Up a little, down a little, so go rates. If the employment data from Friday is any indication of the strength of the U.S. economy, maybe rates won’t be in a big hurry to head higher. Employers added far fewer jobs (113k) than expected in January with the prior month barely revised up. In an interesting twist, construction added the largest increase in jobs in almost seven years indicating the recent storm may not be as impactful as previously thought, and the private sector accounted for all the hiring as government payrolls fell 20,000. The unemployment rate (6.6%) is now at a five-year low as market participation increased to 63 percent. Additionally, policy makers have made it clear that they will not be raising rates anytime soon even if the unemployment benchmark is met.
Despite the steep rise in rates in 2013, the average rate for the entire year of 4.25% is the second lowest on record next to 2012′s 3.75%. The previous 3 years were each roughly 0.25% higher and 2008 was roughly a full 1.0% higher than that. To make this easier to understand here is a breakdown of the average rates over the last 6 years:
2008 – 6.0%
2009 – 5.0%
2010 – 4.75%
2011 – 4.5%
2012 – 3.75%
2013 – 4.25%
A mixed outlook for housing in 2014; recent forecasts from NAR, the MBA and others have been calling for a slowing in sales next year but new construction of homes is expected to improve. Continued increases in mortgage rates are more than likely in 2014 with the Fed reducing its monthly bond and mortgage purchases, but according to Zillow and Zelman Assoc. new construction is expected to increase along with the value of homes in 2014. Prices however are not expected to increase as rapidly as this year according to Zillow; it is projecting an increase of 3.0% in prices in 2014 versus the 5.2% increase this year. Zillow’s forecast is less than 110 economists the company surveyed, their average increase was 4.3%. If we had to choose between Zillow’s forecast and economists’’ forecasts we would line up behind Zillow; economists generally don’t do well with forecasts. 2014 will see less n re-finances as rates increase; foreclosures and short sales also declining. There is a little hope that underwriting may be less restrictive in 2014 but we don’t see much relaxation. More regulations and continued legal suits and massive settlements that banks are paying for the home market crash will keep credit tight and hamper the market’s potential improvements.
What Taper? The Fed’s announcement of tapering QE is having little immediate effect on our mortgage rates, in part because of the lackluster economic data we are simultaneously receiving. More decline in the housing sector, now down for three consecutive months. Sales in Nov fell 4.3%, twice what was thought, to 4.9 mil; yr/yr down 1.6% the first decline in 29 months. Since mortgage rates began to increase sales have slipped, partly because of a lack of inventories but there is more to it. Although the Fed believes the economy is improving (the data overall has been better) and employment is improving (slightly), consumers remain cautious and don’t have a lot of incentive to buy or move with uncertainty still running at high levels. The housing sector led the economic recovery with very low interest rates, now and into 2014 the sector is likely to lag other sectors. MBA reported Wednesday that re-finance still amount to 65% of all apps. Not encouraging as refi’s will ebb as interest rates increase.
True, the economy is improving and the Fed was correct in beginning the tapering, but the pace of improvement for most Americans is very slow. We believe the Fed will not taper again at the January FOMC meeting; although Bernanke and Yellen are talking the talk when Dec data is reported most will not be as strong as expectations are presently, and the Fed won’t walk the walk. Maybe it is a seasonal decline but until inflation increases consumers do not have that motivation to increase purchases. Beside the economic outlook, in January Congress has to face the debt ceiling; the budget deal after the mess in October went off smoothly on the surface, the debt ceiling isn’t likely to go as smooth, another headwind for consumers having to hear and witness the inability to govern effectively in a bi-partisan manner.
Government-run Fannie Mae and Freddie Mac will raise the fees they charge mortgage lenders for guaranteeing new loans in March to encourage private firms to wade back into the housing finance market. The so-called guarantee fees that the two taxpayer-owned companies charge lenders will increase by an average of 10 basis points, or one-tenth of one percent, their regulator said in a statement. Increasing the fees will make loans backed by Fannie Mae and Freddie Mac more expensive, making it easier for private sources of capital to compete.
The government wants to reduce the burden on taxpayers of running the two companies and have private companies take their place in a market they largely abandoned during the financial crisis. Edward DeMarco, acting director of the Federal Housing Finance Agency, which regulates the firms, said the fee increases are needed to shrink the footprint of the two companies. “The price changes provide better protection of and return to taxpayers, who are providing the capital support that keeps these companies operating,” he said. “These changes should encourage further return of private capital to the mortgage market.”
