Monday Market Commentary: Rates Unchanged Last Week

Last Week:
Mortgage rates lost some ground early last week as inflation fears sparked a mild selloff in Mortgage Bonds.  Mid week saw mortgage bonds claw back some lost ground on the heels of weak earnings reports (which hurt stocks,) and the Consumer Price Index, which posted the highest increase since the early 1990's.  A consumer price index this "hot" would normally send mortgage bonds tumbling, and rates higher.  In this case, it was mostly ignored by market participants taking comfort that the slide in oil prices will right the ship and inflation will moderate.

By the end of the week, mortgage rates were essentially unchanged.

This Week:
A number of high profile economic reports to watch this week, along with a passel of consumer focused companies' earnings (Lowe's, Gap, Barnes & Noble) could make for a volatile mix as we watch both the stock and bond markets (remember, when stocks do well, it is often at the expense of bonds, which can cause mortgage rates to rise) impact on mortgage rates.

On Tuesday, we have the Producer Price Index for July.  A hot reading here could negatively impact mortgage rates, though given the markets non-reaction to last week's read on consumer prices, this data might also be ignored by the market even if it shows inflation.  Housing starts and building permits also report tuesday, and while these figures are widely expected to be negative, any surprises of the "not as bad as expected" variety may help stocks and hurt mortgage rates.

Later in the week, we have the Philly Fed Index, which measures manufacturing activity and is often looked at as a proxy for the national manufacturing picture.  A strong number here could spark a rally in stocks and hurt mortgage rates.

08/18/08 at 09:10 AM Permalink | Comments (1) | TrackBack (0)
Filed Under: Interest Rates

July Stats for Twin Cities Show Mixed Outlook for Housing Market

We'd be remiss in not pointing out that the local realtor orgs have disgorged the July numbers.

Jim Buchta at the Strib hits the high points:

• Home sales up 6.2% from a year ago.
• Pending home sales notched the first monthly increase in 30 months, still down 7.6% year-over-year

An increase in sales and pending sales is touted as perhapsmaybe an early sign of a turnaround or "bottom."  It might well be, but before we start toasting, remember a few points:

1.  Sales are up, but at what price?  Yes, more sales will help clear out the excess inventory, which is part of the problem, but lots and lots of sales at ever lower prices will not a turnaround make.

2.  Month-to-month data on pending home sales can be noisy/volatile: A single month-to-month increase in the last 29 months is not necessarily a sign of a nascent turnaround.  Simply that July was better than June.  If we string a few of these months together, that may mean something, BUT

3.  Pending sales are not closed sales: They are signed contracts pending closing. Nothing more, nothing less.  In our experience, and from what we have heard from nearly everyone in the industry, (and with "lender-mediated" - foreclosures, short sales, etc. - sales accounting for something like 20-30% of activity,) the pull-through rate on pending sales is as poor as any time in recent memory.

In other words, many pending sales, and more than what most would consider "normal" simply never make it past the contract stage, and don't close.  (lots of reasons for this, but that is another post.)

Says Jeff Allen, head stats dude the MAAR, (and creator of the research blog The Skinny) who was kind enough to answer a couple of questions on this for us:

"Cancellation rates on pending sales are tough to quantify right now. Normally, we see closed sales follow a similar trajectory as pending sales a month or two later.  We have not seen this same level of correlation recently."

Jeff also promises a sexy graphic illustrating the divergence of pending vs. closed sales, which we will run right here if he can mash the data for us and make pretty.

08/13/08 at 04:43 PM Permalink | Comments (2) | TrackBack (0)
Filed Under: Market Stats

Wednesday AM Linklube

Local:
Today: Foshay Tower Becomes W Hotel [Metblogs]
Key Player in North Minneapolis Mortgage Fraud Pleads [Strib]
First Rate Mortgage: Final Sentencing, Two Years [Strib]
Oak Grove Couple Charged with Mortgage Related Mail Fraud [Strib]

Elsewhere and Otherwise:
Housing Bottom Alphabet: Think "L" not "V" [Merkel]
Fed Survey on Lending Standards: Credit More Tighter! [Kedrosky]
Must Read: Understanding Alt-A Lending [Tanta]

08/13/08 at 09:19 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Linklube

Monday Market Commentary: Rates Unchanged, Big Week Ahead

Last Week:
Mortgage rates were mostly unchanged last week.  Early on, rates increased after Monday's PCE (Personal Consumption Expenditures Index - a key measure of inflation) pointed to elevated inflation, and on Tuesday, the Fed elected to keep rates unchanged.  Said events did little to calm the fears of bond investors growing skittish over inflation.

