Market Update - Time to Push Debt Out

By Nate.Kuchera@nafinc.com November 16, 2017

Without a doubt debt has been very cheap for the past several years. Not to mention record low interest rates and fiscal stimulus have pushed up asset prices following the financial crisis. The stock market has pushed higher and higher as have real estate prices. But so has the debt load of the US Government, the US homeowner as well as college students around the nation. In fact the total US Household Debt has reached $13 trillion, $280 billion higher than in 2008 as the financial crisis unfolded.  We’ve been told that the loans made today are of much higher quality than loans made before the financial crisis. That’s certainly true with mortgages but what about other types of debt? Subprime auto is experiencing heavy losses nearing pre-crisis levels, student loan debt has reached $1.4 trillion with a 11.2% 90-day delinquency rate and credit card balances continued to rise. Mortgages have become the safe form of debt but other forms are becoming very risky. What’s the solution?

As it stands today tax reform likely won’t be passed in its current form. Certainly any type of stimulation to the economy could cure the current debt problems (and potential crisis for students). If nothing is done it’s going to be very difficult to continue to borrow our way into prosperity. And that’s where rates come into play…

If you’ve been watching the market you’ve seen short term rates via the Federal Reserve continue to rise while long term rates have remained relatively flat. See the chart below that represents the spread between the 2yr and 10yr Treasuries. As you can see over the last 8+ years the spread has nearly collapsed, meaning it’s becoming cheaper to borrow over the long term relative to the short term. This is often referred to as a flattening of the yield curve. It’s generally a result of the Federal Reserve raising interest rates and a low growth and inflation outlook for the longer term. Yes there are some supply and demand effects as well. So why care?

As a mortgage banker it certainly is an encouraging sign on the likely long term path of lower interest rates. It also serves as economic encouragement for borrowers to take debt over longer periods of time. If it costs the same to borrow for thirty years versus two years, why not borrow for thirty? And given the equity that has built up over the last several years in real estate, most homeowners have a very effective method to borrow debt versus other forms, especially considering the tax advantage of a home mortgage.

The 10yr is currently at 2.32% versus the average for all of 2017 at 2.32%. The entire range for 2017 has been very tight with it trading between 2.04% and 2.62%. 2018 however could be a very different year with a new Fed Chair (yes Janet Yellen is being replaced by President Trump). We will also see how inflation plays out now that the FOMC has raised twice in 2017 and possibly a third time will come in December. The current odds of a December hike are 92% and a 50% chance of two hikes in 2018. I’m going to call 2018 as a make or break year for the Federal Reserve. They are raising rates, so let’s sit back and see how this plays out. Not to mention a flattening yield curve. If it goes negative (2yr yield is higher than the 10yr yield) then hang onto your hat.

 

image: http://www.newamericanagent.com/uploads/images/Jason_11.16.17.png

2 yr - 10 yr spread

 

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Market Update - Halloween Edition

By Nate.Kuchera@nafinc.com October 27, 2017

Market Update - Halloween Edition


Hello everyone and welcome back to the Mortgage Rundown brought to you by New American Funding.  Today I’m going to review what’s happened in the markets these past 12 months and my predictions for the future.

The end of 2016 saw interest rates move higher by 70bps right after around the election of a new US President.  Republicans retained house and senate majority and looked to advance their agendas on tax reform, health care reform and infrastructure spending.  The 10yr finished 2016 at 2.45% and as you can see on your screen it reached an all-time low in July at 1.36%.

In the 1st quarter of 2017, fears of inflation have plagued the markets with many economists calling for the Federal Reserve to raise rates 4 times this year.  Core PCE has almost reached 1.9% and the unemployment rate is right around 4.7%.   The Fed’s dual mandate of below 5% unemployment and 2% inflation is about to be met.  As you can see on this graphic unemployment has been falling continually since 2009.

The 2nd quarter saw inflation falling at a dangerous pace and suddenly the market doesn’t believe the Fed can raise 4 times in 2017.  The market believes that tax reform and health care reform are still on the table.  The 10yr Treasury moved very little.  It started the quarter at 2.38% and finished the quarter at 2.31%.  The graph on your screen shows the change in inflation over the past five years.

The 3rd quarter brought more bad news on inflation with Core PCE and CPI below 2%.   There were two FOMC meetings in Q3 but the Fed made no changes to the benchmark rate during either session. Over the quarter there was rate volatility as the 10yr fell to 2.04% before climbing all the way to 2.33% by September 30th.   

