The Little-Known Reason Why Mortgage Rates Are Rising This Week (And Why They May Go Higher Still)

After starting the week with a run lower toward 5 percent, mortgage rates have reversed course. 

It started mid-day Tuesday and the culprit is Basic Economics.  Here’s why.

Mortgage rates are based on the price of mortgage-backed bonds and — like most things — mortgage-backed bonds prices are based on Supply and Demand. 

When bond supplies grow faster than the corresponding demand for them, bond prices tend to fall and when bond prices are down, bond yields are up.

Meanwhile, this week, the U.S. Treasury is making its largest weekly auction in history.  $115 billion in new debt, to be exact.  This means that before the week is through, $115 billion in new bond supply will have been introduced into the market and — so far — demand hasn’t kept pace with the new supply.

Prices are plunging.

For home buyers and rate shoppers, this is especially bad news because mortgage-backed debt is less desirable to investors than is treasury debt.  As a result, when treasury debt loses values, mortgage-backed debt tends to lose value, too.  Not always, but most of the time.

So, beginning with Tuesday afternoon’s auction, debt supplies have been growing faster than buyer demand. 

Bond markets are suffering from an abundance of debt supply and it’s been a big reason why mortgage rates are rising.  The week’s not over yet, either.  $28 billion is due for auction Thursday. 

If demand at the auction is similarly low, watch for mortgage rates to spike again.

Using The Case-Shiller Index To Predict The End Of The Recession

For May, the Case-Shiller Index showed home values up in 15 of its 20 tracked U.S. markets.  It’s the first time in nearly 3 years that the index showed such strength and a signal that home prices may be turning higher for good.

According to a Case-Shiller Index spokesperson, “this could be a signal that home price declines are finally stabilizing.”

However, just because the Case-Shiller Index indicates home values are stabilizing, doesn’t necessarily make it true.  Real estate is a local phenomenon and the Case-Shiller Index tracks just 20 U.S. cities. 

Residents of every other town are unaccounted for.

Additionally, even within the 20 tracked cities, there are distinct neighborhoods and pockets that are under-performing the general market — just as there are those that are over-performing.  The Case-Shiller Index can’t get that granular.

Despite its imperfections, the Case-Shiller Index remains a helpful, broader measurement of U.S. real estate.  Economists believe that housing led the U.S. into the recession and they believe housing will lead us out, too.

If that’s true, May’s figures are the next step in the right direction.

More Housing Strength : New Home Sales Surge In June

Once again, the housing market is showing that its worst days may be over.

According to the Census Bureau, the number of new homes sold in June leapt by 11 percent from the month prior. It stands as the biggest one-month jump in 8 years.

A “new home sale” is when a home in any stage of construction — not yet started, under construction, or already completed — goes under contract, often with a builder. It’s the opposite of an “existing home sale”.

In addition to surging sales, the monthly supply of new homes fell to its lowest level in 11 years.

Because home values are based on the relative supply and demand for a particular home in a particular area, anytime that demand for homes grows faster than supply, we would expect prices to rise.

Indeed, that’s what we’ve been seeing. The combination of low interest rates, seller-paid incentives and a first-time home buyer tax credit is bringing buyers into the market faster than new supply can come online. It’s one reason why home prices have stopped falling across many parts of the country.

It’s also why home buyers may find it tougher to get “a good deal” in real estate later this year and into 2010. If demand stays high and supplies fall further, sellers should regain the upper-hand in contract negotiations.

Home Supply Falls To An 8-Month Low

The national home supply is falling, down to its lowest levels since December 2008.

In June, there was 9.4 months of supply, down from a year-ago level of 11.0 months.  It’s one more sign that the housing market may be mending itself.

Housing supply is an important metric because home values across every U.S. market are rooted in Supply and Demand.  When the supply of available homes outpaces buyer demand, home values tend to fall.  And, by contrast, when homes are relatively scarce, values tend to rise.

We’re still a long way from historical averages, but dwindling home inventory may be one reason why the national median sale price rose by $7,000 last month. 

