Lee Morof's Real Estate Blog

Mortgage bonds improved last week, pushing mortgage rates lower in Michigan and nationwide.

Positive economic news and strong housing data was trumped by ongoing Fiscal Cliff discussions on Capitol Hill.

The “Fiscal Cliff” is meant to represent January 1, 2013 — the date on which mandatory spending cuts are enacted by Congress and on which tax rates increases for many U.S. taxpayers.

Some analysts believe that if these two events are to occur simultaneously, it would derail the current U.S. economic expansion and revert the economy back into recession. That concern has spurred a flight-to-quality which has benefited mortgage bonds and, therefore, U.S. mortgage rates.

For example, last week, Freddie Mac reported the average 30-year fixed rate mortgage rate at 3.35 percent nationwide for borrowers willing to pay an accompanying 0.7 discount points plus a full set of closing costs. This is a 0.02 percentage point reduction from the week prior.

The average 15-year fixed rate mortgage rate was unchanged last week at 2.66 percent for borrowers paying an accompanying 0.7 discount points plus closing costs.

In this holiday-shortened week, mortgage rates may fade again.

Congress convened over the weekend in order to discuss the impending Fiscal Cliff, and ways to avoid it. Talks have been ongoing since this year’s election yet it appears unlikely that the simultaneous expiration will be avoided.

How this would affect the economy is unknown but mortgage markets would witness an immediate boost of demand, leading Bloomfield Hills mortgage rates lower. Conventional, FHA and VA mortgage rates would all likely benefit.

And then, Wall Street will turn its attention to Friday’s December Non-Farm Payroll report.

Mortgage rates are expected to make big moves upon the report’s release. This is because, earlier this month, the Federal Reserve said it would begin raising the Fed Funds Rate only after the Unemployment Rate reaches 6.5 percent. Currently, the Unemployment Rate is 7.7 percent. If December’s jobless rate slips, moving closer to the Fed’s stated target, mortgage rates are expected to rise.

Similarly, if the Unemployment Rate rises, mortgage rates are expected to drop.

The U.S. housing market continues to make home price gains.

Earlier this week, the S&P/Case-Shiller Index showed home prices gaining 4.3 percent during the 12-month period ending October 2012, marking the largest one-year gain in home prices since May 2010.

The Case-Shiller Index measures changes in home prices by tracking same-home sales throughout 20 housing markets nationwide; and the change in sales price from sale-to-sale. Detached, single-family residences are used in the Case-Shiller Index methodology and data is for closed purchase transactions only.

Between October 2011 and October 2012, home values rose in 18 of the 20 Case-Shiller Index markets, with previously-hard hit areas such as Phoenix, Arizona leading the national price recovery.

The top three “gainers” for the 12 months ending October 2012 were :

• Phoenix, Arizona : +21.7 percent
• Detroit, Michigan :  +10.0 percent
• Minneapolis, Minnesota : +9.2 Percent

Only Chicago and New York City posted annual home value depreciation. On average, homes lost -1.3% and -1.2% in value, respectively.

It should be noted, however, that the Case-Shiller Index is an imperfect gauge of home values

First, as mentioned, the index tracks changes in the detached, single-family housing market only. It specifically ignores sales of condominiums, co-ops and multi-unit homes. 

Second, the Case-Shiller Index data set is limited to just 20 U.S. cities. There are more than 3,000 cities nationwide, which illustrates that the Case-Shiller sample set is limited.

And, lastly, the home sale price data used for the Case-Shiller Index is nearly two months behind its release date, rendering its conclusions somewhat out-of-date.

That said, the Case-Shiller Index joins the bevy of home value trackers pointing to home price growth over the last year. The Federal Housing Finance Agency (FHFA), for example, reported similar home price growth with its October 2012 House Price Index (HPI).

Home values rose 0.5 percent between September and October 2012 nationwide, the FHFA said, and climbed 5.6 percent during the 12 months ending October 2012.

Economists attribute increasing home prices to higher buyer demand, record-low mortgage rates and the gradual improvement of the U.S. economy.

Mortgage markets worsened last week amid ongoing discussions budget and tax conversations in Washington, D.C., and the release of key housing and economic data.

Mortgage rates climbed in Michigan and nationwide.

Freddie Mac reported the average 30-year fixed rate mortgage rate at 3.37 percent nationwide for borrowers willing to pay an accompanying 0.7 discount points at closing, plus closing costs — an increase of 0.05 percentage points from the week prior.

The average 15-year fixed rate mortgage rate was listed at 2.65 percent nationwide with an accompanying 0.7 discount points plus a full set of closing costs.

