Dennis' Mortgage Blog

July 25th, 2014 2:47 PM


Question: Following up on the homeowner insurance topic the past two weeks (single family residences here; condominiums here) a brief word about the deductible on your homeowner’s policy.

 

Answer:  Like with auto insurance and many health insurance policies, homeowner’s insurance policies have a deductible. To refresh the deductible is the amount of money you have to per incident or per year before your insurance kicks in and your company pays for the incident. For example if you have a $500 deductible on your auto policy and get into a fender bender the insurance company will have an adjuster review your claim and damage and estimate it will cost $750 to fix the damage. You go get the damage fixed at the local (and reputable) collision repair shop and your insurance company will send you a check for $250; the $750 estimate in repairs less your $500 deductible. If six months later someone sideswipes your car in the street and it has $1400 in damage your insurance will now pay the entire $1400 in damages as you have already met your deductible.

 

As with auto insurance, the higher the deductible you choose the lower your insurance premium is going to be. If you choose a policy with a $1000 deductible policy you may pay $400 per year for homeowner’s coverage, if you choose $5000 deductible your annual premium may be only $300. DISCLAIMER: these numbers are strictly for example purposes and do not correlate directly to any direct relationship between premiums and deductibles. Mandatory disclaimer aside, the point to understand is that you can lower your annual insurance costs by increasing your mandatory insurance obligation if you have a claim.

 

Should you get a higher deductible and pay a lower premium? This depends on many factors. First do the math, in the above instance you can lower your premium by $100 per year by increasing your deductible by $4000; if you have no claims for 40 years (40 x 100 = $4000) then you “win” by having the higher deductible. Second consider the likeliness of a claim, and remember a homeowner’s claim is not just fire damage but also theft, injury—postal carrier slips on your porch and breaks a pelvis, and other damage that may be covered.

 

There are limits from most lenders as to maximum amount they will allow for your deductible. If you are buying a $350,000 home, make $75,000 per year and after close will have reserves of only $5000 then an underwriter may have a difficult time approving a policy with a $7500 deductible; on the other hand if you are buying a $2 million home, make over $500,000 per year and will have reserves in the hundreds of thousands of dollars an underwriter may not blink at a $20,000 deductible.

 

For most homeowners we encourage a lower deductible to protect against an assault on assets if you have a claim—that is after all what insurance is for. However there are occasions when we may be very close to the qualifying point and need a lower insurance premium to ensure we can qualify and purchase the home, in which case we suggest a higher deductible policy for the first year.

 

Insurance is a major factor in purchasing and maintaining your home, too often it is treated as an afterthought in the process. When you are purchasing or refinancing your home it is also a good time to review your insurance policies and coverages and see what else may be on the market, weighing your long term relationship, service and costs with other policies that may be available. When getting insurance quotes always get quotes for the one product (i.e. just homeowner’s or just auto) and also if the policies were bundled; most companies have discounts for the more policies they hold as well as length of relationship and number of claims.

 

Have a question? Ask me!  

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

Another week that was light on economic data, but the data released carries weight. International events continue to weigh on markets, as has the announcements of corporate earnings for the second quarter. The major news was the release of the Consumer Price Index (CPI) for June, which depending on how you dissect the numbers either was good news for continued low rates or good news for those who feel rates should be higher (labelled “hawks”). The overall number was a modest 0.3% increase in prices to consumers, down from the 0.4% increase in May. Year over year the inflation number is 2.1%, just over the 2% level that many use as a benchmark that the Fed should use to determine higher interest rates. Dissecting the data and we see that if food and energy are stripped from the number (because hey, who buys food or energy?) for what is known as the “core inflation” number prices only increased 0.1% for the month and 1.9% year over year.  This indicates the increase in the overall number was due to higher food and/or energy prices, and it was the latter  hat pushed the overall inflation number. Food prices in June only increased 0.1%, but gasoline prices that typically rise in summer months spiked 3.3% for the month—annualized that would result in almost 40% increase in prices at the pump, thankfully it is a one month measure and not annual which actually saw pump prices decline 0.3% in rate to an increase of 2.0% year over year.

