August 4, 2020
Rates continue to remain near historic lows, driving purchase demand over 20 percent above a year ago. Real estate is one of the bright spots in the economy, with strong demand and modest slowdown in home prices heading into the late summer. Home sales should remain strong the next few months into the early fall.
At American Pacific Mortgage, we are focused on purchase business. It comes first and takes priority over any other financing we offer. Our turn times are strong and highly competitive. Have a deal that needs to close quickly and on time? Call me.
Now, if you or any of your clients, friends, family members or colleagues are considering a refinance, I want to share a perspective with you. Rates have been dropping based on what’s happening in the equity sector (poor performance and volatility), which leads to money moving towards the safety of the bond markets and specifically, mortgage backed securities. The latter being where mortgage interest rates are mostly born. That the Federal Reserve Board has committed so much money to purchasing these bonds (billions per day for months) has only bolstered increased demand for these instruments and kept interest rates for home loans low.
That’s terrific news for those of us looking to purchase or refinance, right? It is but the party may be coming to lull. What I mean by that is demand so high right now for home loans due to low rates that it might be tough for them to go much lower because most lenders are experiencing huge volume.
Lowering rates further would only tax their production further. So, while rates look to be continuing their downward trend based on market dynamics, we may not see that translate to what is available in the market. This is sort of what happened back in March—rates drop, everyone rushes in to refinance or scoop up cheap money for a purchase and the banks are flooded with loan volume. Some other important things like liquidity played a strong role at that time but this is generally what happens when a wave of volume hits the system.
At that time, many lenders chose to keep rates from going lower because they had so much business already that it would have been bad business to accept more than what they already had in the pipeline.
I know this sounds weird but consider going to your favorite restaurant and it is packed (yeah, I remember those days too and miss them, just like you). The host tells you that your table will be ready shortly. Starving and excited about what you are going to order, you grab a seat in the waiting area, only to find out after waiting for over an hour for your table that the wait is going to be longer! Wouldn’t you be furious, if not down-right hangry? Yeah. Same.
It’s a long way around to simple statement: If you want to purchase a home or refinance your existing mortgage and you’re waiting for the market to “bottom out”, you just might miss that mortgage with a 2 in front of it.
As a smart guy I know says regularly, “timing the market is nearly impossible.” Does that mean you can’t hit the bottom? No! But you must have your loan application submitted and all your docs in so that when you find your dream home or the rates meet your refinance objectives, you can lock in that really low rate. So, stop trying to time the market and let’s go get you a home or refinance your current loan! CALL ME!!
A Word on Employment Benefits
This was shared with me from an economist that I follow, and I thought it was a refreshing approach to resolving the unemployment benefits that so many folks are depending on these days.
“Rather than dramatically slashing the extra $600/week in unemployment benefits coming from Congress, which is slightly reducing labor supply, do the following: Reduce the rate by $120/week for each percentage point decline in the state unemployment rate. If unemployment is 11% or higher, the benefit is $600/week, at 10% the benefit is $480/week, at 9% it is $360, and when the unemployment rate hits 6%, the benefit falls to zero.”
Week of July 27th, 2020 in Review
Initial Jobless Claims rose for a second week in a row, as another 1.434 million people filed for unemployment benefits for the first time during the week ending July 25. This was about 12,000 claims higher than the previous week and reflects a pause in re-opening in some states and the exhaustion of Paycheck Protection Program (PPP) funds. Continuing claims, which measure people who continue to receive benefits, also increased.
The much-anticipated advanced or first look at second quarter GDP was reported at -32.9%. Though this was a little better than the -34.7% expected, it was the worst reading on record. Based on this decline, we will need to see a 50% gain in GDP to get back to where the economy was before the pandemic began.
There was some good news from the manufacturing sector as the Chicago PMI (which measures the health of manufacturing activity in that region) came in better than expected at 51.9. Readings above 50 indicate expansion while readings below 50 indicate contraction.
The housing sector delivered some positive news as well, with Pending Homes Sales up 16.6% in June after rising 44.3% in May. The report reflects signed contracts on existing homes in June, and a 16.6% gain speaks well for future existing sales. There was also an update from Case-Shiller on home appreciation, as detailed below.
