Counterintuitive Weakness Early, But Inconsequential in Bigger Picture
By:
Matthew Graham
Thu, Jun 20 2024, 3:26 PM
Counterintuitive Weakness Early, But Inconsequential in Bigger Picture
The past two trading days each had their own version of counterintuitive movement. Today’s installment featured bond yields rising after a batch of mostly weaker economic data. The only way to justify it using the data itself would be to assume the market’s nearly exclusive focus was on the inflation implications associated with higher Philly Fed prices (a component of the Philly Fed Index). Apart from that, we can consider position-driven trading which may have been behind Tuesday’s gains and now today’s offsetting losses. Regardless, none of the above matters considering the well-contained size of each move. Yields remain just shy of recent lows and have been trading a narrow range ever since last week’s rally concluded.
Jobless Claims
238k vs 235k f’cast, 243k prev
Continued Claims
1828k vs 1810k f’cast, 1813k prev
Philly Fed Index
1.3 vs 5.0 f’cast, 4.5 prev
Philly Fed Prices
22.5 vs 18.7 prev
Housing Starts
1.277m vs 1.37m f’cast, 1.352m prev
09:46 AM
paradoxically weaker after data. 10yr up 6bps at 4.284. MBS down 6 ticks
11:39 AM
gradually off the lows. MBS down an eighth and 10yr up 4.5bps at 4.269
02:32 PM
A bit more healing in Treasuries with 10yr up 2.6bps at 4.249. MBS still down almost an eighth.
Download our mobile app to get alerts for MBS Commentary and streaming MBS and Treasury prices.
Purchase loan applications have surged for two weeks in a row, but rates for conforming mortgages are inching back up toward 7 percent this week as investors weigh the odds of Fed rate cuts.
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Homebuyer demand for purchase rates picked up last week for the second week in a row, as mortgage rates dropped to the lowest levels since March. But rates for conforming mortgages are once again inching back toward 7 percent this week as investors weigh the odds of Fed rate cuts later this year.
Applications for purchase loans were up by a seasonally adjusted 2 percent last week compared to the week before, according to a weekly survey of lenders by the Mortgage Bankers Association. While it was the second consecutive week-over-week increase in demand for purchase mortgages, applications were still down 12 percent from a year ago.
TAKE THE INMAN INTEL INDEX SURVEY FOR JUNE
Refinancing applications during the week ending June 14 were essentially flat from the week before, but up 30 percent from a year ago.
Mike Fratantoni
“Mortgage rates dropped last week following the latest inflation data and the [Federal Reserve] meeting, with the 30-year conforming rate dropping to 6.94 percent and reaching its lowest level since the end of March,” MBA Chief Economist Mike Fratantoni said in a statement Wednesday.
Federal Reserve policymakers held rates steady at their June 12 meeting, saying they wanted more evidence that inflation is subsiding before cutting interest rates.
But the Fed only has direct control over short-term rates. Bond market investors who fund most mortgages brought long-term rates down sharply last week after seeing the latest Consumer Price Index reading, which showed inflation eased in May.
Mortgage rates came down again the next day on reports showing May jobless claims jumped to their highest level since August 2023 and that wholesale prices unexpectedly dropped in May brought long-term rates down again.
Rates on 30-year fixed-rate conforming loans dropped to 6.81 percent on June 13, down nearly half a percentage point from a 2024 high of 7.27 percent registered April 25, according to rate lock data tracked by Optimal Blue.
Mortgage rates bounce
But mortgage rates have been on the rebound this week as a number of Fed policymakers — including the presidents of the Federal Reserve banks of New York, Boston, Dallas and St. Louis — continue to stress that the Fed is looking for more data confirming that inflation is headed toward their 2 percent target before cutting rates, Reuters reported.
Optimal Blue data shows that after climbing for three days in a row, rates on 30-year fixed rate loans were averaging 6.88 percent Tuesday.
An index maintained by Mortgage News Daily showed rates for 30-year fixed-rate loans had climbed back above 7 percent Monday but flattened out since then.
(Rates reported by Mortgage News Daily are higher because they are adjusted to estimate the effective rate borrowers are offered, regardless of what points they’re willing to pay. Optimal Blue tracks contracted rates, including those locked in by borrowers who paid points to get a lower rate.)
The next big move in mortgage rates could be triggered on June 28, when the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is set to be updated with data from May.