Second half of the week brought some relief as the dollar strengthened, commodity prices eased slightly (calming inflation fears somewhat), and stocks sold off on a negative vibe from Wal-Mart (slow sales warning) and a spike in initial jobless claims.

End result, a round trip, with mortgage rates closing Friday right about where they started the week.

This Week:
For bond market observers (remember, mortgage rates are largely derived from bond prices) the seminal event on the economic calendar this week is the Consumer Price index (CPI), which hits Thursday.  CPI is widely expected to show that July price increases slowed from the torid pace set in June.  Anything short of that will likely push interest rates up, though continued easing of commodity prices, if such a thing materializes, could help to offset an unexpected spike in the July CPI.

Stocks warrant close attention this week as well.  Retail sales report Wednesday, and a lackluster showing here could push money out of stocks and into bonds, helping mortgage rates.  If retail sales remain strong, expect stocks to suck $$ out of bonds and hurt mortgage rates in the process.  Wal-mart and UBS also report earnings, and the state of these two behemoths could drive stocks in their own right.

08/11/08 at 08:39 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates

Does Panhandling Pay Better than Selling Real Estate?

"I figured out the hours I put into [selling that home] I made about 25 cents an hour so I could have just picked up change on the street and done just as well."

Says local realtor Faith McGown after selling a home for a personal record low $30,000.00.
Realtors the Latest Casualties of the Real Estate Market [KARE]

08/08/08 at 10:05 AM Permalink | Comments (1) | TrackBack (0)
Filed Under: Random

Friday AM Linklube

Local
· Super Agents: real deal, or marketing schtick? [Ross Kaplan]
· Home Building Slows to a Crawl [Strib]
· It's a Landlord's Market [PiPress]
· Sela Roofing: Owner Charged with Crookitude [TCBJ]
· NIMBY: Affordable Housing in Apple Valley [Strib]
Elsewhere & Otherwise
· If you think Freddie Mac's loss was huge, check out Fannie [WSJ]
· Why We Have a Foreclosure Crisis in the First Place [CR]
· Video: Freddie CEO Syron Responds to NYT [CNBC]
· Pending Sales: Once Again, the Media Gets it Wrong [Ritholtz]
· Morgan Stanley Latest to Freeze Home Equity Loans [MSNBC]

Continue reading "Friday AM Linklube"

08/08/08 at 09:21 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Linklube

As Home Prices Fall, Costs of Financing Continue to Rise

Can we talk about risk based pricing?

In the simplest of terms, risk based pricing is a system where the interest rate and/or fees paid for a mortgage vary based on the characteristics of both the borrower and the loan itself.

Some borrowers are more likely to default.  Some loan types, such as those with lower down payments, cost the lender more when they go bad. It really is a straightforward system designed to equitably align the costs and rewards for banks and borrowers by assigning a rate that, as accurately as possible, reflects the risk of default.

It's a nearly universal practice in mortgage lending, and whether you know it or not, the rate you are carrying right now probably included at least one adjustment to the rate or fees you were charged.

There are, quite literally, dozens of variables that can impact the price, or rate on a given mortgage, but the two most important are loan-to-value (equity in the home), and credit score.

Generally speaking, the higher the credit score, and the lower the loan-to-value, the better your rate.

We bring all this up because with defaults and losses on the rise (Freddie Mac lost $821 Million dollars last quarter) Fannie Mae is changing their risk based pricing fees, or "hits."  At Fannie, these are known as LLPA's or Loan Level Price Adjustments, and this is actually the third such adjustment since November of last year.

Take a look at this graphic (click to biggify), straight from a document called Updated Adverse Market Delivery Charge and Flow Business Pricing Requirements, which was released on Monday, right here.  We can think of no better way to illustrate how down payment and credit score interplay to drive the rate you actually get.

We've marked this up to illustrate what has changed since the last adjustment by Fannie.  Some are for the worse (in red.)  Some were for the better (green).  The negative negative numbers are credits, positive numbers are fees.

It's important to understand that the items in the chart are not adjustments to the rate, but to the price of a loan at any given rate. 

Adjustments can be paid (OR credited) in a lump sum, up front, as part of your closing costs, or as a slightly higher (or lower) rate. 

Here's a prime example of how the specific characteristics of the loan, AND the borrower can impact the cost of financing.

For example, if someone with a credit score of 685 puts 15% down on a purchase, there is a .5% price adjustment.  This means you can pay .5% of your loan amount up front, or take a rate that is .125% higher.  If that same person had a credit score of 675, the adjustment balloons to 1.5% of the loan amount, or .375% higher in rate.

On a $200,000 loan, that's a difference of $2000 up front, or $38.00 per month over a 30 year term.

The moral of the story: Even as home prices fall, the cost of financing those homes will steadily rise, especially if you have imperfect credit and lack a big down payment.

