Monday Mortgage Update – 01/27/2020

Mortgage Rates Drop to Lowest Level in Five Months

Rates fell to the lowest level in five months this past week and are about a quarter point above all-time lows. The very low rate environment has clearly had an impact on the housing market as both new construction and home sales have surged in response to the decline in rates, the rebound in the economy and improving financial market sentiment.

As fears over the coronavirus roil global financial markets, investors are rushing to the relative safety of bonds. As a result, mortgage rates are falling. The 30-year fixed mortgage loosely follows the yield on the 10-year Treasury.

The average rate on the 30-year fixed hit a recent high in December of 3.84%, but slid steadily last week and is now falling more steeply, according to Mortgage News Daily.

“3.625% is widely available, and that was already getting to be the case last Friday,” said Matthew Graham, chief operating officer at Mortgage News Daily. “Today brings 3.5% into the mix for more than just a few of the most aggressive lenders.”

That is the best rate since early September, and Graham said he believes the market is “only one to two solid days away from 3.375%.”

Falling rates couldn’t come at a better time for the housing market, as strong demand is fueling both sales and construction of new, single-family homes. Builder sentiment hit a 20-year high in December, and while sales of newly built homes slipped slightly, they were still a strong 23% higher than December 2018.

There is no other way to read these tea leaves, except to say that NOW IS A GREAT TIME TO BUY OR REFINANCE! Need to make a move? Want to retire debt, build that granny unit or put your kids through school? CALL ME!

The big news of last week was again out of China…but this time not pertaining to trade relations. The new coronavirus that originated in Wuhan, China is something that not only individuals are fearful about, but also the markets.

Coronaviruses are a large family of viruses that usually infect animals but can sometimes mutate and spread to humans. Symptoms in humans include fever, coughing and shortness of breath, which can progress to pneumonia. This new virus is similar to the 2003 outbreak of SARS. 

There are two confirmed cases in the US, one in Washington and the other in Illinois. Additionally, there are 63 cases being monitored as potential cases that stretch across 22 states. If the situation persists and worsens, it may cause fear in the Stock market. If a selloff were to occur, that money would likely find its way into the Bond market.

Another Contrarian Indicator

Citigroup released their panic/euphoria model, which is another great contrarian indicator, meaning it goes against the prevailing market trends – Selling when others are buying and buying when most investors are selling. Historically in this model, once the market reaches euphoria, there is an 80% chance that Stocks will be lower the following year. Currently the index is a .34, just below Euphoria, which is at .41. This is similar to the fear/greed index referenced a few weeks ago. This is something to keep an eye on for a reversal in the Stock market.

Paul Tudor Jones, the billionaire investor, made some interesting comments last week on how the current Stock market reminds him of the 1999 bull market that ended with the dot com bubble. Remember, the best indicator for recession is the unemployment rate. If it starts to move higher, breaking above 4%, that could be a sign that things are turning.

Strong Sales Despite Tight Inventory and Higher Prices

The Existing Home Sales report for December, which measures closings in that month and likely represents buyers shopping for homes in October and November, increased by 3.6%. This is the highest sales pace in 2 years. On a year over year basis, sales are up 10.8%.

There were only 1.4 M units for sale in December, the lowest reading on record. Imagine how many more sales there would have been if there were more homes for sale. At the current pace of sales, there is a 3-month supply. 

The median home price was reported at $274,500, up 7.8% year over year, which is the largest jump since January 2016. We can’t stress enough how strong this housing report is – Sales are at a 2-year high, even with inventory levels at the lowest levels on record.

The media and Diana Olick did their best to shed some negative light on the report, as usual. Diana said that home prices were rising at double the pace of income – Incomes are rising at 3.1% year over year, while the Median home price is up 7.8%…but she doesn’t understand what the median home price is. The median home price means that half the homes sold above that number and half the homes sold below it. This does not necessarily show appreciation, it shows that more higher priced homes were sold. It is not a direct translation to appreciation, that is what reports like the FHFA House Price Index and Case Shiller Home Price Index are for.

Perhaps more importantly, Diana is incorrect in her statement that home prices were rising at double the pace of income because of the relationship between income and home payment. Incomes don’t have to keep pace with appreciation because a home buyer does not use 100% of their income to pay for their home. Look at this example, which is an oversimplification but expresses the point:

If a home buyer earns $5,000 per month, it would not be uncommon for them to purchase a home and have a monthly principal and interest payment of $1,000. Now if that person waited to purchase the home, and home prices went up 5%, their new monthly principal and interest payment would rise to $1,050. The home buyer’s income does not have to go up by 5% to make up the $50 increase, only 1%. Because of the typical relationship between home payment and income, incomes DO NOT have to keep pace.

And according to the FHFA House Price Index (Federal Housing Finance Agency), a report that measures appreciation, single family homes with conforming loan amounts rose 4.9% year over year, not the 7.8% that the median home price rose. This means that the pace of incomes rising could sustain a much greater level of appreciation than the current rates we are seeing.

What to Look for This Week

This week is action-packed with housing data, the Fed, and inflation. We will get New Home Sales, Pending Home Sales, The Case Shiller Home Price Index, GDP, a Fed Meeting, and the Fed’s favorite measure of inflation, Personal Consumption Expenditures. We expect the housing reports to continue to show strength and for sales to accelerate. The Fed meeting, PCE report, and GDP can all impact the markets and will need to be followed closely.

Technical Analysis Breakdown

Mortgage Bonds continue to contend with overhead resistance at 101.904, which has proven to be a tough ceiling. This level put a lid on Bonds last week and must be watched closely because if Bonds are pushed lower, there is a long way down until the next floor of support. If Bonds can make a convincing break above 101.904, it will be a significant move and positive sign for rates. A move higher in Bonds above this level will likely coincide with a move lower in Stocks.

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