 

What does all this mean? Last week we saw that wholesale prices (PPI), those paid by producers of goods and services, increased 0.4% led by higher energy costs. The PPI outpaced the CPI in June but is usually a leader for consumer prices, leading one to suspect that consumer prices in July should rise by more than June’s 0.2%. If this is the case then investors should be reacting based on a higher chance that the Federal Reserve will increase its discount rate, and therefore start the trickle effect through other interest rates, sooner rather than later. The rate hawks are concerned about inflation and that it will start to grow in the economy faster and stronger than the Fed may be able to manage. Those who feel the hawks are correct and see higher producer and consumer prices will begin to bet on higher rates, and self-fulling prophecy holds that rates will increase. In the short term due to the mixed nature of Tuesday’s report the overall impact on mortgages was not significant.

 

Of greater importance to most readers of the Weekly Rate & Market report was the National Association of Realtors release of existing home sales data for June. After declining each month in the first quarter homes sales increased each month in the second quarter with a gain of 2.6% in June from May (May up 5.4% from April) and year over year sales are down only 2.3% from June 2013, which was the first closing month following the sharp jump in rates in May 2013. Increased activity in sales did not have a large impact on prices, the national median home price increased 5.3% in June to $223,300 (as an aside, this was approximately the average loan amount of my clients around 2000). As existing home sales increase, and home prices increase, the expectation would be for mortgage rates to increase as well. Stronger home sales indicates a strengthening economy which leads to higher interest rates.

 

Yesterday’s release of unemployment claims was a big one. Typically unemployment claims increase in the summer as auto manufacturers layoff workers to retool plants for new models. The decline in recent weeks topped off by the large decline last week to only 284,000 new claims being filed either indicates that auto makers are slow to begin retooling this summer, or that other industries have drastically reduced layoffs. If this is the case then labor markets would appear to be strengthening faster than anticipated. The news pushed rates up as the Fed has stated that employment is the key focus for raising rates, and lower unemployment claims means higher rates are that much closer.

 

Rates for Friday July 25, 2014: A large drop in stock prices today and push up in Mortgage Backed Securities prices (rates down) on some disappointing earnings statements from some major companies and a flow into cash and bonds for the weekend due to ongoing international events. After moving down a bit early in the week, rates climbed yesterday and at opening today before easing back down during trading today on the poor stock performances. Net result is another flat Friday from the prior week, this puts the 30 year fixed conforming on the same number, 3.99%, for nine of the past eleven weeks. I’d call that a narrow trading range.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.99%               Flat

30 year high-balance conforming           4.125%             Flat

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               Flat***

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have credits available for closing costs at these rates and higher.

 


My apologies to those who went to visit the link to the Jimmy Valvano speech I hyped last week only to give you a link to a canoe trip our oldest daughter will be going on this coming week in Minnesota—I dialed up the trip link to send to Leslie so she could show family members and copied that instead of the Jimmy V speech—file under we all make mistakes.

 

Here is the link, the speech is still excellent and I continue to encourage everyone to watch! (Yes, I tested the link and it works!)

 

Taking advantage of our daughters’ month long absence as they enjoy camp in Minnesota, Leslie and I took a long weekend to San Luis Obispo last week. What a gorgeous part of our state. For those who have not been, or not been in a while I encourage you to plan a weekend get-away—if you want any recommendations don’t hesitate to ask!

 

Have a great week,

 

Dennis


Posted by Dennis C. Smith on July 25th, 2014 2:47 PMPost a Comment (0)

July 18th, 2014 3:13 PM



Question:
Last week you wrote about insurance for homeowners, what about insurance for condo owners?

 

Answer:  Great question as some transactions do not have lender required insurance policies and some do. Why?

 

Let’s start with what needs to be covered if you do own a condominium unit. Condos are joint ownership of land and structure, when you own a condo you own an undivided interest in the entire complex, and a divided interest in the unit which you purchased. If the structure is jointly owned how can you own your unit?

 

The Homeowners’ Association owns the main structure and you own what is attached to that structure. For instance the HOA owns the struts that make up the walls, you own the drywall. The HOA owns the structure that is your floor, but you own the flooring. The HOA owns the plumbing to your unit but you own the fixtures. Essentially anything you can see inside your unit you own, anything past that is joint ownership with your neighbors.

