago, these homes accounted for 53% of sales. Affordable entry-market new homes remain a rare commodity.

And prices, they continue to rise.

The latest reading of the S&P CoreLogic Case-Shiller Home Price Index shows home prices rose 6.3% year over year in February. The West again led the index. Seattle, Las Vegas, and San Francisco all posted double-digit year-over-year price gains.

It’s all mostly good. Nevertheless, the trends in home prices, mortgage rates, and inventory could cool sales in the coming months, even in the red-hot West.

Going into the mortgage process, it is common for many first-time or even seasoned homebuyers to have a few misconceptions. With reasonable and clear expectations, the entire process of obtaining home financing can be simple and painless. Here are few myths about the homebuying process, combined with the truths behind them.

Lenders only look at your best credit scores

When you apply for a loan, all three reports from the major credit agencies — Experian, Transunion and Equifax — are pulled. Your lender will look at all of them then use the middle of the three. If you are applying as a couple, each borrower’s middle score will be looked at and the lowest middle will be used for approval. This means that if you have a score of 780 and your spouse has a score of 700, your loan is likely to qualify at 700. 

One exception is jumbo loans: typically in a situation where one borrower has a higher score and is a higher earner, some lenders will allow the higher credit score on the file to be used.

The rate you are quoted at the start will be the rate you get

Rate quotes, unless locked in immediately, are akin to an estimate based on the market and your personal eligibility. The rate quotes can change over the course of the process. 

For those seeking a mortgage refinance, locking in a rate when its quoted to you is possible as long as you’ve provided your lender with sufficient information. For homebuyers, through, this is more tricky: you are typically given a rate quote at the start of your pre-approval process, but you cannot lock in that rate until you’ve actually found a property you aim to buy. 

Fixed rate loans are better than adjustable rate loans

The loan you choose is going to be the one that works best for you and your unique finances. While rates are historically low, it may be tempting to play it safe and opt for a 30-year fixed rate mortgage. But if you are not sure how long you’ll own the home, a adjustable rate mortgage (ARM) may be a better option. ARMs have lower rates and shorter durations before the rate resets, so if after 5 years you are looking to move on and sell the house, you’ll have saved serious money in that time. 

Mortgage insurance is always required for down payments less than 20 percent

While lenders typically require you purchase mortgage insurance on all loans where the borrower is putting down less than 20 percent of the principle as a down payment, certain loan programs like a “piggyback” loan or VA loans allow for no mortgage insurance premiums for those who qualify.

New Penn Financial is here to educate homebuyers and connect them with the loan that is right for them. 

Rates Stay Low as the Economy Keeps Humming Along

Businesses keep doing what they’ve been doing for the past five years — hiring employees and making money. 

On the former, business hiring helped lift payrolls by 261,000 in October. The surge in hiring dropped the unemployment rate to 4.1%. This is the lowest the unemployment rate has been since the year 2000. 

The latest round of monthly hiring lowered the pool of available workers to 11.7 million, which is shallow by historical standards. Businesses have been able to hire workers without breaking the bank. Wage growth remains anemic, with average hourly wages up only 0.5% in October. Year over year, hourly wages are up a moderate 2.4%. (That said, total compensation is likely growing at a faster rate when benefits are factored in.) 

On the latter, corporate earnings continue to flow unabated. Eighty-one percent of S&P 500 companies have reported third-quarter earnings. The blended earnings growth rate for these companies is 5.9% year over year. The flow should rise a few notches in the fourth quarter. Factset, a financial data provider, surveyed analysts and the analysts it surveyed expect S&P 500 fourth-quarter earnings to grow 10.4% year over year. 

Businesses are hiring, and they’re efficient about it. What modest wage growth we have has led to even greater earnings growth. (This is rational from an economic perspective: A business expects to receive a positive return on its factors of production.) 

So, wage-rate inflation remains a nonstarter for credit markets. There has been little of it to pressure interest rates to rise. Factor in low consumer-price inflation, another nonstarter, and it’s easy enough to understand why long-term interest rates continue to hover near multi-decade lows. 

As for long-term mortgage rates, 4% on the conventional 30-year fixed-rate loan serves as the fulcrum, as it has for most of 2017. Quotes on the national scene see-saw between 3.875% and 4.125%. 

We’re in a tight range, and we don’t expect to break that range in the foreseeable future. The range could easily hold for the remainder of the year.

It’s still a range worth gaming. After all, the difference in monthly P&I payments on a $300,000 30-year fixed-rate loan financed at 3.875% or 4.12% is $43. That will buy at least a couple of entrees and a round of drinks at the Olive Garden each month. 