A reduction in inventory may also explain why two other popular home value metrics — the government’s Home Price Index and the private-sector’s Case-Shiller Index — are each showing signs of a rebound, too. 

However, before we get too excited, it’s important to remember that home sales of late have been spurred by low mortgage rates and by the First-Time Home Buyer Tax Credit.  A real estate trade group says first-timers represent 29 percent of the market, for example.

But so long as rates remain low and buyer stimulus is in place, we can expect that the recent trends in real estate will continue.  Inventory should continue to drop and prices should start to rise. 

Therefore, if you’re planning to buy a home in the next 12 months, buying sooner rather than later may be a smart way to save on your next home.

The Home Price Index Shows That Home Values Increased In May

Home values around the country appear to be leveling.

The Federal Housing Finance Agency’s latest Home Price Index report shows values up by nearly 1 percent in May versus the month prior.

Since peaking in April 2007, values remain off by 11 percent nationwide.

The FHFA Home Price Index is an interesting metric.  Different from the Case-Shiller Index which collects data from just 20 U.S. markets, the Home Price Index reflects every U.S. home that backs a mortgage sold to Fannie Mae and Freddie Mac.

In this sense, the FHFA Home Price Index is more “national” than the Case-Shiller Index but the HPI has its flaws, too. 

The House Price Index specifically excludes from its measurements the sales price on any home purchase with any of following traits:

1. Is new home construction
   
2. Is a multi-unit property
   
3. Is financed by an entity other than Fannie Mae or Freddie Mac

Because of these exclusions, some analysts say the report is incomplete.  The same could be said of every method of home valuation, however. 

Therefore, what’s most important to today’s home buyers and sellers is that each of the “popular” home valuation reports shows similar patterns.  Home prices appear to have stopped falling and may be even starting to recover.

It won’t be for a few years that we’ll be able to look back and point to the exact month that real estate bottomed. Nevertheless, considering how the data has presented as of late, it’s reasonable to think that we’ve already hit it.  Certainly, that’s what the Home Price Index suggests. 

For a region-by-region breakdown of the Home Price Index, visit the FHFA website.

Mortgage Rates Drop On Ben Bernanke’s “Exit Strategy”

Mortgage markets rallied Tuesday while Fed Chairman Ben Bernanke gave his semi-annual testimony to Congress.

By the time the day was over, some conforming mortgage rates were down by as much as 0.250 percent.

One of the leading causes for the market rally was Chairman Bernanke revealing an “exit strategy” from its massive market stimulus. 

Until Tuesday, the Fed hadn’t gone into much depth about means and methods by which it would unwind its interventions.  In addition to penning a widely-read Op-Ed piece in the Wall Street Journal Tuesday, Bernanke testified to Congress that the Federal Reserve has a viable “exit strategy”.

Wall Street was pleased to hear it. 

The specter of long-term inflation has spooked the mortgage markets off-and-on since the start of the year.  It’s one of the reasons why mortgage rates have been so jumpy, and why they crossed 6 percent last month.  Inflation is terrible for mortgage markets.

So, with the fear of inflation subsiding — at least temporarily — mortgage rates sunk Tuesday. 

With any bit of luck, momentum will carry rates lower today and through the rest of the week.  But, don’t get greedy.  Mortgage markets are notoriously fickle and one “bad” statement from the Fed Chairman could cause rates to rise right back up.

Bernanke’s complete Tuesday testimony can read online at the Federal Reserve website.

Housing Starts Make Its Largest Leap Since 2004

Housing Starts soared in June, thumping analyst expectations for the second straight month.

A “housing start” is a new home on which construction has started.  Last month’s jump in single-family starts is the largest one-month jump since 2004.

To Wall Street, June’s figures are the latest signal that the country’s housing markets may be on the mend.

For home sellers, however, the news may not be so rosy.  With more homes expected to come on the market, price competition among sellers could intensify and — all things equal — that would push sales prices lower.

So far in 2009, that hasn’t happened. 

As home supply has grown, it’s been met by off-setting buyer demand.  Spurred by low mortgage rates and an $8,000 first-time homebuyer tax credit, Americans appear to find today’s home buying conditions somewhat ideal. 