 

The question for insurance on your mortgage transaction is coverage of the interior of your unit. Lenders require coverage that insures the interior of the unit, if you have a kitchen fire and the cabinets, walls, fixtures, etc need to be replaced many HOA master policies will not cover the loss. If this is the case then you need to obtain your own policy that covers the part of your unit that you own and for which you are responsible.

 

When we are financing a condominium unit we contact the HOA management company and request a copy of the master insurance policy, that tells us if your unit is covered as part of the policy or if you will need a separate, “HO6”, policy to cover the accidents that may occur damaging part or all of your unit.

 

If you do need to obtain an HO6 policy the coverage requirement is significantly less than the price (or value if a refinance) of your property and premiums are much lower than a policy for a detached single family residence.

 

If you own, or are buying, a condominium unit it is a good idea to review the master policy to see what is and is not covered and what your liability is should something happen. As well you may wish to see if the HOA has separate earthquake coverage and if so what is covered in regards to your unit and possessions.

 

Have a question? Ask me!  

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

Economic news this week was light on data and heavy on testimony.  Major news for the week started with disappointing retail sales figures for June, rising only 0.2% dragged down by auto sales which declined 0.3% from May. Slower retail sales usually push rates lower as it can be a leading indicator for a slowdown in the economy as consumer spending is 65-70% of the total economy.

 

Wholesale prices jumped in June, up 0.4%, after declining 0.2% in May, however most of the increase was due to higher energy costs. Some price increases on the wholesale level are good for the economy and the 1.9% year over year increase was within that healthy range. As long as wholesale prices increase in moderation the impact on rates should be to slightly to higher rates, large increases in wholesale prices push rates higher as higher wholesale prices usually lead to higher consumer prices, and higher inflation brings on higher rates.

 

Unemployment claims continue to decline with 302,000 initial claims filed last week. Continuing claims also continue to decline, at post-recovery lows. Lower unemployment can be negative for mortgage rates if it is accompanied by higher employment and not dropping because people are dropping off the unemployment roles due to expiration instead of finding work. The Fed has pegged employment as a key factor in its decision to raise rates in the future, dropping unemployment claims puts upward pressure on rates.

 

The biggest impact on rates this week was the semi-annual testimony to the Senate Banking Committee by Federal Reserve Chair Janet Yellen. Two days of testimony regarding the Fed’s economic outlook and future for interest rates. Yellen said that she is concerned with the housing markets that have not had a strong rebound from the slow down after rates increased last May. On employment Yellen said there is “considerable slack,” which is Fed speak for despite the positive recent news on the jobs front there is a long way to go for recovery in employment. Yellen confirmed that the Fed will wind down its purchase of mortgages and Treasury debt in October. The big question that does not seem to be asked is then what? What happens to the mortgages and Treasury debt that will still be coming to market that has been absorbed by the Fed? What happens to the Fed’s huge balance sheet loaded with long term securities? Everyone seems to keep asking when the Fed will begin to raise its discount rate, and though the  consensus is mid-2015 for these increases the focus continues to be on when the Fed raises rates. I am more concerned with when, how, whether the Fed starts selling the trillions of dollars of assets it is holding in mortgages and Treasury debt which can have a far greater impact on you and me than increases in the discount rate. Mortgage rates headed up with Yellin’s testimony due to the media and investor focus on rate comments.

 

The economic news this week was over-shadowed by the tragic shooting down of the Malaysia Airlines plane over the Ukraine on Thursday and Israeli troops entering Gaza. Following the news of the disasters Mortgage Backed Securities began to climb (lower rates) and by days end erased losses from the first three days of the week. The incident increases tensions in the region and internationally, which causes investors to flee to safety, which means U.S. long term investments like mortgages and bonds. If the situations in the Ukraine, Israel and Gaza, Syria, Iraq continue to escalate rates will drop steadily as investors pull money out of foreign markets and invest in United State Treasuries, mortgages and other bonds. Bad news, either foreign or domestic moves interest rates, and therefore mortgage rates, down.

 

Rates for Friday July 18, 2014: As mentioned above, international events caused retreat for mortgage rates after climbing earlier in the week, as a result no change from last Friday. We have spent the last twelve weeks within 0.115% of today’s conforming rates. Stability is very welcome in our industry!