For the immediate future, keep an eye on tax reform. If it becomes likely something might pass into law, mortgage rates will likely favor the 4.125% side of the fulcrum.

What to Know About FHA Loan Requirements

U.S. homebuyers have a number of financial tools at their disposal today when it comes to smoothing out the notoriously expensive and complicated process of purchasing a home. One of the oldest and most well-known is a publicly funded program from the Federal Housing Administration, popularly known as the FHA loan. For qualifying homebuyers who can find the right house, FHA loans are mortgages backed by the FHA that can allow for home purchases with low down payments and closing costs. That makes them particularly attractive to many first-time buyers or anyone who has difficulty qualifying for a conventional mortgage.

While FHA loans are not directly financed by the FHA, they do involve a number of strict requirements that buyers and their potential new homes must pass. It’s essential to understand these rules to decide whether or not FHA is right for you.

The basics

The main selling points of the FHA loan program are its low down payment requirements, competitive interest rates and more lenient credit requirements compared to conventional mortgages.

• FHA buyers may purchase a home with a down payment as low as 3.5 percent of the loan’s value.
• Interest rates on FHA loans are still around 4 percent on average.
• Buyers need a FICO credit score of at least 580 to qualify for the lowest down payment.

According to experts who spoke with Nerdwallet, these main points make FHA loans a generally good option for low- to middle-income borrowers, families and seniors. But gaining approval for an FHA loan also requires its own rigorous application process.

Important FHA credit requirements

Like most lenders, FHA buyers will need to be approved for their loan based on a set of credit and financial requirements:

• Borrowers will need to provide a valid Social Security number or proof of lawful U.S. residency.
• Borrowers must have proof of a steady income for at least the last two years.
• The borrower’s front-end ratio (the cost of the monthly mortgage payment plus mortgage insurance, taxes and other fees) should usually be less than 31 percent of their gross income, although it may be as high as 40 percent in some cases.
• The borrower’s back-end ratio (mortgage costs in addition to spending on other debt from credit cards, student loans, etc) cannot exceed 43 percent of their gross income in most cases, but may be approved as high as 50 percent.
• For those with FICO scores between 500 and 580, borrowers will need to make a minimum 10 percent down payment.

The FHA also imposes limits on exactly what sort of house you can buy with an FHA-sponsored loan:

• The borrower must live in the property as their primary residence.
• Limits on FHA loan value vary depending on location. In general, the loan limit is equal to 115 percent of the county’s median home price.
• The property to be purchased must be appraised by an approved appraiser in most cases. The appraiser will assess the home’s fair market value as well as criteria for safety and security mandated by the U.S. Department of Housing and Urban Development.

Mortgage insurance

One other important difference between FHA loans and conventional mortgages is how they handle mortgage insurance. In most situations where borrowers put less than 20 percent down on a home purchase, they need to pay additional private mortgage insurance fees at some point in the life of their loan, which drives up monthly payments. 

In the case of FHA loans, borrowers need to pay two kinds of mortgage insurance:

• Upfront mortgage insurance may be paid as a lump sum at closing or rolled into monthly costs. Regardless of credit score, FHA borrowers will pay 1.75 percent of their loan value for this insurance premium.
• Annual mortgage insurance premiums are tacked onto monthly payments, and vary depending on the terms of the mortgage. This premium ranges from 0.45 percent to 1.05 percent of the loan’s value.

Borrowers may need to pay mortgage insurance premiums for only up to 11 years, or they might extend over the entire life of the loan depending on the terms of the mortgage. 

These are just the most essential facts most borrowers need to know about FHA loans, but they do not cover every consideration that each buyer needs to make. Work with an FHA-approved lender like New Penn Financial to understand all the details of the program and whether it’s right for you given your financial situation and specific housing needs.

With this knowledge in mind, you’ll be in a better position to get a great deal on a new home using this popular program.

Rates Are up…and so Are Home Sales

It’s more fours than threes these days.

Mortgage rates — rates on the long-end of the curve, in particular — are at a two-month high. 

Our own central bank, the Federal Reserve, has long ago telegraphed its intentions on monetary policy:

Raising interest rates and reducing securities purchases are on order. More recently, the European Central Bank will likely reduce its bond purchases, and it could do so by half. This would tighten the money supply in Europe. Interest rates in Europe are more likely to rise.

“Likely” is not the same as guaranteed, though. As we’ve seen on our side of the Atlantic, market participants frequently buy the rumor and the sell the news (reverse course on the news). For the immediate future, say for the week, quotes above 4% on the 30-year loan will likely persist. Beyond the week, uncertainty prevails. More adventurous borrowers might want to float in anticipation of a rate reversal (the selling of the news).

Mortgage rates are up, but so are home sales, at least for September. 