PCE and Core PCE trending down
The PCE price index showed inflation dropping to 2.65 percent in April, the first improvement since January. Core PCE, which excludes the cost of food and energy and can be a better indicator of underlying inflation trends, has been moving in the right direction for 15 consecutive months, falling to 2.75 percent in April.
Forecasters at Pantheon Macroeconomics are predicting the PCE price index will show inflation cooled more in May than many economists are predicting. Recent evidence that inflation will continue to ease includes:
Oliver Allen
“The sharp falls in total housing starts and building permits are surprising; they take both series to their lowest levels since June 2020,” Pantheon Senior U.S. Economist Oliver Allen said in a note to clients Thursday. “Lower rates will help sales eventually, but we expect them to be accompanied by a weaker labor market and a rising unemployment rate, thinning the ranks of potential homebuyers.”
The latest jobless numbers show claims for unemployment insurance during the week ending June 15 dropping slightly from the week before, to 238,000. But the four-week average increased to 232,750 — the highest level since September 2023.
“The Fed’s forecast that the unemployment rate will be unchanged throughout the rest of this year looks implausibly upbeat,” Pantheon Chief Economist Ian Shepherdson said in a note to clients Thursday.
Pantheon is forecasting that the unemployment rate will rise to 4.5 percent by the end of the year, up from 4.0 percent in May.
While Fed policymakers indicated they only expect to cut short-term rates once this year, futures markets tracked by the CME FedWatch Tool are expecting at least two cuts, with the first coming in September.
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Federal Reserve Bank of Richmond President Thomas Barkin said he needs further clarity on the path of inflation before lowering interest rates.
“My personal view is let’s get more conviction before moving,” Barkin said to reporters Thursday following an event in Richmond, reiterating that he needs sustained and broadening progress toward the Fed’s 2% goal before adjusting borrowing costs lower.
Barkin, who is a voting member of the Federal Open Market Committee this year, said policy is currently well positioned, adding the central bank has the firepower necessary to tame inflation.
When asked if the Fed could do one rate cut and hold at that level, Barkin said it depends on the economy. If current conditions hold, he said it may not be the best time to give guidance on timing about subsequent policy adjustments.
“There are times where we will want to give forward guidance and have given forward guidance,” he told reporters. “This doesn’t feel like one of those times to me. It doesn’t feel like a forward guidance time.”
Last week, policymakers voted to hold interest rates steady in a range of 5.25% to 5.5%, the highest in more than two decades. Policymakers penciled in one interest rate cut for 2024 and four for 2025, according to the median projection.
“At this moment it feels like if you made a cut, you made a cut, and then let’s see where the data takes you,” Barkin said.
There was a slight increase in mortgage application volume during the week ended June 14. For a change, it was accounted for by the home purchasing component.
The Mortgage Bankers Association says its Market Composite Index, a measure of loan application volume, increased 0.9 percent on a seasonally adjusted basis although it lost 0.1 percent before adjustment compared with the previous week.
The Refinance Index decreased 0.4 percent from the prior week and was 30 percent higher than the same week one year ago. The refinance share of mortgage activity remained unchanged at 35.2 percent of total applications.
Purchase loan applications rose 2.0 percent from one week earlier, its second straight positive performance. The unadjusted Purchase Index decreased 0.1 percent compared with the previous week and was 12 percent lower than the same week one year ago.
“Mortgage rates dropped last week following the latest inflation data and the FOMC meeting, with the 30year conforming rate dropping to 6.94 percent and reaching its lowest level since the end of March,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Purchase applications increased a small amount for the week, led by applications for conventional loans. Refinance application volume was also down slightly for the week but remains about 30 percent higher than this time last year.”
Added Fratantoni, “Purchase volume is still more than 10 percent behind last year’s pace, but MBA is forecasting a pickup in home sales for the remainder of the year as more inventory is hitting the market.”
Highlights from MBA’s Weekly Mortgage Application Survey
The average loan size slipped $900 to $372,300 while loans for home purchasing fell from $428,700 to $420,300.
The FHA share of total applications decreased to 12.7 percent from 13.1 percent while the VA share increased to 14.8 percent from 14.7 percent. The USDA share of applications was unchanged at 0.4 percent.