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.99%               Flat
30 year high-balance conforming           4.125%             Flat
30 year FHA                                         3.375%             Flat***
30 year FHA high-balance                     3.75%               Flat***

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have credits available for closing costs at these rates and higher.

 

I often post links in this space, and I know many (most?) do not follow them. I think if you follow this week’s link you will be glad you did and I’m willing to be that most of you who watch the video will forward it to others.

 

I believe I post this every year at this time, when ESPN has their Espy’s Awards show. I was very fortunate to see the speech linked below in real time, I happened to be home and flipping the channels and caught the introduction of Jimmy Valvano acceptance speech for the Arthur Ashe Award the first year the Espy’s were held. For those of you not familiar with Jimmy V, he as a college basketball coach who took a Cinderella team through the NCAA tournament ultimately winning the tournament, playing much better teams every round. After coaching he became a commentator for ESPN on college basketball and the sports community was stunned to learn he had been diagnosed with brain cancer. Just before it became impossible for Valvano to get around or have any energy he was able to give this speech. Without hyperbole, I consider this to be one of the greatest speeches given in my lifetime.

 

I strongly implore you to take the ten minutes this video runs, grab your loved ones, kids, grandkids and watch this speech. His message, the message of a dying man, resonates throughout time and is one I think of not infrequently when I think I am having a challenging day. His motto, “Don’t give up, don’t every give up” is timeless. He definition of a good day should be remembered by each of us as we rise in the morning and lay down at night.

 

Here is the link

 

Have a great week,

 

Dennis 


Posted by Dennis C. Smith on July 18th, 2014 3:13 PMPost a Comment (0)

July 12th, 2014 9:00 AM

Question: Do I need hazard insurance or fire insurance and how much do I need?

 

Answer: Yes you need hazard insurance, and fire insurance and homeowner’s insurance. The good news is do not need three policies and do not have to pay three premiums. In our industry hazard, fire and homeowner’s are synonymous when it comes to the insurance coverage necessary for your final mortgage approval, so one policy and one premium.

 

Lenders require that you have insurance to protect their collateral, and the minimum requirement is just the coverage of the collateral. Not as much as in the past but still on occasion we see policies for clients that cover the full purchase price of a transaction. When we see that we generally strongly suggest the client get additional quotes since covering the purchase price will result in your being over insured, significantly.

 

Consider the purchase price of your new home. When you purchase the home you will get the actual home itself, the structure on the property, and you are buying the lot upon which it sits. Dirt doesn’t burn so we do not want to insure it. So if you are insuring the entire purchase value of the home  then you are insuring the dirt, and hence paying too much for insurance.

 

The minimum insurance requirements for most lenders is for your homeowner’s policy to cover replacement of the structure should it be entirely destroyed. The coverage amount required is usually based upon the appraisal report where the appraiser will detail the “replacement cost new.” This amount is usually arrived at using a program that considers the location (rebuilding a home in Southern California will generally cost more than rebuilding a home in Tulsa), size, type of construction, bedroom and bath count among other factors. Most lenders will not require the entire replacement value new be covered but a very high percentage (approximately 85% of the value provided by the appraiser).

 

This coverage, 85% of the estimate cost to replace your home should it need to be completely rebuild, has a significantly lower premium than your quote to insure the entire purchase price of your new home not just the structures.

 

Note that earthquake insurance is not required by lenders for home purchases. Earthquake insurance can be quite costly and has a very high deductible. Before purchasing earthquake insurance consider the amount of equity in your home and balance that with the deductible and premium you will have to pay.

 

Finally, many Southern Californians have or are purchasing homes that are in Federal flood zones. If this is the case then the lender will require you obtain flood insurance. This is very costly and also could be a timely process as it requires special inspections. If you are purchasing a home in a flood zone it is highly recommended that you begin the process of getting flood insurance as soon as possible.

 

Have a question? Ask me!  