As a result, purchase activity has been strong and first-time home buyers now account for close to 30 percent of existing home sales.

Rising Housing Starts can be a double-edged sword.  It shows strength that builders are more optimistic about the economy, but too much optimism can lead to a glut of unsold homes and that could reverse the recovery’s momentum.

The First-Time Home Buyer Tax Credit : Use It By December 1, 2009 Or Lose It

The government’s First-Time Home Buyer Tax Credit expires December 1, 2009. 

If you expect to use the program in conjunction with a home purchase, therefore, you may want to consider yourself officially “on the clock”. 

Assuming a 60-day window between contract and closing, there are now 77 days left to find a home and go under contract for it.

The First-Time Home Buyer Tax Credit refunds up to $8,000 at Tax Time for qualified home buyers.  A few of the program’s qualification criteria include:

• Home buyer must not have owned a primary residence in the past 36 months
  
• The home may not be purchased from a family member
  
• The household adjusted gross income must be below $95,000 for single tax filers and $170,000 for joint tax filers

The tax credit itself is limited to $8,000 or 10% of the purchase price, whichever is less. 

Remember, though: The refund is a true tax credit — not a deduction.  This means that a taxpayer owing $8,000 to the IRS and claiming the $8,000 First-Time Home Buyer Tax Credit would owe the IRS nothing on April 15, 2010.

The complete list of qualifying criteria is posted on the IRS website.

Foreclosures Still Concentrated In Just A Few States

For the fourth consecutive month, the country’s foreclosure activity was dominated by a small number of states.

As reported by RealtyTrac.com, more than 50 percent of the country’s foreclosure-related actions in June concentrated in just 3 states:

1. California
   
2. Florida
   
3. Nevada

The states rounding out the Top 10 include Arizona, Georgia, Michigan, Texas, Ohio, Illinois and Colorado.

Meanwhile, June’s reported foreclosure figures are consistent with the data from earlier this year, suggesting that the foreclosure remedy plans put forth by the government and by lenders can barely keep pace with the national default rate.

Foreclosure-related actions nationwide are up 5 percent from May.

The silver lining in data this negative is that foreclosures are creating tremendous buying opportunities for the right buyers.  Because foreclosed homes tend to sell at a discount versus non-foreclosed homes and because mortgage rates are low, home sales are showing strength in a multitude of markets because of ample supply at relatively cheap prices.

Distressed homes accounted for one-third of all existing home sales in May.

Search the complete June 2009 foreclosure report for yourself, including foreclosure heat maps and other trends on the RealtyTrac website.

Fannie Mae Restricts 2-Unit Borrowing

For the first time in nearly six months, Fannie Mae is imposing strict, new guidelines on American homeowners. 

This time, the hardest hit demographic is owners of 2-unit homes.

In its official announcement, Fannie Mae listed the following changes to its 2-unit financing programs, separated by occupancy type.

Primary Residence

• Purchase: Maximum loan-to-value drops to 80%; FICO minimums reset to 640.
  
• Rate-and-Term Refinance: Maximum loan-to-value drops to 80%; FICO minimums reset to 640.
  
• Cash Out Refinance: Maximum loan-to-value drops to 75%; FICO minimums reset to 680.

Investment Property

• Purchase: Maximum loan-to-value drops to 75%; FICO minimums reset to 660.
  
• Rate-and-Term Refinance: Maximum loan-to-value drops to 75%; FICO minimums reset to 660.
  
• Cash Out Refinance: Maximum loan-to-value drops to 70%; FICO minimums reset to 680.

With Fannie Mae’s new loan-to-value limits falling by as much as 15 percent, it’s a certainty that fewer 2-unit homeowners will be approved in the mortgage process.  This could slow both purchase and refinance activity in the coming months.

The good news, though, is that while Fannie Mae recommends that lenders institute the new policy immediately, September 1, 2009, is the “effective date”.

Therefore, if you plan to buy a 2-unit home, or if you own one and know you’ll need to refinance it soon, it may be a good idea to move up your timeframe. 

Lenders could implement the new guidelines at any time and usually do so without warning.