The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.4% from May to June while also rising from 0.5% to 0.8% year over year. Core PCE, which strips out volatile food and energy prices, increased 0.2% in June while decreasing from 1.0% to 0.9% annually.
Core PCE is most important to the Fed and it is well below the Fed’s target of 2%. This does give the Fed cover to continue its asset purchases without the fear of inflation. More on last week’s Fed meeting and its statement regarding these purchases below. Also of note within the report, Personal Incomes fell 1.1% in June, while Personal Spending rose by 5.6%, marking a second straight month of increases.
Initial Jobless Claims Rise in the Latest Week
Another 1.434 million people filed for unemployment benefits for the first time during the week ending July 25, about 12,000 more than the previous week. This marked the second consecutive week of higher figures and reflects some states reclosing portions of their economy and the exhaustion of PPP funds. California (+249K), Florida (+87K) and New York (+85K) reported the largest gains.
Continuing claims, which measure people who continue to receive benefits, also increased from 16.79 million to 17.018 million.
In addition to the headline jobless claims figure, 830,000 Pandemic Unemployment Assistance (PUA) Claims were also filed in the latest week. PUA Claims represent people like gig workers and contractors who would not usually be approved for unemployment benefits. Continuing PUA Claims did improve slightly from 13.18 million to 12.4 million but are still extremely high.
All in all, the total amount of people receiving some type of benefits improved slightly from 31.8 million to 30.2 million. If we divide this total into the labor force of 160 million, there is likely a 19% unemployment rate.
Two Updates from the Housing Sector
The latest Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed that home prices nationwide rose 4.5% on an annual basis in May. This was a drop from the 4.6% year-over-year reading in April.
The 20-city Index decreased from 3.9% in April to 3.7% in May but considering the adversity that the housing market has faced due to the pandemic, these are still very strong appreciation figures. Part of the reason for the strong gains is a lack of supply, as the Existing Home Sales report for June showed that inventory is down 18% when compared to the same time a year ago.
Regionally, price gains in Phoenix, Seattle and Tampa continued to be the strongest in the nation. Phoenix posted a 9% year-over-year price increase, followed by Seattle with a 6.8% increase and Tampa with a 6.0% increase. Price gains were smallest in Chicago, New York and San Francisco.
On the sales front, Pending Home Sales were up 16.6% in June after rising 44.3% in May, which was just above the expected 15% gain. On an annual basis, sales were up 6.3% when compared to June of last year, after being down 5.1% annually in May.
The Pending Home Sales report is an important one because it reflects how many signed contracts on existing homes there were in June. The 16.6% gain speaks well for future existing sales.
Fed Willing to Do Whatever It Takes
The Fed held their regularly scheduled Federal Open Market Committee meeting last week and of note, Fed Chair Jerome Powell said that the Fed would be willing to do whatever it takes to foster maximum employment in efforts to return to pre-pandemic levels.
Powell said the Fed will continue to buy assets, including Mortgage Backed Securities, at least at the current pace. The Fed also said they would be willing to do more if they thought it would help.
This is significant because the Fed’s current purchases have been a stabilizing force in the markets. The Bond market took the Fed’s remarks as a positive sign that the Fed is going to be buying Mortgage Bonds for a long time.
What to Look for This Week
Monday brings news from the manufacturing sector, with the ISM Index reading for July. Then news on employment will dominate the headlines. The ADP employment report for July releases first on Wednesday. The latest Initial Jobless Claims will be reported as usual on Thursday, and we’ll be watching closely to see if claims rise for a third straight week. Friday brings the much-anticipated Bureau of Labor Statistics Jobs Report for July, which includes non-farm payrolls and the unemployment rate.
Technical Picture
The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities. Mortgage Bonds busted through resistance at 103.219 and broke above the next ceiling at 103.469 as well. Bonds are trading just below the next level of resistance at 103.70, which is the top of the recent rising trend line, so we must be on guard for a pullback from these high levels. Also keep in mind that Bonds are in overbought territory, so if there is a pullback it could be exacerbated. Yields on the 10-year broke beneath 0.54% and are now trading at 0.53%, which is another positive.