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

A very slow week for economic news.  Wednesday the Federal Reserve Open Market Committee released the minutes from its June meeting. No big surprises in the minutes. The unwinding of its Quantitative Easing policy of purchasing mortgages and U.S. Treasury debt is still on schedule to end in October. During the QE period the Fed has been reinvesting the principal payments received on its holdings, either through normal payments of principal and interest or from early payoffs on mortgages, back into the mortgage and Treasury markets. The Fed minutes indicate that this policy of principal re-investment will continue until the Feds first hike in the Federal Discount Rate, currently estimated to be by mid-2015, or one year from now or sooner. Fed governors are concerned that employment is still lagging and also concerned about the “subdued” housing sector. Based on the comments from the Fed during their meeting there was no reason for mortgage rates to react in either direction.

 

The only other news of significance was the weekly announcement of initial unemployment claims, which dropped to 304,000 filings down from 315,000 the prior week. Lower, and dropping, unemployment claims is generally negative for mortgage rates.

 

Rates for Friday July 11, 2014: With the slow news week Mortgage Backed Securities have traded mainly on technical levels. It has been a choppy week with significant swings intraday through the week and a general increase in MBS prices, that said rates are consistent with last week.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.99%               Flat

30 year high-balance conforming           4.125%             Flat

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               Flat***

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have credits available for closing costs at these rates and higher.

 

 

Thanks to everyone who came out for our 4th Annual Flag Collection and Retirement Ceremony. It was a wonderful evening with plenty of flags collected and a special retirement of a flag that was used to cover the coffin of my friend Colleen’s uncle who served in the Navy in World War II. The young men from Boy Scout Troop 29 acquitted themselves very well and it was an evening I am sure they will remember for years to come.

 

Next week’s update may be very delayed but it will be in your in boxes either late Friday or early Saturday.

 

Have a great week,

 

Dennis


Posted by Dennis C. Smith on July 12th, 2014 9:00 AMPost a Comment (0)

July 3rd, 2014 1:48 PM

Buying a new flag for July 4th?  Don’t know what to do with the old one?  Join us on the evening of Thursday July 3rd for our Fourth Annual Flag Retirement Event.  Bring your old flag(s) that need to be properly disposed and witness the Boy Scouts properly retire a flag with a ceremony.  More information here.

 

A shortened Weekly Rate & Market Update this week for the Independence Day holiday and long weekend.

 

We start the celebrations tonight with our 4th Annual Flag Collection and Retirement Ceremony. Starting at 6:00 this evening we will be set up in the parking lot of Nino’s Italian Restaurant at 3853 Atlantic Avenue in the Bixby Knolls area of Long Beach. Nino’s is on the corner of Atlantic and Roosevelt. At 8:00 Boy Scout Troop 29 will be conducting a flag retirement ceremony, a very inspirational event.

 

All evening the monthly  “First Fridays” event will be occurring, this month “Almost First Friday” in deference to the July 4th holiday tomorrow. Shops and restaurants will have specials, bands, activities for kids, etc. A great night to stroll the Avenue with the family—very old fashioned America!

 

As for specials Nino’s is offering spaghetti dinners for $5.60 in celebration of their 56th anniversary.

 

Bring your old flags that need to be properly retired and come say hello this evening!

 

Have a question? Ask me!  

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

In economic news today was a biggie. The monthly employment report for June was released and it was good news. The economy added 288,000 jobs in June, well beyond the consensus estimates of 211,000. As well the unemployment rate dropped to 6.1%, the lowest since 2008. Most of the gains were in retail trade employment which is an indicator businesses feel consumer spending will be on the rise. Yesterday payroll giant ADP released their monthly report and it was positive sending Mortgage Backed Security prices down (rates up). Today MBS opened strongly down on the positive labor news pushing rates up. The good news from a rates standpoint is the comments from members of the Fed and Chair Yellen have been that they are firm in their commitment to retaining low rates for some time so this slight bounce should (could, may?) be temporary. Most of the major bond traders are adjusting their rate forecasts for this year and next year downward—which should portend low(er) mortgage rates as well.

 

Rates for Friday July 4, 2014: Yes, rates for tomorrow, markets are closed tomorrow so today’s rates will be good until markets open Monday morning. Rates up a little bit from last Friday’s dip.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.99%               Up 0.088

30 year high-balance conforming           4.125%             Up 0.125

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               Flat***

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have credits available for closing costs at these rates and higher.

