News Driving Mortgage Rates & The Economy 04/29/2014

This week there is a full slate of economic news that will drive mortgage rates. In addition, mortgage rates are having a lot of volatility due to the ongoing crisis in the Ukraine. The data also shows that rising mortgage rates and poor job growth are killing the housing market.

For a more detailed update here is some great information from our partners at NYCB:

While the weather in the U.S. may be feeling a little warmer after an intensely cold winter, the markets these days seem to be frozen solid from after the Christmas rally of last year. Pundits are finding it hard to form any opinion about the direction as to where the market is heading, not that it was ever easy to do so. The 10-year Treasury is held up in a narrow range of 25 basis points and the Dow index goes up and down like a see-saw. Tensions in the Ukraine flared up again and the housing market is not thawing out yet. The Fed has hinted that it won’t raise interest rates soon. Leading indicators continued to rise but the declines in home sales lead to a 14 year low in mortgage originations. Everyone is hoping for an active summer.

One of the reasons behind this frozen market scenario is that the U.S. economy has been stuck in a vicious cycle: A slow moving housing market saps the economy’s strength, and the ensuing weakness—high unemployment, slow wage growth—this all means that fewer people are leaving their parents home for one of their own. Those who do move out are choosing smaller rental apartments that generate less spillover benefits for the broader economy. “Household formation,” as economists call it, is the foundation of demand in the housing market. The number of households rose by an average of 569,000 a year from 2007 to 2013, according to census data, down from 1.35 million a year from 2001 to 2006. This shortfall is what economists refer to as “missing” households and as per estimates, there were 2.3 million “missing” households.

What is the mystery behind these missing household numbers? Mostly, they can be explained by young people who by choice or circumstance, stay at home longer than they have in previous generations. The bottom line is that that the young population is under-employed. Only 62.9 percent of 20-to-24-year-olds had a job in March, according to Labor Department data, down about 7 percentage points from the spring of 2007. Those who get a low paying job and want to live independently may choose apartments over single-family homes. On average, it cost $102,000 to build each of those new apartment units last year, according to census data, compared with $224,000 for each single-family home. Moody’s Analytics estimates that every single-family home that is started creates 3.7 jobs over the following year, compared with 1.8 jobs for a unit in each multifamily home. Thus the spillover effects in the economy are not realized yet. Some form of incentive, either in tax breaks or lower rates, to these held back 2.3 million missing households may encourage them to start looking for their own places, which then in turn generates more building activity, which strengthens the economy and results in more jobs and higher wages.

During the housing boom, it was frenzied euphoria that eased mortgage lending standards but this time, it appears to be desperation. Mortgage originations have reached a 14 year low level. The MBA reported that application volume fell 3.3 percent for the week ending April 19. This decline is attributable to the combination of low inventory of homes for sale, the rising cost of housing due to recent appreciation and increasing interest rates and stagnant incomes, have combined to primarily cause rates of homeownership to decline. Median household income in America has declined. In the meantime, lenders are looking for ways to enable more borrowers’ access to credit. Lenders’ margins have compressed to bare survival levels and credit standards are being relaxed. Average credit scores on recently for-purchase mortgages stood at 755 in March, down from 761 a year earlier, according to data from Ellie Mae, a mortgage-software provider. Those on purchase loans backed by the FHA dropped to 684, compared with 696 one year earlier. After the shrinkage in refinancing share, these desperate times are forcing lenders to take aggressive measures to generate originations.

Corporate America is still going strong though. We are roughly midway through earnings season and so far the first quarter earnings results have been positive, on a net basis. With 60 percent of the S&P 500 market cap reported, earnings have outpaced expectations by 7.8 percent. Over the past month, S&P 500 earnings revisions have been muted, with 2015 earnings estimates revised up by 0.2 percent. At the sector level, healthcare and technology were among those with the largest upward revisions, while discretionary and materials experienced the largest downward revisions. At least some optimism in the markets is being maintained.

Last week, the most surprising quarterly results came from the world’s most valuable company, Apple. Apart from outperforming earnings on all metrics, the company seems to be outsmarting Uncle Sam for taxes also. Apple said it planned to split stocks and increase its share buyback from $60bn to $90bn, funded by domestic and international bond sales. Given its strong balance sheet and its stellar credit rating, Apple is able to issue huge amounts of debt. Apple is preparing for another blockbuster debt sale of $17bn that could rank as the second largest corporate bond sale of all time. Apple will use proceeds from the debt sale to fund the buyback and presumably avoid taxes rather than tap into its $150bn cash pile; returning it to the U.S. could lead to a tax charge of up to 35 percent. A foreign debt sale would likely target the Eurozone, where interest rates are lower than in the U.S., and serve to diversify Apple’s debt investor base.

Here are some key economy updates from last week.

  • Durable goods orders for March rose to a 2.6 percent level, up from 2.1 percent in February. This was higher than expected.
  • Leading indicators published by the Conference Board rose 0.8 percent in March, up from 0.5 percent in February and 0.1 percent in January.
  • Mortgage delinquency rates hit 5.52 percent, its lowest point since October 2007 and down by 16.29 percent from a year ago.
  • Americans owe about $72 billion in student debt. The federal government is seeking ways to forgive some student debt.

The week ahead offers a great deal of new information between Wednesday’s FOMC decision and Friday’s employment report. There are several key data releases this week, including PCE, ISM, and Consumer Confidence, but it’s ultimately the employment report that will receive the bulk of the attention. The consensus call is for a +215k headline print and +210k on the private side. During this week’s economic calendar, investors will watch out for GDP and the FOMC meeting announcement on Wednesday, and the Employment situation on Friday.

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