With certain government funding and tax reductions set to expire December 31, legislators appear unlikely to avoid what’s been called the “Fiscal Cliff”. Some economists believe that reaching January 1 with no agreement in place will set the economy in to recession.

Mortgage rates tend to improve on “negative” news for the economy, which partially explains why mortgage rates made a small comeback late in the week.

In other news, according the National Association of REALTORS®, Existing Home Sales reached their highest point since November 2009, climbing to 5.04 million homes sold on a seasonally-adjusted, annualized basis. In addition, the real estate trade group reports that the Existing Home Supply has dropped to 4.8 months — a figure firmly suggesting a “seller’s market”.

Separately, the Commerce Department reported single-family housing starts rising, too; down 4.1 percent in November but up nearly 23 percent as compared to November 2011.

This week, Fiscal Cliff discussions are likely to dominate mortgage markets. The trading week will be holiday-shortened and volume will be lighter-than-normal. This may lead to volatile pricing and rapid interest rate movements.

Markets close early Monday and remain closed through Tuesday. Wednesday, markets re-open with no new data set for release. Then, Thursday, scheduled economic news events resume Thursday with New Home Sales, Jobless Claims and Consumer Confidence due.

Friday, the Pending Home Sales Index is released.

Single-family housing starts took a small step back in November.

According to the monthly Housing Starts report from the U.S. Department of Commerce, single-family housing starts tallied 565,000 in November 2012 on a seasonally-adjusted, annualized basis. This marks a 4 percent decline from October, but is more than 100,000 higher than the count from 12 months ago.

Clearly, the nation’s new home construction market is expanding.

On a regional basis, single-family housing starts have been strongest in the Midwest; and Hurricane Sandy appears to have affected the number of starts across the Northeast.

As compared to one year ago:

• Northeast Region : Housing starts down 19% on an annual basis
• Midwest Region : Housing starts up 40% on an annual basis
• South Region : Housing starts up 24% on an annual basis
• West Region : Housing starts up 33% on an annual basis

It’s expected that new construction growth will continue into 2013, too. This is because the Department of Commerce report also showed Building Permits mostly unchanged for November at 565,000 units on a seasonally-adjusted annualized basis.

As compared to November 2011, this marks a 25% increase. Permits for multi-family homes are up 17%, too.

There are more building permits being issued today that at any time in the last 4 years.

For home buyers, this may be good news. Rising permits and housing starts suggests a more healthy U.S. economy, but it also means that home supplies may not be as tight throughout the next few months.

Overly-tight home supplies in some U.S. markets have contributed to rapidly rising home values. With more construction and larger home inventories, home prices may rise in 2013 less slowly.

The good news, though, is the mortgage rates in Royal Oak remain near all-time lows and low- and no-downpayment mortgage programs are abundant. For today’s home buyer, there are plenty of affordable ways to purchase a home.

Talk with your real estate agent and your loan officer to see which plan works best for you.

The National Association of Home Builders (NAHB) released its Housing Market Index (HMI), showing another monthly gain — its ninth in a row.

The HMI — a gauge of homebuilder confidence — rose 1 point to 47 in December 2012, lifting the index to its highest levels since April 2006.

Readings under 50 indicate unfavorable housing conditions for builders. Readings over 50 signal “good” conditions. Coincidentally, the last time that the HMI read above 50 was April 2006, too.

The Housing Market Index is based on a survey which the NAHB sends to its members. The survey asks the nation’s builders to rate the current housing market conditions.

In December, home builders reported gains in two of the three areas surveyed:

• Current Single-Family Sales: 51 (+2 from November 2012)
• Projected Single-Family Sales: 51 (-1 from November 2012)
• Buyer Foot Traffic: 36 (+1 from November 2012)

It’s noteworthy that buyer foot traffic has climbed over nine straight months and is now at it’s highest reported level in nearly 7 years. Low mortgage rates and rising home prices throughout Royal Oak have compelled today’s renters and existing homeowners to consider their home buying options.

This was none more apparent that in the Northeast Region in which builder confidence grew twelve points to 42. The Midwest Region also showed a strong improvement, climbing 2 points to 53. The West and South regions fell slightly between November and December.

For today’s buyers, rising builder confidence may be a signal that home prices are headed higher. Confident home sellers — including the nation’s builders — are less likely to make price concessions into an improving market, or may be less likely to offer free upgrades to buyers.

Therefore, if you are in the market for a newly-built home, consider that you may get the best “deal” by acting sooner rather than later. Mortgage rates are rising and home prices are, too. Six months from now, your costs of homeownership may be higher.

