Bulls & Blogs

Rate update: Contradictory data leaves rates drifting

Interest Rates, Residential Mortgage Comments Off

Jul 282015

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By G. Steven Bray

Even though mortgage rates drifted slowly lower last week, I would call the risks of higher and lower rates fairly balanced at this time.

European economies are showing nascent signs of recovery, but China is slowing. The US economy isn’t booming, but it isn’t collapsing. On a more granular scale existing home sales hit their highest level in years while new home sales took a dive. Employment growth continues unabated while wage growth continues to be stagnant.

This contradictory data combined with the typical summer doldrums is leaving markets looking for direction. I doubt they’ll find it in this week’s Fed meeting. While the Fed is widely expected to announce a rate hike in Sep, it’s unlikely it will change its posture this week.

The most meaningful data this week may be Friday’s release of 2nd quarter GDP numbers. While this is backward looking data, markets may view a strong reading as giving the Fed a green light to raise rates in Sep.

But just because the Fed raises rates doesn’t mean mortgage rates are going to rise. The Fed directly influences very short-term rates. Longer-term rates, such as mortgage rates, are more heavily influenced by expectations of economic growth and inflation, and on that we have our contradictory data.

Rate update: Onset of the summer doldrums

Interest Rates, Residential Mortgage Comments Off

Jul 212015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

For rate markets, it’s been a summer of headlines and volatility so far, especially Greece and China, so the onset of the summer doldrums feels somewhat odd. The summer doldrums kick in as investors take vacation, and market movement seems to slow down. Fortunately, prior to that onset, market sentiment seemed to have balanced. While investors are still concerned about the effects of a pending Fed rate hike, other factors are pulling rates back, including some weak economic data last week.

This week’s economic calendar provides some housing data but little else. Absent some truly unexpected results, it’s likely rates will hang in a narrow range looking for the next source of momentum. During the doldrums, that could take weeks. I’d say the most likely candidates at this point are US jobs data in two weeks or further weakening reported out of China. The former could move rates either way. The latter could start another rate rally.

Rate update: Rates rise again as concern wanes

Interest Rates, Residential Mortgage 2 Responses »

Jul 142015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

If you only paid attention to the headlines today, you’d think Greece won a new bailout deal. It’s not that simple. The Greek parliament has to approve several austerity measures, including pension reforms and sales tax increases, by Wed to move the deal forward. The problem is these measures are harsher than the ones the Greek people rejected in the referendum a week ago. I’m not sure we’ve put this one in the rearview yet. If Greece balks at the measures, we’re looking at a default. If it doesn’t, Europe has kicked the Greek can down the road a little further.

Our other major source of uncertainty last week was the plunging Chinese stock market. The Chinese government implemented extraordinary measures, including a huge backstop of equity buying by the government. The measures seem to have plugged the hole in the dike. Whether the plug is temporary remains to be seen.

As we’ve discussed before, economic uncertainty is a friend to low interest rates. As uncertainty waned last week, interest rates drifted higher again. Absent economic concerns, the momentum in the market seems to be for higher rates. And I don’t see that changing soon without additional unexpected headlines.

Rate update: Are we seeing a market shift?

Interest Rates, Residential Mortgage Comments Off

Jul 072015

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By G. Steven Bray

The Greeks just said NO to fiscal responsibility, and investors rushed to the safety of bonds, pushing interest rates down a tad. No surprise here. This part of the script was pretty certain, but the rest of the plotline is less clear.

The talking heads are convinced Greece will leave the Eurozone, but it’s really not in the rest of Europe’s interest for Greece to go. To that end, it’s still possible they craft a solution that allows Greece to save face and just as importantly, allows the Eurozone to claim that it held the Greek feet to the fire. I really think the Eurozone is less worried about Greece leaving than it is about potential contagion. Greece is a very small economy. Italy and Spain also are struggling with reform measures, and their economies are much larger. Leftist factions in both counties are watching the Greek situation carefully. If Greece wins debt relief, you can bet these factions will demand the same.

Because of that and because markets have had ample time to anticipate this situation, I still think the effect on rates will be temporary. However, we had two other headlines this past week that may help shift market sentiment in favor of lower rates.

First, the jobs report last Thurs was surprisingly weak. The headlines, the unemployment rate dropping to 5.3% and 200k+ jobs created, sounded great, but the internals of the report were more troubling. The rate only dropped because 423k folks left the workforce, leaving workforce participation at an almost 40-year low. In addition, wage growth stagnated again, and last month’s surprising increase was revised lower. This left pundits questioning the strength of the recovery again.

Second, the Chinese stock market has been crashing. It’s bad enough that the Chinese government has initiated an equity buying program to stem the fall. If China takes a nosedive, you can bet the rest of the world economies will feel some pain.

Rate update: Is it really all about Greece?

Interest Rates, Residential Mortgage Comments Off

Jun 302015

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By G. Steven Bray

Well, Greece went and did it. They defaulted on their IMF debt. Markets reacted rather hysterically yesterday driving interest rates down. Now what?

It’s still possible Greece and its creditors will find a last-minute, face-saving solution that will float Greece a little longer. However, the Germans seem tired and scared of the grandstanding Greek politicians. If the Germans cave, they might invite other struggling nations to toss their austerity plans. In any event, the Greek president has called a referendum this Sun to let his people decide whether to accept its creditors’ latest offer. A no-vote could roil markets again next Mon.