08/07/08 at 01:18 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Credit, Financing Options, Freddie Mac, Interest Rates, Risk Based Pricing

On Risk: Quote of the Day

It's become axiomatic that what led to the current financial & housing crisis was too much risk taken on by borrowers, banks, Wall Street investors, the real estate complex, et al. 

But could the problem have been too little risk? 

Steven Randy Waldman thinks so, and elegantly argues it was the relentless pursuit of risk-free return that lead to the current state of affairs. Emphasis ours:

We've trained a generation of professionals to forget that investing is precisely the art of taking economic risks, then delivering the goods or eating the losses...until owners of capital stop hiding behind cleverness and diversification and take responsibility for the resources they steward, finance will remain a shell game, a tournament in evading responsibility for poor outcomes.

Investors' childlike demand for safety has made the financial world terribly risky

Brilliant thinking.  There is much more.

08/07/08 at 08:56 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Quote of the Day

Deathmatch: NYT vs. Freddie Mac

Interesting little dust-up between the New York Times and Freddie Mac.  The executive summary:

NYT reporter alleges Freddie Mac CEO Syron was warned, ignored these warnings and should have known about looming problems with riskier loans in their portfolio.

Freddie responds, stating that at best, this is revisionist history, sloppy reporting, and utter bunk.

Also worth reading is Tanta's take-down of the NYT article over at Calculated Risk, and Jeff Miller's analysis of over at A Dash of Insight.

This may seem like inside baseball to many, but it would be a mistake to ignore this.  Legislators are already wielding the housing correction like a cudgel (which can be good, so long as they are crushing the right skulls) so it will pay to understand the facts in the rush to assign blame somewhere.

08/06/08 at 07:58 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Freddie Mac, GSE's, Housing Market Politics

Fed Decision: How Will it Impact Mortgage Rates?

As you've no doubt heard, the Federal Open Market Committee concluded its meeting at 2PM today and announced that the Federal Funds and Discount Rate will remain at current levels.

Though this will get plenty of coverage in the mainstream press, we wanted to take a moment to explain how this action may impact mortgage rates in particular.

As you'll recall, when the Fed announces an interest rate decision, the decision itself is less important than the accompanying policy statement, which articulates the Fed's views on the economy, inflation and the outlook for future changes to Monetary Policy (rates, etc.)

It is that document, (which makes up for being somewhat boring and often obtuse - except to mortgage geeks like this one - by being mercifully short) which can drive mortgage rates.

You can read the whole thing in less than 30 seconds right here.

What Does this REALLY mean for mortgage rates?

Though it will take a few days for the dust to settle, the immediate result today is that rates are moving up - the stock market is up over 300 points as I type this - as money flows out bonds into a stock market that has taken the Fed statement like a shot in the arm.  Expect to see this reflected in lender rate sheets this afternoon or tomorrow morning.

From a broader point of view, within the context of today's policy statement, the Fed seems to suggest that an economic slowdown is more cause for concern that the presence of inflation, and it does not appear that a return to rate hikes is imminent.

Silver Lining?

Though the initial reaction looks to be higher rates, If the Fed is correct - that inflationary pressures will moderate - this may be good news for mortgage rates. It is useful at this point to insert a very simple rule of thumb that describes the relationship between mortgage rates, and inflation.

Elevated inflation = Higher rates; Lack Inflation = Lower Rates

In that sense, moderating inflation will will keep the door open for low, or lower, mortgage rates through the end of 2008.

Also, don't forget, credit standards continue to tighten, so even if prevailing rates fall, the cost of financing (larger down payments, credit based interest rate adjustors or additional fees) may continue to rise.

08/05/08 at 04:53 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Interest Rates, The Fed

Me Media: With WCCO on Walking Away

If you were up early, you might have caught us at the Downtown WCCO studio this morning with Bill Hudson as we discussed the potential impact of homeowners walking away from mortgages worth more than their home. Check it.

08/04/08 at 11:45 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Press

All Real Estate Is Local: Best and Worst Zip Codes

Felix Salmon has up a great little graphic (via Jake at Econompic Data) based on a Businessweek comparison of the best and worst performing zip codes in major metropolitan areas.

A very simple way of pressing home the point that despite the general negativity in the real estate market, some areas continue to appreciate, (and these areas tend to be of the long established and higher-priced ilk.)

In the Twin Cities, North Oaks nabbed the top spot, marking 15% appreciation.  South Minneapolis's 55409 (basically the Kingield neighborhood and other areas east of Uptown near 35W) zip code saw a 24% drop.

08/04/08 at 10:54 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Market Stats, Minneapolis, Reports & Research, Twin Cities