![Why We Could Get Negative Interest Rates Even Though The Fed Is Hiking]()
by LLT | Apr 4, 2017 | LLT, News
At its March meeting, the Federal Reserve raised interest rates by 0.25%. In doing so, it hiked rates for only the third time since 2006. However, in a strange turn of events, the Fed’s move was perceived as a dovish one by the markets.
That’s because even with inflation at its highest level since 2012, the Fed said monetary policy will remain accommodative “for some time.” As has been the case in the past, the Fed is willing to let inflation consolidate above its 2% target before embarking on a more aggressive tightening path.
This willingness to let inflation “run hot” means even as nominal rates rise, real rates—that is, the nominal interest rate minus inflation—are headed into negative territory.
So what are the implications of negative real rates?
Negative Real Rates Drive Gold Higher
The consumer price index (CPI), the most widely used measure of inflation, averaged 2.67% for the first two months of the year. Even if inflation averaged only 2% for all of 2017—the Fed’s target—it would be a big problem for investors and savers alike.
Today, a one-year bank CD pays about 1.4%. Therefore, anyone who keeps their money in a bank is watching their purchasing power erode.
Of course, there are other options. You can put your money in U.S. Treasuries or dividend-paying stocks—both popular sources of fixed income.
However, with both the 10-year Treasury yield and the average dividend yield for a company on the S&P 500 hovering around 2.35%, that doesn’t leave much in the way of real gains if inflation is running at 2% per annum.
If inflation rises or bond yields fall, real interest rates will be pushed into the red… and that’s very bullish for gold.
Gold is known as the yellow metal with no yield, but simple math tells us no yield is better than a negative one. Because of this, gold has done well when real rates are in negative territory. In fact, real US interest rates are a major determinate of which direction the price of gold moves in.
A study from the National Bureau of Economic Research found that from 1997–2012, the correlation between real U.S. interest rates and the gold price was -0.82.
This means as real rates rise, the price of gold falls and vice versa. A -1.0 reading would be a perfect negative correlation, so this is a tight relationship.
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by LLT | Apr 3, 2017 | LLT, News
Continued increases in home prices is driving a the strongest equity market in a decade, according to the latest Mortgage Monitor Report by Black Knight Financial Services. The report, looking at February numbers, found that appreciation nationally has generated $4.7 trillion in equity available to borrowers, the highest it’s been since 2006.
Appreciation is also having a profound effect on the number of underwater borrowers, Black knight reported. An annual home price appreciation of 5.5 percent in 2016 helped raise number of U.S. mortgage holders with tappable equity to 39.5 million. Two thirds of that equity belongs to borrowers with current interest rates below today’s 30-year interest rate, and 78 percent belongs to borrowers with credit scores of 720 or higher.
Overall, Black Knight reported, the total U.S. loan delinquency rate in February was 4.21 percent, a 1 percent drop from January. Mississippi, Louisiana, Alabama, West Virginia, and New Jersey had the highest rates of delinquency; Idaho, Montana, Minnesota, Colorado, and North Dakota had the lowest.
Ben Graboske Black Knight executive vice president for Black Knight’s Data & Analytics division, said that the current equity landscape, in conjunction with a higher interest rate environment, will likely affect mortgage lending trends over the coming year.
“December 2016 marked 56 consecutive months of annual home price appreciation,” Graboske said. “That served to not only lift an additional one million formerly underwater homeowners back into positive equity throughout the year, but also increased the amount of tappable equity available to U.S. mortgage holders by an additional $568 billion.”
The nearly 40 million homeowners with tappable equity have current combined loan-to-value ratios of less than 80 percent, Black Knight reported. And cash-out refinance data suggests that they have been increasingly tapping that equity, though perhaps more conservatively than homeowners had in the past.
In Q4, $31 billion in equity was extracted from the market via first lien refinances. While that was the most equity drawn in over eight years, borrowers are still tapping equity at less than a third of the rate they were back in 2005, and they’re doing so more prudently. Post-cash-out loan-to-value-ratio was 65.6 percent, the lowest on record.
However, Graboske said, prepayment speeds, historically a good indicator of refinance activity, have dropped by nearly 40 percent since Jan.1, in the face of today’s higher interest rate environment.