Mortgage bonds worsened last week, moving mortgage rates higher. Economic news was mostly positive and the Federal Open Market Committee (FOMC) changed some of Wall Street expectations for future monetary policy.

Freddie Mac reported the average 30-year fixed rate mortgage rate at 3.32 percent nationwide for borrowers willing to pay an accompanying 0.7 discount points plus closing costs. The average 15-year fixed rate mortgage rate was listed at 2.66 percent nationwide with an accompanying 0.6 discount points plus closing costs.

Both mortgage rates had climbed by week’s end, however. Mortgage rates made their best levels Monday afternoon. Between Tuesday and Friday, mortgage rates in Bloomfield Hills climbed.

Also last week, the National Association of Homebuilders/First American Improving Markets Index (IMI) reported 201 improving metropolitan economies nationwide. This index uses data including local employment statistics and home values to determine whether an area’s economy is “improving”.

76 new areas were added to the IMI list in December as compared to November. The geographic diversity the newly-added markets suggests an overall improvement in the national economy.

Last week’s major event, however, was the 2-day Federal Reserve meeting, which adjourned Wednesday.

The post-meeting press release after included the Fed’s commitment to hold the Fed Funds Rate near zero percent where it’s been since December 2008. However, the Fed announced a change to in its plans to raise the Fed Funds Rate from near-zero at a future date.

Previously, the Fed had said it would raise the Fed Funds Rate beginning in mid-2015. Now, the Fed says it will start to raise rates when the national unemployment rate reaches 6.5 percent.

This week, mortgage rates have a lot to move on including Housing Starts (Wednesday) and Existing Home Sales (Thursday) from the housing sector; Jobless Claims (Thursday) from the Labor Department; and a key inflation reading from the Department of Commerce. Each has the capability to move mortgage rates.

Markets will respond to Fiscal Cliff discussions, too.

Last week’s National Association of Home Builders/First American Improving Markets Index (IMI) brought positive news about U.S. housing markets and the broader U.S. economy, in general.

According to the IMI, there are now 201 U.S. markets which can be considered “improving”.

To meet this standard, a local area economy must exhibit at least six consecutive months of improvement in terms of local employment, single-family housing permits and area home prices; and, at least six months must have passed since each of these readings were at their respective low points, called troughs.

The Improving Market Index added 76 metropolitan areas in December as compared to the month prior. 45 states are now represented on the list, in addition to the District of Columbia.

The cities deemed “improving” aren’t limited to recent, high-profile hot spots such as Detroit, Michigan; and Phoenix, Arizona, either. Several of the newly-included areas for December were :

• Atlanta, Georgia
• Bloomfield, Illinois
• Ithaca, New York
• Riverside, California
• Seattle, Washington

The geographic diversity of this month’s Improving Market Index suggests a nationwide economic recovery in progress. More jobs, a steady supply of available homes, plus rising home prices helps communities thrive.

Unfortunately, it may also mean less opportunity to buy homes as rock-bottom prices.

As sellers and home builders gain confidence in the economy, it may be more challenging for today’s Bloomfield Hills buyers to get a “great deal”.  In addition, an improving, post-recession economy will likely lead mortgage rates higher, robbing home buyers of their purchasing power.

Freddie Mac says that the average 30-year fixed rate mortgage rate is 3.32% nationwide. In a fully-recovered economy, that rate could be 5 percent or higher. The impact on monthly housing payments would be palpable.

The National Association of Homebuilders expects more markets to join the Improving Market Index list through 2013. Today’s home buyers may want to lock in today’s low rates before economic improvement leads mortgage rates higher.

The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent Wednesday.

For the tenth consecutive meeting, the FOMC vote was nearly unanimous. Richmond Federal Reserve President Jeffrey Lacker was the lone dissenter in the 9-1 vote.

The Fed Funds Rate has been near zero percent since December 2008.

In its press release, the Federal Reserve noted that, since its last meeting in late-October, the U.S. economy has expanded “at a moderate pace” despite “weather-related disruptions”. It also acknowledged that “strains in global financial markets” remain a threat to U.S. economic growth.

This comment is in direct reference to the Eurozone, its sovereign debt concerns, and its nation’s economies.

The Fed included the following observations in its statement, too :

1. Growth in employment is expanding but unemployment is elevated
2. Inflation pressures are stable, and below the Fed’s target range of 2%
3. Business spending on equipment and structures has slowed

In addressing the housing market, the Fed said that there has been “further signs” of improvement and the group re-affirmed its commitment to the $40-billion monthly QE3 bond buying program.

QE3 is meant to suppress U.S. mortgage rates from rising too high, too quickly.