The fourth quarter has begun with a more hawkish tone as there is now an 80% chance the Fed raises rates in December.  Keep a close eye out for more inflation data from October.

Looking into the future, my prediction is that tax overhaul and health care overhaul will continue to stall.  Inflation without an overhauled tax code will remain relatively low.  The Fed’s unwinding of the balance sheet will take precedence over interest rate increases and last but not least the 10yr will remain below 3%.

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Boomerang Buyers Are Back

By Nate.Kuchera@nafinc.com January 21, 2016

Everyone remembers the housing crisis that hit Americans in 2008. According to the National Bureau of economic interest, America's housing bubble burst led to a substantial fall in home prices. When the value of homeowners' property decreased so quickly, it left many Americans with mortgages that were higher than the price of their homes. Many individuals wound up defaulting and foreclosing.

The Impact of the Burst

According to RealtyTrac, nearly 3 million homeowners filed for foreclosure at least once in 2009. Foreclosure activity increased 25 percent from 2008 to 2009.

"As bad as the 2009 numbers are, they probably would have been worse if not for legislative and industry-related delays in processing delinquent loans," said James J. Saccacio, chief executive officer of RealtyTrac. "After peaking in July with over 361,000 homes receiving a foreclosure notice, we saw four straight monthly decreases driven primarily by short-term factors: trial loan modifications, state legislation extending the foreclosure process and an overwhelming volume of inventory clogging the foreclosure pipeline."

These substantial numbers left many Americans in quite the predicament.

"Despite all the delays, foreclosure activity still hit a record high for our report in 2009, capped off by a substantial increase in December," Saccacio continued. "In the long term a massive supply of delinquent loans continues to loom over the housing market, and many of those delinquencies will end up in the foreclosure process in 2010 and beyond as lenders gradually work their way through the backlog."

In total, 7.3 million homeowners wound up losing their home due to either short sale or foreclosure. While this is a substantial chunk of the nation, these previous homeowners might be ready to reenter the housing market and invest in real estate once again.

Boomerang Buyers Are Coming Back

RealtyTrac indicated the first wave of what is commonly called boomerang buyers, or individuals who lost a home in the crash and are looking to purchase again, is expected to enter the market relatively soon. Seven years after the burst, many individuals have had time to repair their credit, which allows them to better qualify for a U.S. home mortgage.

My FICO indicated foreclosure will remain on an individuals' credit report for about seven years. It's impact will decrease over the years, and the score itself can improve in as little as two years.

"The housing crisis certainly hit home the fact that homeownership is not for everyone, but those burned by the housing crisis should not immediately throw the baby out with the bathwater when it comes to their second chance at homeownership," said Chris Pollinger, senior vice president of sales at First Team Real Estate. "Homeownership done responsibly is still one of the best disciplined wealth-building strategies, and there is much more data available for homebuyers than there was five years ago to help them make an informed decision about a home purchase."

Between 2015 and 2018, RealtyTrac forecast more than 4 million boomerang buyers will invest in a home.

Homeownership Is a Possibility

For boomerang buyers, becoming a homeowner once again can happen. It will take a little work, but as the economy improves and the housing market continues to bolster, this is a great time to invest in a home.

Bankrate recommended improving your credit score to ensure you lock in the best interest rate for a house.

"Your first objective is that since you're going to have to wait, make sure the rest of your credit is clean," said Bert Carpenter, a loan officer at Nova Home Loans "That way, when you move into the phase when you're almost out of your penalty period, you'll know it's just a matter of waiting."

In addition, it is important to provide a down payment for a home. While prior loans may have not required this in the past, at least a 3.5 percent down payment is required for a loan through the Federal Housing Administration and a 20 percent down payment must be provided to avoid paying mortgage insurance.

If you are interested in becoming a homeowner once again, make sure you speak with a professional to ensure you take the proper steps. It's a very real possibility that you can once again own a home of your own despite the housing crisis, noted the Wall Street Journal. As the economy has improved and more individuals have accessed home loans, boomerang buyers can also take advantage of the opportunity.

"The dark shadow of the foreclosure crisis is finally beginning to fade," said Mark Zandi, chief economist at Moody's Analytics, a unit of Moody's Corp, according to the Journal. "That should be a positive for single-family housing and, by extension, for the broader economy."

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