“The last time interest rates rose as much as they have over the past few months, we saw cash-out refinances decline by 50 percent, but rate-term refinances decline by 75 percent,” he said. “Based on past behavior, we may see a decline in first lien cash-out refinance volume, but it’s still likely that cash-out refinances‒‒and purchase loans‒‒will drive the lion’s share of prepayment activity over the coming year in any case.
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![Why We Could Get Negative Interest Rates Even Though The Fed Is Hiking]()
by LLT | Mar 31, 2017 | LLT, News
Mortgage rates tumbled for the second week in a row as long-term bond yields fell to their lowest level in a month.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average slid to 4.14 percent with an average 0.5 point. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 4.23 percent a week ago and 3.71 percent a year ago.
The 15-year fixed-rate average dropped to 3.39 percent with an average 0.4 point. It was 3.44 percent a week ago and 2.98 percent a year ago. The five-year adjustable rate average slipped to 3.18 percent with an average 0.4 point. It was 3.24 percent a week ago and 2.90 percent a year ago.
The failure by the House of Representatives to pass health-care legislation last week fueled the move by investors from stocks to bonds, driving down yields. The yield on the 10-year Treasury fell to 2.38 percent Monday, its lowest level since late February.
Because mortgage rates tend to follow the movement of long-term bonds, home loan rates also dropped.
Rates aren’t expected to move much in the coming week. According to Bankrate.com, which puts out a weekly mortgage rate trend index, nearly two-thirds of the experts it surveyed say rates will remain relatively stable, moving up or down less than two basis points. (A basis point is 0.01 percentage point.) Logan Mohtashami, a senior loan officer with AMC Lending Group, is one who predicts home loan rates will hold steady.
“Once again we are in a tight range for the bond market from 2.27 percent to 2.62 percent and we haven’t broken either level once,” Mohtashami said. “Pricing for rates will stay in the same range until something on the macroeconomic side or headline side gets us over or under this channel in yields for the 10-year [Treasury].”
In addition to lower mortgage rates, which increases affordability, more good news arrived for the housing market this week. Pending home sales were up 5.5 percent in February, according to the National Association of Realtors. New-home sales also rose last month.
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by LLT | Mar 30, 2017 | LLT, News
Seniors are sitting on trillions of dollars in equity, according to the National Reverse Mortgage Lenders Association (NRMLA). The association reported that retirement-aged homeowners saw an increase of 2.8 percent in home equity, or $170.7 billion, in Q4 2016. This puts their total housing wealth at $6.2 trillion.
Home values for homeowners aged 62 and older in Q4 2016 grew by 2.4 percent, according to the NRMLA/RiskSpan Reverse Mortgage Market Index. The index reports an all time high of 221.75, and a year-over-year increase of 9 percent.
“The strong RMMI in the fourth quarter of last year shows that home equity continues to be a valuable asset for homeowners 62 and older,” said NRMLA President and CEO Peter Bell. “It’s time for consumers to study what it means to have home equity and to learn about its strategic uses, including how it can be used to support retirement goals.”
Despite the increase in equity and value, seniors are unwilling to tap into it. Fannie Mae’s National Housing Survey found that 37 percent of senior homeowners feel concerned for their finances in retirement, and only 6 percent of seniors are interested into tapping into their home equity to address these concerns.
The low rate of equity access through mortgage products among seniors may be due to a desire to stay out of debt, or the increased number of seniors who stay in the workforce into old age. Additionally, poor financial literacy and complexity as well as the high costs of some mortgage products may steer seniors away from such products. These factors combined have led to a large, untapped amount of wealth.
Research from the National Council on Aging (NCOA) and the Center for Retirement Research (CRR) at Boston College both show that seniors are not willing to consider their housing wealth as a financial resource in retirement. Seniors require extra knowledge of home equity tools, such as reverse mortgages.
Read the full article.
by LLT | Mar 29, 2017 | LLT, News
Zillow, Quicken Loans, First American and others weigh in
The latest S&P CoreLogic Case-Shiller Indices showed that home prices hit a 31-month high in January, but will those record prices be a speed bump or a brick wall for home buying moving forward?
Opinions appear to be a bit mixed in that regard, with some analysts viewing January’s data as a significant drawback for certain segments of the home-buying market, while others say the rising prices aren’t a concern, yet.