But the real question is whether the resulting uncertainty can reverse the current market sentiment towards higher rates. I said last week that any rate rally would be temporary, and I’m still leaning that way. US economic data has been stronger of late, with both retail sales and wages growth showing a pulse. Most of the Federal Reserve governors seem intent on raising short term interest rates before the end of the year. I think it will take more than Greek drama to turn the tide.

Interest-only mortgages make a comeback

Loan Programs, Residential Mortgage Comments Off

Jun 262015

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By G. Steven Bray

One of the more notorious loan products back before the housing crisis was the interest-only loan. Homebuyers who wanted a larger home, but couldn’t qualify for a traditional mortgage, would use an interest-only program because of the lower initial payment, and some lenders were approving the loans based on that lower payment. When the interest-only period ended, borrowers would face a sharp payment increase when their payment started to include principal reduction.

But interest-only loans are not inherently dangerous. In fact, they can make sense in some cases. For example, the product could make sense to a starting doctor who is confident his income will rise in the future. At the end of the interest-only period, the payment shock wouldn’t be difficult for him to handle. Or consider the case of an investor who wants to allocate her money to higher earning assets. If her investment horizon is shorter than the interest-only period, she’ll never see the payment shock.

Today, the program is making a comeback, but unlike pre-crisis, today’s lenders require that the borrower qualify at the payment that would apply after the interest-only period ends. It’s a very conservative approach that will prevent many from using the product, but in today’s market, safety trumps utility.

Rate update: Will Greece give mortgage seekers a gift?

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Jun 242015

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By G. Steven Bray

Last week gave us a nice pause in what had been a steady rise in mortgage rates, but it apparently had more to do with market mechanics than a fundamental change of sentiment.

This week is a fairly busy one for US economic data. The most interesting may be housing data, which finally has been showing strength. The housing market has been a big missing in the anemic recovery from the financial crisis. While other economic data remains lackluster, the thinking is that housing may drag the economy into a more robust recovery. In anticipation of more robust growth, markets are pushing interest rates higher.

Pushing the other way are Greece and weakness in China, but Greece may be the key this week. Greece has a huge debt payment due, and they have no way to pay it without an extension of its bailout. Based on recent headlines, it sounds like Europe fears the uncertainty of a Greek default more than it fears that fiscal mismanagement will drain the EU of economic growth. But, if Greece defaults, I bet we see a nice, albeit temporary, rally in mortgage rates.

Flood insurance rate spike

Residential Mortgage Comments Off

Jun 102015

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By G. Steven Bray

The recent flooding in our state may have some folks thinking about flood insurance. The National Flood Insurance Program, backed by the federal government, provides the only reasonable insurance for those in flood-prone areas against catastrophic loss.

Unfortunately for those who need the insurance, the government announced an annual surcharge starting this year of $25 for owner-occupied homes in flood zones and a surcharge of $250 for vacation homes. Insurance premiums are heavily subsidized by taxpayers, so the much higher surcharge for vacation homes is intended to reduce that subsidy somewhat on properties that are considered more of a luxury. If you own your vacation home free and clear, you could consider dropping coverage, but unfortunately, if you own a home in a flood zone that has a mortgage, you have no choice but to pony up the extra $250.

FEMA reports that the average premium for homes in flood zones is $638, so the increase for owner-occupied homes is rather mild, especially given reports last year that the fund was in danger of running dry.

Rate update: What could stop the move towards higher rates?

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Jun 092015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates shot up last week to their highest levels of the year. While Fri’s jobs report showed healthy job creation in May, I think it’s the undercurrent from the European bond market that’s driving rates higher. German 10y bond rates have increased from near-zero to almost 1% in a couple short months, and they’re dragging US rates along for the ride. Unless and until investors stop the bond selling stampede, the market is going to be biased towards higher rates.

There are 2 other things to keep in mind:

– Recent US economic data has been fairly positive, especially wage growth, which finally has a pulse. It is increasingly likely the Federal Reserve will raise short-term interest rates at its Sep meeting, and that will inject more volatility into markets.

– In Europe, the chances of a Greek default are increasing. Greece needs an extension of its bailout, but the European Union wants it to reform its economy. Reports are that recent Greek reform proposals are rehashed junk the EU already has rejected. That said, I’m still betting the EU finds a way for Greece to save face. But if Greece defaults, that could be the ripple to pause this move towards higher rates.

Rate update: Push-me, pull-me rate monster

Interest Rates, Residential Mortgage Comments Off

May 272015

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The same forces that have existed for months are pulling on mortgage rates – among them, the German bond market, US economic data, the Greek debt soap opera, and Fed rate hike fears – which has resulted in volatility and unpredictability. Recently, German bonds seem to have held the most sway. Even on days when the other forces push down, German bonds seem to be able to drag US rates the other way. Really, I don’t see that changing, but a couple upcoming events at least have a chance.

Greece has a debt payment due next week, and it seems they really don’t have the money this time. I’d say odds are that the European Union will figure out some way to rescue them again, but if it doesn’t, Greece would default. The effect probably won’t be catastrophic as it won’t be a big surprise, but it should put some downward pressure on rates.

Next week also is a jobs report week. The last report was back on trend of a little more than 200k jobs, but, unfortunately, average earnings also returned to trend showing little income growth for US workers. As I’ve said previously, I think earnings growth is more important than job growth at this point. The addition of low-paying service jobs makes for weak economic growth and little pressure on interest rates.

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