Lastly, the Federal Reserve announced an explicit economic target for when it will begin to consider raising the Fed Funds Rate from its current target range near 0.000%. When the national Unemployment Rate reaches 6.5%, the Fed said, it will likely move to start raising its benchmark borrowing rate. 

Previously, the Fed had provided only a date-based target of mid-2015.

The 6.5% Unemployment Rate target may be pre-empted by rising inflation rates. The Fed does not expect price pressures to mount prior to jobless rates dropping from the current 7.7% levels, however.

Mortgage rates in Royal Oak are rising post-FOMC announcement. Many lenders raised mortgage rates mid-day Wednesday in response to the Fed’s statement. 

The FOMC’s next scheduled meeting is a two-day event scheduled for January 29-30, 2013.

According to the Bureau of Labor Statistics (BLS) and its November 2012 Non-Farm Payrolls report, the U.S. economy added 146,000 net new jobs last month.

November’s job growth exceeded Wall Street expectations of 90,000 jobs added for the month, and was a small increase from October’s 138,000 jobs added.

Three job sectors in which employment rose in November include :

• Retail : 58,000 jobs added
• Business and Professional Services : 43,000 jobs added
• Healthcare : 20,000 jobs added

It appears that the effects of Hurricane Sandy were muted, although they may be temporarily overshadowed by seasonal factors.

After losing more than 7 million jobs in 2008 and 2009, the U.S. economy has since recovered more than 4.6 million jobs. Job growth has reached 26 consecutive months and is expected to remain consistent through 2013.

In addition, the BLS report showed the national unemployment rate dropping 0.2 percentage points in November to 7.7 percent. This is the lowest Unemployment Rate since January 2009.

Growing employment is a strong indicator of economic expansion, which traditionally leads to rising mortgage rates.

When mortgage people work, more income is earned and more taxes are paid. This often leads to higher levels of both consumer spending and government spending, both of which spur additional hiring and economic expansion.

When the economy is in expansion, equity markets often gain and bond markets often lose. When bond markets are in retreat, mortgage rates in Birmingham rise. This relationship takes on added importance this week with the Federal Reserve’s Federal Open Market Committee (FOMC) scheduled to adjourn.

The Non-Farm Payrolls Report is a top economic indicator and is a key part of economic and policy decision made Capitol Hill and within the Federal Reserve. As one example, recent Federal Reserve stimulus has been specifically aimed at lowering the national Unemployment Rate. As the economy improves and as jobs are regained, the Fed may be less likely to support low rates.

If you’re floating a mortgage rate, consider locking in. Rates can’t stay low forever.

The Federal Open Market Committee (FOMC) begins a 2-day meeting today, its last of 8 scheduled meetings this year.

The Federal Open Market Committee is a 12-person subcommittee within the Federal Reserve. It’s the group which votes upon U.S. monetary policy. 

The monetary policy action for which the FOMC is most well-known is its setting of the Fed Funds Funds. The Fed Funds Rate is the interest rate at which banks borrow money from each other overnight.

Since late-2008, the Fed Funds Rate has been near zero percent.

Prime Rate, a business and consumer interest rate used in lines of credit and credit card rates, is based on the Fed Funds Rate. Prime Rate has been similarly unchanged since 2008.

One rate which the Federal Reserve does not set is the 30-year fixed rate mortgage (FRM) rate.

Like all other mortgage rates, the 30-year FRM is based on the market value of mortgage-backed bonds; securities bought and sold by investors.

There is no correlation between the Federal Reserve’s Fed Funds Rate and the everyday homeowner’s 30-year fixed rate mortgage rate. Some months, the two rates converge. Other months, they diverge. Since 2000, they’ve been separated by as many as 5.29 percentage points.

They’ve been as close as 0.52 percentage points.

However, although the Federal Reserve does not set U.S. mortgage rates, that doesn’t mean that it can’t influence them. The Fed’s post-meeting press release has been known to make mortgage rates get volatile.

If, in its post-meeting press release, the Fed notes that the U.S. economy is slowing and that new economic stimulus is warranted, mortgage rates will likely fall throughout Michigan. This is because additional Fed stimulus would likely lend support to U.S. mortgage markets which would, in turn, boost demand for mortgage-backed bonds.

Conversely, if the Fed acknowledges stronger-than-expected growth in the U.S. economy and no need for new stimulus, mortgage rates are expected to rise.

Either way, mortgage rates will change Wednesday upon the FOMC’s adjournment — we just don’t know in which direction. Rate shoppers may see fluctuations of as much as 0.250 percent.

The FOMC adjourns at 12:30 PM ET.