Fannie Mae and Freddie Mac have received $187.5 billion in taxpayer aid since they were taken over by the government in 2008 as soured loans threatened their solvency. They have paid about $185.2 billion in dividends to the government for that support. The fees they charge to guarantee principal and interest have almost doubled since 2009, a policy the regulator has used to dampen Fannie and Freddie’s footprint in the mortgage market. The FHFA said Fannie Mae and Freddie Mac will also alter pricing frameworks used to assess credit risk and, in most markets, eliminate an up-front 25 basis point “adverse market” fee they have been charging since 2008. They would still charge the fee in New York, Florida, New Jersey and Connecticut, where foreclosure costs remain elevated. Taken together, all the steps would produce an average fee increase of about 11 basis points, it said.
The Federal Housing Administration (FHA) will drop the maximum size of home-mortgage loans that it will guarantee beginning next month in nearly 650 counties, the agency said Friday. The maximum for single-family homes in certain “high-cost” housing markets including Los Angeles, Orange County, San Francisco and New York will fall to $625,500, from the current level of $729,750.
The FHA’s loan limits vary by county and are calculated using certain formulas that are pegged to local median home values. Click HERE to find the FHA loan limits in your county. Loan limits are as low as $271,050 in the nation’s least expensive housing markets and as high as $625,500 in the most expensive ones. Previously, the FHA could back mortgages up to 125% of the median home price for a given county. Beginning next year, the FHA will only back loans up to 115% of the area median price. That will take the loan limit for San Bernardino, Calif., for example, to $355,350 next year from $500,000 on a single-family home. Limits in Chicago will fall to $365,700 from $410,000.
The FHA has experienced heavy losses as a result of loans it guaranteed as the housing downturn deepened, and earlier this year it received a $1.7 billion infusion from the U.S. Treasury, the first in the agency’s 79-year history. Officials have repeatedly boosted insurance fees charged to borrowers in a bid to replenish reserves. Fee increases have made private-mortgage insurance options more competitive, and the FHA has witnessed volumes decline this year. Officials said Friday that the loan limit declines, which had been largely anticipated, would help the agency reduce its role in the market.
The FHA limits are separate from those used by Fannie and Freddie, which have a national loan limit of $417,000 but will buy loans as large as $625,500 in more expensive housing markets. Click HERE to find the Fannie Mae & Freddie Mac loan limits in your county. The regulator of the two mortgage-finance giants had said earlier this year that it might drop both the national limit and the high-cost limit, but said last week that it wouldn’t proceed with those declines for now.
The Federal Reserve needs to be more aggressive in providing detail on what would lead it to eventually raise interest rates in order to prevent uncertainty among investors that could rile markets and hurt the economic recovery, a top Fed official said on Tuesday. In an interview with Reuters, John Williams, president of the San Francisco Federal Reserve Bank, said the central bank needed to do more to convince investors that rates will stay low long after the Fed stops buying bonds. It should not wait to twin that message with a decision on cutting back its bond-buying stimulus, he said. But once the Fed decides the economy is strong enough for the Fed to reduce its $85 billion in monthly bond purchases, it should announce an end date and a purchase total for the program, Williams said.
For now, he said, the Fed must drive the message of continued support for the economy. “My view would be that we would not be raising the funds rate even if the unemployment rate was below 6.5 percent as long as inflation continued to be low, for some time,” Williams said. “We need to be communicating more about the post-6.5-percent world now, because it could be with us much sooner than we expect, and I don’t want market participants to be surprised.”
Although both Fed Chairman Ben Bernanke and Vice Chair Janet Yellen have emphasized that a fall in unemployment to below 6.5 percent will not trigger rate hikes, neither has offered clear guidance on what would. Yellen is expected to soon win Senate confirmation to become Fed chief when Bernanke’s term expires on January 31. “We could be a little more concrete about what we are going to be looking for liftoff,” Williams said. “We’re really going to be looking obviously for not only improvement in the labor market, but looking for continued growth.”
The goal, he said, is that people understand the Fed is “not in a rush” to raise interest rates. For his part, he said, he does not expect rates to rise until the latter part of 2015.
U.S. policymakers have fretted about how markets reacted earlier this year to signals that the Fed was preparing to reduce its monthly bond purchases. Investors pushed up borrowing costs so fast that Fed officials worried they could undercut the still-fragile recovery. An opposite but equally sharp reaction was seen in September when the Fed unexpectedly decided not to taper bond-buying, causing investors to push borrowing costs back down. “The market swings way too much both ways,” Williams said. “I wish in September we could have had some way of showing that any movement towards tapering is not an action that starts a whole tightening process. … You can taper and still plan to keep interest rates low for a very long time.”