The 6.94 average contract rate for conforming 30-year fixed-rate mortgages (FRM) was down 8 basis points compared to the prior week. Points decreased to 0.61 from 0.65.
Jumbo 30-year FRM had an average rate of 7.12 percent, down from 7.18 percent,with points decreasing to 0.48 from 0.54.
The average rate for 30-year FRM backed by the FHA decreased to 6.79 percent from 6.87 percent,with points increasing to 0.93 from 0.92.
Fifteen-year FRM rates averaged 6.47 percent, a 13-basis point drop from the prior week. Points increased to 0.60 from 0.55.
Adjustable-rate products (ARMs) also enjoyed some rate relief. The popular 5/1 ARM rate decreased to 6.27 percent from 6.45 percent,with points increasing to 0.96 from 0.81.
The ARM share of activity fell to 6.0 percent of total applications from 6.3 percent the previous week.
Maryland family closes on dream home with a 3.4% mortgage rate — paying $1K a month less than the market rate
With house prices and mortgage rates hovering at painful highs, many Americans have tossed aside their dreams of homeownership — but are they missing a trick?
The Sutton family in Northeast Maryland recently secured their dream home with a mortgage rate of around 3.4% — which was roughly half the average 30-year fixed mortgage rate at the time of purchase.
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How did they beat the home buying odds? They used something called an assumable mortgage — a special type of home loan where the buyer essentially takes over the seller’s mortgage.
The young family shared their story with NBC News. By going down the assumable mortgage route, the Suttons not only managed to avoid the stress and fees associated with qualifying for a conventional mortgage, but they also saved themselves about $1,000 to $1,500 a month by taking on the low interest rate.
Here’s how assumable mortgages work and how to determine if one might be right for you.
What is an assumable mortgage?
An assumable mortgage is a type of home loan where a qualified buyer can take over (or assume) a seller’s mortgage terms, including the existing balance, repayment period and interest rate.
These loans can be appealing for both buyers and sellers, particularly those, like the Suttons, looking to capitalize on lower mortgage rates of the past. But they do also have their limitations and are bound by strict regulations.
Christopher Sutton admitting he’d “never heard of” assumable mortgages before his realtor suggested one is unsurprising.
Assumable mortgages are a relatively niche product today, but they were immensely popular back in the 1980s, when mortgage rates lingered in double-digit territory for years and many lenders (including conventional banks) accepted the practice.
Since then, the majority of lenders have restructured their loan terms (in line with regulatory and market developments) to prohibit the practice. Today, conventional loans are no longer eligible for assumption. They must be paid in full — and a new one issued — whenever a property is sold or transferred to a new owner.
There are three exceptions, where home loans are assumable:
FHA loans: These loans are backed by the Federal Housing Administration and are popular with first-time buyers and those with lower incomes who may not qualify for a conventional loan. Like conventional loans, borrowers still have to qualify under all FHA terms, including credit and employment standards.
USDA loans: These loans are intended for low-income borrowers in rural areas. They’re backed by the U.S. Department of Agriculture and don’t require any down payment.
VA loans: These loans are offered to active or retired members of the U.S. military.
The Suttons assumed an FHA loan in order to secure their dream home in Maryland.
Read more: ‘You didn’t want to risk it’: 80-year-old woman from South Carolina is looking for the safest place for her family’s $250,000 savings. Dave Ramsey responds
Things to be wary of
To successfully assume someone else’s mortgage, you need to cover all of the equity already built up in the house. So, if the seller bought the home for $200,000 and paid off $50,000 in principal, the buyer would have to bring $50,000 to the table (a bit like a down payment) and qualify to assume the remaining mortgage.
This worked out for the Suttons because the previous owner of the house had only made about 18 months of mortgage payments before relocating to Florida for work, meaning they had not built up a ton of equity that the Suttons would have to match.
“It was just one more of those stars that had to align for this to work,” the family’s realtor, John Gatsoulas from REMAX, told NBC News.
It’s also important to consider the property value before assuming a mortgage. If the home has appreciated significantly since the seller first bought it, the original home loan that you assume may not cover your costs.
So, if you assume a mortgage for $350,000, but the house is now worth $500,000, you’ll need to pay the $150,000 difference out of pocket. You may be able to secure financing to cover that cost, but second mortgages are typically expensive, hard to qualify for and not really suitable for families, like the Suttons, seeking assumable mortgages for their affordability.
