Tag Archives: interest rates

Mortgage Market Update from Calculated Risk

Calculated Risk is a blog that basically aggregates and analyzes up-to-date financial and economic data as it is released, particularly that which applies to the housing market.  The number of economic and financial metrics that are available on the internet is useful in some contexts but often feels more like a confusing, frustrating glut of information that renders answering a pithy question like “What is the rate of foreclosures like in the current housing market relative to pre-crisis times?” difficult to answer.  Trying to get beyond this issue is where I’ve found Calculated Risk really useful – relevant date for a particular issue is laid out, cited, and analyzed clearly in an effective and timely fashion.

I was curious about the housing market after meeting a seemingly overzealous realtor on the train, and here’s what I found via calculated risk.

Delinquencies 

At the end of Q3 2014, the delinquency rate on 1 to 4 unit residential properties was 5.85% of all loans outstanding, down for the 6th consecutive quarter and the lowest rate since the end of 2007.  The delinquency rate does not include loans in foreclosure, though they as well are at their lowest rate since the 4th quarter of ’07 at just under 2.5%.  Though foreclosures have come down from the stratospheric levels reached during their peak in 2010, they’re still more common than they were before the crisis.  Mortgages that are 30 and 60 days past due, on the other hand, have returned to approximately pre-crisis levels.  

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Mortgage Rates 

30-year fixed rate mortgage (FRM) rates are down 1 basis point (.01) from last week at 4.01%, roughly the same level as 2011 but lower than last year’s 4.46%.  Obviously there isn’t “one” mortgage rate – the rate we’re talking about here is the one that applies to the most creditworthy borrowers in the best scenario possibly to receive a loan from the bank.  Though all other mortgages are based on this rate, it’s not exactly a rate one should expect to be offered by a bank.

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The relatively small difference between a mortgage quoted at 4.01% and 4.45% has a surprisingly large financial impact on the 30 year FRM.  A $250,000, 30-yr. FRM at a 4.01% nominal annual rate compounded monthly (as is typically the case) necessitates a monthly payment of $1,194.98, whereas the same mortgage at 4.45% would require a monthly payment of $1,259.30.  With the higher payment, the borrower pays an additional $23,155 in interest over the term of the mortgage.

Another post talks about subdued refinancing activity, which I’d guess is the result of relatively static mortgage rates as it’s generally only financially viable to refinance when rates have changed significantly.  Banks could also be offering fewer refinancing options after the crisis, a reasonable assumption given their cautious resumption of lending post-crisis and the role that refinancing options played in exacerbating the housing bubble.  I’m purely speculating, though, and I’ll look into this more later.

Residential Prices

A widespread slowdown in the rate of housing price increases has been steadily taking hold since February of this year.  Residential prices aren’t decreasing, they’re just rising at a slower and slower rate each month, and now sit 20% below their 2006 peak.  This is not to say we should expect or even wish that housing prices should resume at 2006 levels, as such was clearly unsustainable – furthermore, though slow relative to preceding months, the (annualized) 6%+ experienced last month is still pretty strong and obviously outpaces inflation.

 

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Is the Stock Market a Viable Barometer of Economic Health?

The S&P’s record close of 1992.37 on Thursday begs the following question: what, if anything, does a soaring stock market index, up almost 8% just this year, say about the health of the real economy?  As I’ve mentioned previously, there are quite a few issues in the current U.S. economy that may have to be rectified before the real economy can sustain robust growth – a weak labor force and stagnant wage growth, for example.  If we are to interpret the appreciation in the price of a stock market index as a sign of economic health, as many pundits on TV seem to do, then Thursday’s record close seems to contradict what the assertion that wage growth and a robust labor force are vital to the U.S. economy’s health.  This subject is briefly addressed on page 101 of  Freefall by economist Joseph Stiglitz, an account of the financial crisis, its causes, and aftermath.  He says:

“Unfortunately, an increase in stock market prices may not necessarily indicate that all is well.  Stock market prices may rise because the Fed is flooding the world with liquidity, and interest rates are low, so stocks look much better than bonds.  The flood of liquidity coming from the Fed will find some outlet, hopefully leading to more lending to businesses, but it could also result in a mini-asset price or stock market bubble.  Or rising stock market prices may reflect the success of firms in cutting costs – firing workers and lowering wages.  If so, it’s a harbinger of problems for the overall economy.  If workers’ incomes remain weak, so will consumption, which accounts for 70 percent of GDP.” 