Existing-home sales posted their first gain in four months, rising 0.7% to 5.39 million units on an annualized rate. Price concessions contributed to the rise. The median price of an existing home fell 3.2% month over month to $245,100 .

Existing-home remains tight, at 1.9 million resales on the market. Supply is unchanged at only 4.2 months based on the latest sales numbers. With supply holding tight, sales growth will be difficult to achieve unless we see further price concessions.  

As for new-home sales, they had no trouble posting a gain in September. Sales blew past nearly everyone’s estimate to post at 667,000 units on an annualized rate. Little discounting occurred to move inventory. The median price of a new home rose 5.2% for the month.  

No doubt that some sales were attributable to a post-hurricane Harvey rebound. Sales in the South were up sharply from August, and at the highest level since July 2007. Some contracts in the South were surely delayed until September. 

The South should continue to lead the way with a post-hurricane Irma rebound. New homes, in particular, should see elevated sales over the next couple months due to increase activity. That said, the post-hurricane Irma rebound will have less of impact on existing-home sales.

Is Renting Really the Better Deal? 

According to the Wall Street Journal, 76% of millennials believe renting a home is the better deal compared to buying a home. The latest survey is a 10-point increase favoring renting compared with the same survey a year ago. 

We tend to view such surveys with a degree of skepticism: We don’t know how the questions of affordability were worded. We do know that respondents tend to answer questions to satisfy the surveyor. The respondents are prone to say what they think the other person wants to hear.

All that aside, and if it is true that the younger generations view renting as the more affordable option, will the homeownership rate continue to decline? 

It might not reverse course in the near term, but it will reach a point where it will reverse. That point might be closer than many of the experts expect.

Renting is certainly the preferable option when you first move out of the parent’s house. But continual rent increases and continual moving drive the longer-term costs higher.

Psychological costs also drag on the benefits of renting. An itinerant lifestyle becomes less satisfying the older we get. We want to own. We want to drive a nail into a wall without worrying about the security deposit. A neighborhood of owner occupiers is generally preferred over a neighborhood of renters. 

When all the costs are considered — monetary and psychic — through time, renting becomes more of a false economy for many people. When we finally get a break on relentless home-price appreciation, that false economy will become more apparent to more people.

HARP Extended Through 2018

The U.S. government deploys several resources for Americans who need help financing a home purchase, including the popular FHA Loan program. But unbeknownst to some, there are also tools available for current homeowners who have fallen behind on their mortgage payments.

One of them is known as the Home Affordable Refinance Program managed by the Federal Housing Finance Agency, a wing of the Treasury Department. Although it was set to expire in September, HARP has been extended once again, continuing to offer homeowners additional options if they find themselves underwater on their mortgages.

Background of HARP

HARP was originally created as a direct response to the housing crisis and economic recession that began in 2008. During this time, as property values around the country plummeted, large numbers of mortgage borrowers found themselves paying off home loans that were now more expensive than the market value of their house. This caused millions to slip into foreclosure, especially with homeowners who had just recently bought had not yet built up significant equity.

The surge in foreclosures around this time was abetted by the fact that many of these homeowners were unable to refinance and gain some relief from ballooning debt. Conditions in the U.S. real estate market at the time made it unfeasible for financial institutions to save these loans from foreclosure.

To rectify this complex problem, the FHFA authorized federal lenders Fannie Mae and Freddie Mac to enact HARP. Beginning in March 2009, HARP offered refinancing services to homeowners who met certain qualifications. These qualifications remain mostly intact in the current iteration of HARP, which may offer assistance to mortgage borrowers who:

• Are paying off a mortgage originated on or before May 31, 2009 and is currently owned by Fannie Mae or Freddie Mac.
• Have a current loan-to-value ratio (LTV) over 80 percent. LTV is the amount of debt owed on the loan divided by the home’s current value, expressed as a percentage.
• Are up-to-date with their mortgage payments, and have a history of on-time payments over the last year.
• Either live in the home as a primary residence, or consider it a second home or investment property with no more than four units for rent.

The official website of HARP offers tools for users to find out if their mortgage meets most of these qualifications, and guides them through the application process.

Does HARP work?

Some policy analysts had speculated that after nearly eight years and previous renewals, HARP would soon be on the chopping block for federal budget planners. Its renewal through 2018 is therefore a demonstration of its success as well as the need that still exists.

A study from the Urban Institute found that despite early struggles, HARP could now be considered “arguably the most successful housing policy initiative coming out of [the 2008 housing crisis].” The FHFA estimated that HARP refinanced around 2 million loans just in its first two years, a figure that has since surpassed 3.5 million. With HARP borrowers saving an average $200 per month on their mortgage, the program has provided cumulative savings of approximately $35 billion since its inception.