Case in point: Zillow Chief Economist Svenja Gudell said the rising prices won’t impact home buying, but another factor could dampen 2017’s prospects – rising interest rates.
“Today’s Case-Shiller data showed continued growth in home prices, but don’t account for the millions of home shoppers nationwide who pushed the start of their home shopping efforts into February and early March, hoping to get a jump on their competition in the face of persistently low inventory,” Gudell said Tuesday.
“By now, the familiar dynamics driving the U.S. housing market to new heights – namely, high demand from home buyers and limited supply of homes for sale – are well-entrenched, and the next few months look to be as competitive and fast-moving as ever,” Gudell continued.
“Over the long term, the prospect of rising mortgage interest rates looms large over the market. Rising rates may cool rapid home price growth – especially in more-expensive coastal markets – but will also dent overall home affordability,” Gudell added. “But rates are rising slowly and what inventory is available continues to fly off the shelves. Nobody should expect these overall market forces to shift meaningfully overnight.”
Trulia’s senior economist, Cheryl Young, said that the impact of rising prices and rising rates will really be felt by would-be, first-time buyers.
“There is little sign of relief from high home prices as we enter the spring home-buying season. The tough buying market is characterized by competition driven by low inventory and challenges for first-time homebuyers as prices outpace income growth,” Young said.
“Low inventory continues to drive prices higher and indicates spring home-buying season will be a challenge for first-time homebuyers,” Young continued.
“Mortgage rates are trending lower than expected despite the Fed rate hike earlier this month,” Young said. “This points to uncertainty in the financial markets, which will continue to color mortgage rate performance and keep home prices tracking higher.”
Quicken Loans Vice President Bill Banfield said the latest data just continues the ongoing story of the housing market these days.
“Home prices continue to reach new heights, propelled by the lack of available housing,” Banfield. “This is the narrative we have heard many times, and it is likely to continue until construction increases and provides more options to both move-up and first-time buyers.”
On the other hand, First American Chief Economist Mark Fleming suggested that January’s house price data and the specter of rising interest rates won’t actually impact home buying because houses will remain affordable even as prices and interest rates rise.
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by LLT | Mar 28, 2017 | LLT, News
Steve Murray sometimes gets together with other old-timers in the real estate industry, shares some wine and inevitably gets around to remarking, “I sure would’ve thought it would’ve changed more by now.”
Murray, president of consulting firm Real Trends, has been tracking for 40 years how U.S. real estate agents do their jobs. And over the past decade, the Internet has disrupted almost every aspect of a transaction that sits at the core of the American Dream. Everyone now has free access to information that used to be impossible to find or required an agent’s help.
But as a new home-buying season kicks off, one thing remains mostly unchanged: the traditional 5-to-6-percent commission paid to real estate agents when a home sells.
While the Internet has pummeled the middlemen in many industries — decimating travel agents, stomping stock-trading fees, cracking open the heavily regulated taxi industry — the average commission paid to real estate agents has gone up slightly since 2005, according to Real Trends. In 2016, it stood at 5.12 percent.
“There’s not a shred of evidence that the Internet is having an impact,” Murray said, sounding like he almost can’t believe it himself.
The stickiness of the real estate commission is a source of fascination for economists and curiosity for consumers who are doing an increasing share of the home-buying legwork themselves online. It also offers potential lessons for workers in other industries worried about the Internet’s destructive powers. The Web has changed how agents hustle for a share of the estimated $60 billion paid each year in residential real estate commissions. But it hasn’t taken their jobs. In fact, the number of agents has grown 60 percent in the past two decades.
It wasn’t supposed to be like this.
Consider the title of a 1997 article in the Journal of Real Estate Portfolio Management: “The Coming Downsizing of Real Estate: The Implications of Technology.”
In the mid-2000s, the arrival of real estate tech start-ups like Zillow, Redfin and Trulia spurred a fresh dose of anticipation. “Realtors’ sacrosanct commission rates of 6 percent may be in danger,” warned “60 Minutes” in 2007. Jeff Jarvis, a City University of New York professor who examines the Internet’s effects, wrote a 2006 blog post predicting, “Real estate agents are next.”
Agents thought so, too.
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At its March meeting, the Federal Reserve raised interest rates by 0.25%. In doing so, it hiked rates for only the third time since 2006. However, in a strange turn of events, the Fed’s move was perceived as a dovish one by the markets.
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