I quoted the preceding passage because it cogently argues that stock market gains are not necessarily emblematic of health in the economy, as the media – particularly on business-oriented news shows – often suggest.  The two scenarios Stiglitz mentions (expansionary monetary policy and firms cutting costs) result in higher stock prices but not a healthier economy.  It is erroneous to conclude that the price of the S&P 500 is a sufficient and reliable barometer of economic health.


Econ Week in Review: 6/9 – 6/15

Emerging markets have lost momentum throughout the past year, as investors adjust to the changing macroeconomic climate. According to news outlets (MarketWatchBloombergLibertyStreet) global risk aversion is to blame.  Though emerging economies are still poised for more GDP growth than their developed counterparts in 2014 – 2.2% versus 4.9% – they aren’t expected to increase that growth rate by much in ’15 and beyond.

Growth prospects that are relatively weak in comparison to previous estimates (though still strong in comparison to other economies) is one reason why investors are pulling out of emerging market economies, as evidenced by capital outflows in those markets (IMF).  Another is the outlook for developed economies, particularly the United States, which looks much better than it did a year ago.  Now that investors expect the U.S. economy to recover and interest rates move away from the zero lower bound, they expect new financial opportunities to emerge in developed economies as well.  Now that investors think they’ll be able to make a decent return in an advanced economy, there’s less of an incentive to take on the risk associated with emerging markets.  There is evidence of this if you look at capital outflows immediately following Ben Bernanke’s speech in May 2013; it seems that the cautiously positive economic outlook Bernanke conveyed in his speech led to a sell off in emerging markets that has continued for the past year.  Some economists have justified this phenomenon using the VIX as an indicator of risk aversion

Capital outflows put emerging market economies in a tight credit position, constraining their growth potential.  Previously they had enjoyed abundant credit because investors in advanced economies had to go abroad for financial returns.  Furthermore, it has been shown that Quantitative Easing and related policies in the U.S. put downward pressure on interest rates in emerging markets, facilitating even easier borrowing.  This shouldn’t come as a surprise since financial markets are becoming increasingly integrated, but it could pose some problems by limiting the effectiveness of domestic monetary policy (full discussion on if/how us policy affects global market here).  Integrated financial markets are generally a good thing, though , and the fragmentation that currently plagues most of Europe is a pertinent example of that.

I’m going to write a follow-up on QE and the role of expectations in the next week or so (after I finish reading the IMFs global economic outlook), and hopefully delve deeper into the current situation in emerging market economies.


Econ Week in Review: 5/26 – 6/1

This was meant to be a sort of  “week in review”, but I’m (predictably) late, so it’s more like an assortment of articles about housing policy.

On May 13 the Wall Street Journal reported that mortgage behemoths Fannie Mae and Freddie Mac are being encouraged to make more credit available, according to overseer Mel Watt, who communicated the current administration’s stark policy reversal with his statement.  Until now, post-crisis housing policy had focused on restricting credit to prevent another boom and bust.  Efforts to do so included proposals from Washington such as requiring larger down payments on mortgages, which critics argued would unfairly punish creditworthy borrowers.  Read the article for more details on the so-called Johnson-Carpo bill.  An interesting point is that the bill would repeal “Affordable-Housing Goals”, which require Fannie Mae and Freddie Mac to cater to purportedly “underserved” markets (i.e. inner cities and rural areas).   One really interesting proposal (not a part of the Johnson-Carpo bill, just an idea) is that borrowers and lenders share more risk, allowing lenders to cash in if home values rose and take a hit if they fell (via a subsequent fall in the principal mortgage balance).  It’s radical, which the article admits, but an interesting idea nonetheless.

Why is the housing market so important?  The following article explains why the housing crash raped the entire economy, whereas the dot com crash, though slightly larger in terms of dollars of wealth destroyed, had a much smaller effect – and therefore also explains why so many people care so much about the housing market.  The answer has to do with the distribution of losses, according to authors Amir Sufi and Atif Mian at FiveThirtyEight.  On the same website, Andrew Flowers discusses the potential that a bond bubble is forming and how hard the economy would get screwed if this were in fact the case.  The articles aren’t explicitly related, but it’s easy to apply the rationale set forth in the first article, about the distribution of losses and macroeconomic consequences, to what Flowers says about a potential bond bubble.


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