HARP activity peaked around 2012, but its selective criteria means there are likely few homeowners who would still qualify. The FHFA estimated that as of March 2017, roughly 143,000 U.S. homeowners could still take advantage of the program, but that this was likely an overestimation of the number who will actually do so.

Regardless, the continuation of HARP for another year solidifies its legacy as a landmark policy achievement. That’s particularly true, according to the UI study, because HARP needed to be overhauled several times after its inception before it began refinancing loans en masse. Several of these modifications turned out to be forebears to the way mortgage lenders do business today:

• Instead of paying for in-person home appraisals, qualifying properties were processed through an automated valuation system.
• Mortgage insurers adopted a unified approval process to move coverage from old policies to new ones easily.
• Fannie Mae and Freddie Mac increased competition among lenders by reducing the number of underwriting assurances they required for HARP loans.

The Urban Institute concluded that these three changes to the program were largely responsible for its success in reducing refinancing risks for mortgage lenders and passing savings onto the homeowner. The FHFA has also created additional homeowner assistance programs in the mold of HARP, taking these lessons and applying them to other aspects of the home finance market.

With HARP here to stay, both homeowners and mortgage lenders are in a great position to work more effectively and keep the U.S. housing market as robust as ever.

No Reason to Be Afraid This Time of Year

Halloween approaches. We suspect that it’s a favorite holiday for a certain cadre of people. Some people revel in fear. They seek it out; they search for reasons to be afraid. 

Fear is a draw to many financial-market participants as well. The financial website ZeroHedge.com has carved a niche for itself by appealing to the draw. Most everything ZeroHedge reports is reported with a slant to highlight fear: Stories of financial bubbles, impending market crashes, inevitable economic collapses, runaway inflation abound. If you seek a reason to worry, ZeroHedge is the website for you. 

This isn’t to say that there isn’t a need for contrary (or negative) opinion. The world isn’t all sunshine and lollipops. ZeroHedge serves a purpose; it can keep you grounded. Our attention was piqued by a ZeroHedge article titled “Housing Starts, Permits Collapse in September (Spoiler Alert: It Wasn’t Just the Storms).” 

A catchy title, to be sure, but there was no collapse.

Yes, permits were down in September. Specifically, they were down 4.5% month over month.  But when you examine the numbers more closely, you’ll find that they were up where it really mattered.  Permits for single-family homes rose 2.4% to an 819,000 annualized rate in September. Year over year, permits for single-family homes are up 9.3%.

As for housing starts, overall starts were down, but the important single-family segments was up. Single-family starts were up 9.1% year over year.

So, accentuate fear, if you must. At the same time, don’t ignore the possibility that the glass is frequently half full.   

We believe it is more than half full when it comes to housing, particularly the new home market.  Home builders appear to share our optimism. 

After dipping in recent months, home-builder optimism returned with a vengeance in October. The Home Builder Sentiment Index rebounded four points to post at 68 (a posting above 50 is positive). Builders were particularly cheerful on the sales outlook. This component of the index was up five points to post at 78. 

New-homes sales were robust at the beginning of the year, but they faded during the summer months. This latest report on housing starts points to new-home sales regaining momentum.  We expect the new-home market, both starts and sales, to enter 2018 as it entered 2017 — on a rising trend.

A bubble in housing?

We don’t see it. Even after five years of exceptional gains in home prices and building activity, it’s worth noting that single-family starts and completions remain significantly below historical norms. We expect to see a few more years of increasing housing starts and completions, at least in the single-family segment. We see no reason to fear the outlook on housing. 

 

All Quiet on the Rate Front

Everyone expects Federal Reserve officials to raise the federal funds rate at their December meeting. What’s more, most everyone expects the Fed to slowly and predictably reduce its balance sheet over the next couple years. Because everyone shares similar expectations, we’ve seen little movement in interest rates this month. 

We also haven’t seen the next dip in mortgage rates that we thought could occur after rates rose in September. We could still get one, though. It’s worth noting that North Korea’s leader Kim Jong Un has amped up his belligerent posturing in recent days. Markets are also nervous about the prospect of Catalonia breaking away from Spain. We could see more investors seek a haven in the usual assets — U.S. Treasury securities and gold. Should that occur, we could see the dip that has generally followed the rise over the course of 2017. 

Today, though, it’s mostly sideways, as it has been for most of October. This isn’t bad. A rate range of 3.875%-to- 4% is still the going range on a top-tier 30-year conventional loan on the national scene.  In the grand scheme of mortgage-rate history, this is still a good rate.  Of course, we all want a little better, but a little better doesn’t appear likely in the immediate future.