 

 

Tomorrow we celebrate Independence Day, my favorite holiday. Not for the hot dogs, parades and fireworks but for the reason we celebrate, independence, freedom and these famous words as part of the Declaration of Independence, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” Never before had those words been written as the basis of a nation, and to my knowledge never since.

 

Typically on this week’s Rate & Market Update every year I include a link to the Declaration of Independence encouraging everyone to read it (okay, okay I’ll do it again, here it is), this year I invite you to click on the link below. It is for the Museum of the American Revolution, which is yet to be built. They are preparing a plot of land across from Independence Hall in Philadelphia, where the Declaration was voted upon and signed by the Continental Congress. Slated to be completed in 2016 the museum will house a tremendous treasure trove of artifacts from the Revolutionary period.

 

History buffs will love this site, those who are interested in learning a bit more about our history will has well. Click on “Collection” and “Timeline”, very neat. The Museum of the American Revolution.

 

Happy Independence Day!

 

Dennis


Posted by Dennis C. Smith on July 3rd, 2014 1:48 PMPost a Comment (0)

June 27th, 2014 2:42 PM



Buying a new flag for July 4th?  Don’t know what to do with the old one?  Join us on the evening of Thursday July 3rd for our Fourth Annual Flag Retirement Event.  Bring your old flag(s) that need to be properly disposed and witness the Boy Scouts properly retire a flag with a ceremony. 
More information here.

 

 

Question of the week: What does the economic news mean to the mortgage and housing markets?

 

Answer:   Regular readers of the Weekly Rate & Market Update know that I spend about half the update going through economic news for the week that impacts mortgage rates. News this week was the impetus for the question of the week and several conversations I have had with clients past and present, referral sources in the real estate and financial services industries and others in the mortgage industry. The news was that the final revision for Gross Domestic Product (GDP—total of all goods and services produced within the United States) in the first quarter showed the economy shrank by 2.9%. The initial GDP for the first quarter of 2014 showed a decline of 0.1%, the first revision showed contraction of 1.0% and data had most analysts in consensus of a final reading of 1.8% contraction for the quarter. Because of the historically bad weather in most of the country in the first quarter many expected the economy to contract in the first quarter, after showing 2.6% growth the quarter before, however the 2.9% contraction came as a surprise due to the scope of contraction.

 

What does this mean to housing and mortgage markets? There are two approaches to this answer. One is take the news with a grain of salt and bury it due to the inclement weather as an aberration, a one off decline that will be reversed in the second quarter.  The other is to factor in the weather but also other data that raises concerns about the economy in general, which would impact housing markets.

 

The definition of a recession is two consecutive quarters of economic contraction (or in the parlance of political correctness, “negative economic growth”). We now have one of those quarters on the books, will the second quarter GDP, data released July 30th, show growth or contraction? If growth then perhaps the 1st Quarter was an aberration, but if not….

 

Some items to consider regarding the economy and where we stand today. The “Great Recession” that began in December 2007 ended five years ago this month—June 2009. Since that time our economy has seen very low growth, lower than any post war recovery. All economies have cycles of growth, peaks, contraction, troughs and repeat, recovery, peak, recession, bottom, recovery… The question that many economists need to start asking, and I have yet to hear the discussion, is if the U.S. economy hit its post-recession peak in the 4th quarter of 2013, or is it stumbling to the peak?

 

The shallow recovery has been pulled along by two major sectors fueled by the trillions of dollars pumped into the economy by the Federal Reserve’s Quantitative Easing policies and the fiscal policy of the federal government that has put several trillion more into the economy. The financial sector has definitely benefited as seen by the rise in the stock market since the end of the recession; the pre-recession peak of the Dow Jones Industrial Average (DJIA) was just over 14,000 in October 2007, it hit its recession low in March 2009 at just over 6,600 and today is trading at 16,800. So if you have any investment in the equity markets—and almost everyone with a retirement account, be it 401(k) through work, government pension, or IRAs is invested in the equity markets—then you have benefited from the cash influx from the Fed and Washington.