What to read next
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
U.S. homebuilder sentiment unexpectedly declined in June to the lowest level this year as mortgage rates near 7% limited prospective-buyer interest and weighed on the demand outlook.
The National Association of Home Builders/Wells Fargo index of housing market conditions fell by 2 points to 43. This month’s reading trailed all economists’ estimates in a Bloomberg survey, which had a median forecast of 46.
A measure of the sales outlook over the next six months dropped 4 points to 47 this month. That followed a 9-point decline in May that was the largest since October 2022. The prospective-buyer traffic gauge and the NAHB index of current sales both dropped to the lowest level this year.
“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” Carl Harris, NAHB chairman and builder from Kansas, said in a statement. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages and a dearth of buildable lots.”
At the same time, the industry and prospective buyers may soon find some relief from high borrowing costs. Separate figures Wednesday showed the average rate last week on a 30-year fixed mortgage eased below 7% for the first time since March.
Mortgage rates move in tandem with Treasury yields, which also declined notably last week as recent data showed a broad cooling in inflationary pressures. That prompted traders to boost bets the Federal Reserve is in a better position to move ahead with interest-rate cuts, possibly as soon as September.
Cheaper financing costs have the potential to blunt some of the impact from elevated prices in the resale market.
This month, 29% of builders reported cutting home prices, the largest share since January, according to the NAHB survey. The average price reduction held steady at 6% for the 12th straight month. The share using sales incentives increased to 61% from a May reading of 59%.
Builder sentiment fell in the Midwest and South, while improving slightly in the West and Northeast.
Mortgage rates began the week with a modest move back up and over the 7% threshold, but managed to erase some of those losses today. The improvement followed this morning’s Retail Sales data which came out weaker than expected.
Mortgage rates are based on trading levels in the bond market. Bonds pay attention to multiple cues at any given time. Major economic reports are always among those cues as the health of the economy tends to coincide with rates (i.e. stronger = higher).
Retail Sales isn’t as big of a report as the Consumer Price Index (CPI) or The Employment Situation (the jobs report), but it’s a respectable supporting act. Sales growth was surprisingly high in the data that came out in March and April. May’s report showed a correction back to 0.0% growth.
Today’s report came in just barely positive at 0.1–a far cry from the 0.6 level 2 months ago and below the median forecast of 0.2. In addition, it included a revision to May’s report from 0.0 to -0.2. All told, it painted a less upbeat picture for the American consumer compared to a few months ago.
A slower economy is less able to sustain higher interest rates for a variety of reasons–not the least of which being the suggestion of slower price growth. With that, bond traders bought more bonds, thus pushing bond prices higher and yields (aka “rates”) lower.
Tomorrow is a market closure for the Juneteenth holiday. Trading resumes on Thursday but we’ll be waiting until the end of next week for the next round of big ticket economic data.
Mortgage rates cooled slightly once again this week, now averaging 6.95%, as they continued to dial back after last month’s surge and returned to averages typical of a year ago, Freddie Mac reports.
“Mortgage rates continued to fall back this week as incoming data suggests the economy is cooling to a more sustainable level of growth,” says Sam Khater, Freddie Mac’s chief economist. “Top-line inflation numbers were flat but shelter inflation, which measures rent and homeownership costs, increased, showing that housing affordability continues to be an ongoing impediment for buyers on the house hunt.”
Inflation Remains a Thorn for Rates
The Federal Reserve voted this week to hold its key benchmark interest rate, blaming still stubbornly high inflation for delaying its plans for cuts. The Fed’s announcement came shortly after the latest consumer price inflation data showed the CPI up by 3.3% compared to a year ago. While that is its slowest gain in three years, the CPI remains far from the Federal Reserve’s 2% target that it has set as justification for starting to cut its rate.
The biggest pressure on inflation remains the shelter component of the CPI, which is up 5.4%. Shelter made its slowest gain in two years, but it remains high and continues to cause inflation to remain high as well, says Lawrence Yun, NAR’s chief economist. “The non-official private sector data points to rising apartment vacancy rates from temporary oversupply, and rents are essentially showing no increases,” Yun says. “So, official consumer price inflation, with a lag time, no doubt has more room to slow down.”