 

The other sector that has pulled along the economy has been the housing sector. The rise of home prices and sales volume from June 2009 through this year has been fairly robust—some feel too robust—and led to higher consumer confidence and economic growth. Spurring on the housing recovery was a combination of government intervention, HARP refinances for example, and Federal Reserve policies that have kept mortgage rates at extremely low rates for years.

 

Looking forward, the Fed is easing out of its QE policies, which caused the spike in rates last May, and speculation is rising rates by this time next year. As well with labor participation rates at their lowest in forty years there is great concern about the ability for this economy to grow even at 3% much less grow at all in the coming year.

 

If rates rise faster than the economy grows then we face risk to the housing sector of higher costs to purchase the same priced home, this constricts the market and can lead to lower home prices. If we see rates remain stable but enter into another recession the risk is higher unemployment which constricts the pool of eligible buyers, and a drop in consumer confidence which restricts spending and buying of big ticket items, like houses.

 

The economic news this week presents a warning for our economy and the housing markets. On the plus side it pushes out possible rate increases a bit further as the Fed does not want to choke off any growth, or possible recovery if we are entering another recession which supports the housing markets. On the negative side, if we are entering another recession if it is prolonged and/or deep then housing markets that have struggled to recover to near post-recession levels in some markets may see those gains reversed.

 

Overall the news this week has been neutral for interest rates, as you’ll see below, and housing sale numbers for the quarter are firm. However we could have seen the proverbial shot across the bow with the final GDP data for the first quarter, the July 30th report for second quarter GDP activity will have a major impact on mortgage rates and could flow through to housing markets.

 

Note that kept out of my comments was any mention of international events, the most important factor right now on future economic growth or expansion can be (may be? will be?) the situation in the Middle East and its impact on petroleum extraction and delivery. Any major disruption will have deleterious impact on not only the U.S. economy but the global economy.

 

Have a question? Ask me!  

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

In other economic news this week existing  home sales in May increased by 4.9% following a 1.9% increase in April, the first back to back monthly increases since April and May last year. Within the data the West showed a decline year over year of 11.4% and nationally sales are down 5% year over year. Also strong, very strong, was the new home sales report for May which showed an increase of 18.6% for the month, properly labelled a “surge” by one writer. Rising home sales tend to be negative for rates as it indicates positive economic activity and demand for mortgages.

 

An indicator that points to no concern for the GDP numbers I discussed above is Consumer Confidence for June which came in at the highest level during the recovery and the fourth straight month the index is over 80, a level that forecasts economic growth. High consumer confidence is indicator for higher rates as it correlates to higher consumer spending which is estimated to be 65-70% of economic activity, stronger economic activity leads to higher mortgage rates.

 

Speaking of consumer spending, despite a decent growth in personal income (0.4%) in May consumer spending only increased 0.2% following a decline in April. The April and May consumer spending numbers support concerns I addressed in the opening section on GDP for the second quarter. Typically higher personal income will result in higher rates as it leads to higher consumer spending, in this case however consumer spending trumps income and the data is positive for lower rates.

 

Rates for Friday June 27, 2014: Like last week the Mortgage Backed Securities (MBS) market was somewhat volatile day to day, over all pricing improved (lower rates) from last Friday and we have slight improvements in rates across the board.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.912%             Down 0.088

30 year high-balance conforming           4.00%               Down 0.125

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               Flat***

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have credits available for closing costs at these rates and higher.

 

 



Are you a soccer fan? I am not, though I played through high school. Like many I only follow the sport every four years when the World Cup is happening. The games this year have been very exciting and the U.S. squad has performed better than expectations getting out of the “Group of Death” having to play top world teams Germany, Portugal and Ghana. Many unfamiliar with the World Cup wonder how the U.S. could advance when losing to Germany yesterday, it is a point system to advance and just like a hockey, basketball or baseball team can advance to playoffs after losing the last game of the season, in the initial round of World Cup play the last game is certainly important but so are the previous two.

 

Now the U.S. plays Belgium, where I lived from June 1977 to June 1980 having gone to high school in Brussels. While I will be rooting for the U.S. team my heart will not be broken if my former host country advances. Either way I am hoping the next round of games is exciting for all.

 

Have a great week,

 

Dennis


Posted by Dennis C. Smith on June 27th, 2014 2:42 PMPost a Comment (0)

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