Yun says the timing for the Fed to start cutting rates remains unclear. “But the longer-term outlook is for the Fed to cut interest rates six to eight rounds by the end of next year,” he says. If mortgage rates then soon follow, “home prices will remain solid, and home sales will pick up, especially in regions with rising inventory,” he adds.
Mortgage Rates This Week
Freddie Mac reports the following national averages for mortgage rates for the week ending June 13:
30-year fixed-rate mortgages: averaged 6.95%, dropping from last week’s 6.99% average. A year ago, 30-year rates averaged 6.69%.
15-year fixed-rate mortgages: averaged 6.17%, falling from last week’s 6.29% average. Last year at this time, 15-year rates averaged 6.10%.
A former loan processor at Crosscountry Mortgage has accused the lender of discouraging employees from reporting overtime pay.
The plaintiff, Christina Nielsen, claims management informed her and others they could not record any overtime hours worked and that when overtime hours were reported, Crosscountry’s management “refused to record any hours over 40 worked in a workweek,” the suit filed in a Georgia federal court said.
If the company did do so, it would be a violation of the federal Fair Labor Standards Act, which mandates minimum wage and overtime compensation requirements by employers. Other lenders, including LendUS and Rocket Mortgage, have been accused of similar practices.
This is not Nielsen’s first complaint against the company, as a year prior the former employee accused her former CCM branch manager of sexual assault. This particular case is still pending in court as of June 18.
According to the recent overtime suit, Crosscountry required Nielsen and other nonexempt branch employees to work unpaid overtime as a condition of employment.
The complaint points out in February 2022 Nielsen’s job title changed to loan processor manager, but her job duties did not change as a result and she continued to perform nonexempt work. Under the FLSA, an employee must be paid one and one-half times their “regular rate” of pay for all overtime hours worked.
Nielsen, who worked for the company since 2018, was terminated in July 2022.
Nielsen wants the court to certify this suit as a class action and seeks actual and liquidated damages, interest, and reasonable attorneys’ fees and costs for defendants’ failure to pay her.” The exact amount was not disclosed.
Crosscountry did not immediately respond to a request for comment.
A separate refi-boom era suit is also pending against Crosscountry accusing it of failing to cover employee remote work costs.
The complaint accuses the mortgage lender of violating an Illinois state law, which protects workers from wage-related issues, the suit lodged May 3 in a federal court in Illinois, claims. The plaintiff, April Shakoor, who worked at Crosscountry from 2019 to 2020, says the mortgage shop imposed certain requirements such as high speed internet for remote work, but did not pay employees back for the expenses. She is asking the court to certify the suit as a class action.
Alleged violations of workers rights, including the FLSA, have been rampant in recent years. Most recently, Rocket Mortgage has moved to settle such a case for $3.5 million.
The suit, originally filed in January 2023 by a group of loan officers, accused the megalender of violating the Fair Labor Standards Act by failing to compensate them for all hours worked.
Despite moving to quash the suit, Rocket “denies and continues to deny the allegations contained in the plaintiffs’ lawsuit or that it violated any federal, state or local law, breached any duty, failed to pay any employees as required by law,” the company’s filing said.
Additional Mid-Day Gains Independent of Data and Events
By:
Matthew Graham
Tue, Jun 18 2024, 4:13 PM
Additional Mid-Day Gains Independent of Data and Events
Bonds traded the day in two distinct sections. First up was the reaction to the Retail Sales data with a logical rally following the weaker results. Gains weren’t especially huge and a modest correction lasted until 11am. At that point, the second shift began with volume profiles suggesting position squaring ahead of Wednesday’s holiday closure. The preponderance of Fed speakers could also have been deemed supportive, but the timing and trading volumes don’t support that conclusion very well. This mini bull run ended with the 20yr bond auction which caused brief, 2-way trading without leaving a lasting impression. Bonds were flat after that.
Retail Sales
0.1 vs 0.2 f’cast
last month revised down to -0.2 from 0.0
Industrial Production
0.9 vs 0.3 f’cast, 0.0 prev
08:46 AM
flat overnight with a modest rally after Retail Sales. MBS up nearly a quarter point. 10yr down 4.3bps at 4.24.
10:21 AM
Backtracking from AM gains a bit. 10yr down 2.2bps at 4.26. MBS up 3 ticks (.09).
01:08 PM
stronger into the auction and little changed after. 10yr down 6.2bps at 4.22. MBS up a quarter point.
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