Mortgage Rates and News from DDHL - 08.31.2020
New Home Prices to Climb This Fall
This past week, the Jackson Hole Economic Symposium took place. This annual event which started back in 1981 is attended by central bankers, finance ministers, and other officials from around the globe, to discuss and deliver speeches on important economic issues facing worldwide economies.
History has shown this event to deliver market-moving comments and major Fed policy announcements. And this past Thursday, the event didn't disappoint.
Fed Announced Big Changes at Jackson Hole
First, let's remember the Fed's role. The Fed has a dual mandate of promoting maximum employment and price stability. Currently, unemployment is too high at 10.2%, and inflation -- as defined by the Fed's favorite gauge, Core PCE -- is too low at 1.3%.
On Thursday, Fed Chairman Jerome Powell announced a major policy shift to help lift inflation, promote job growth, and make it very clear to the financial markets that rates will remain lower for longer.
The Fed is going to remove its 2% target for inflation and allow inflation to drift higher and remain there for some time before hiking rates.
In addition to allowing inflation to rise, the Fed will also allow the labor market to run "hotter" and create even more jobs before considering a rate hike.
This major policy change is the exact opposite of how the Fed previously addressed inflation and improving economic conditions, with frequent rate hikes "before" inflation and the labor market heated up.
What Does the Fed's Move Mean?
First, it means that the Fed is not likely to hike the Fed Funds Rate for years. So, short term rates like auto loans, home equity lines of credit, and credit cards will remain near current levels for quite some time. Savings accounts will also offer no meaningful interest for savers.
Next, if inflation rises like the Fed wants, home loan rates will rise -- period. Inflation is the tide that raises all boats. The good news: Inflation is currently very low and that's what's keeping home loan rates near all-time lows ... for now.
The Opportunity for Homeowners
Finally, would-be homeowners would be wise to take advantage of current mortgage rates and low inflation because if both rise, you want to be an owner and not a renter of real estate.
In an era of higher inflation and a "hot" labor market, which is what the Fed wants, wages and prices go up. One would want to lock in a mortgage at current rates and make that fixed payment with rising wages over time. Renters will be paying higher rent with higher wages.
One last benefit is that real estate is a real asset and a great hedge on inflation as home prices climb even faster with rising inflation.
Bottom line: If you or someone you know would like to talk about the incredible opportunity to housing -- please contact me.
Looking Ahead
Next week, we will get to see important labor market readings with the ADP and the August Jobs Report. With over 16 million Americans unemployed, a lot of work still has to be done to get unemployment to where it was in February, pre-COVID-19.
FHFA Does an About-Face on the .50 Hit on Refinances- But ONLY Through Dec 1
The Federal Housing Finance Authority blinked in the face of overwhelming opposition. It has pushed back the implementation of the Adverse Market Refinance Fee until Dec. 1. The fee was slated to kick in next Tuesday, Sept. 1, after only being announced earlier this month.
The revised fee also isn't as wide sweeping as originally announced. Fannie Mae and Freddie Mac will exempt refinance loans with balances below $125,000, nearly half of which are comprised of lower-income borrowers at or below 80% of area median income. Affordable refinance products, Home Ready and Home Possible, are also exempt.
"While not as good as repealing it altogether, this is certainly better than the caper they pulled when they initially announced it without any advance notice," Greg McBride, chief financial analyst at Bankrate, told MarketWatch.
Mortgage Bankers Association CEO Bob Broeksmit praised the delay. "Extending the effective date will permit lenders to close refinance loans that are in their pipelines and honor the rate lock commitments they made to their borrowers, ensuring that economic relief in the form of record-low interest rates will continue to flow to consumers," he said.
The FHFA said the fee is necessary to cover projected COVID-19 losses of at least $6 billion at Fannie Mae and Freddie Mac. "Specifically, the actions taken ... during the pandemic to protect renters and borrowers are conservatively projected to cost ... at least $6 billion and could be higher depending on the path of the economic recovery," a press release said.
Those expenses are expected to at least include:
$4 billion in loan losses due to projected forbearance defaults;
$1 billion in foreclosure moratorium losses; and
$1 billion in servicer compensation and other forbearance expenses.
The National Association of Federally Insured Credit Unions praised the delay but questioned the need for the fees' existence. Its President and CEO Dan Berger said. "While this delay will temporarily limit unnecessary financial strains ..., the policy, once implemented, will still force credit unions to absorb new financial costs amid a recession and global pandemic. We understand [Fannie Mae and Freddie Mac are facing financial concerns of their own, but these concerns would be better mitigated through wholesale housing finance reform."
Originally announced on Aug. 13, Fannie Mae and Freddie Mac were to institute the new "Adverse Market Refinance Fee." It adds a 50 basis points fee (0.5%) to most mortgage refinances starting Sept. 1, 2020.
FHFA Extends Foreclosure and Eviction Moratorium for a Third Time to Dec. 31
Four days ahead of its previous expiration date, the Federal Housing Finance Agency extended its moratorium on foreclosures and evictions for borrowers with mortgages backed by Fannie Mae and Freddie Mac until Dec. 31.
After its prior extension to Aug. 31 in June, the agency said it intended to monitor the effects of the coronavirus and update policies as needed. According to FHFA director Mark Calabria, the most recent extension will protect more than 28 million homeowners with a mortgage backed by Fannie Mae or Freddie Mac. "With this latest extension of the foreclosure and eviction moratorium, we can continue to help ensure distressed borrowers are able to remain in their homes during this national emergency," said Malloy Evans, senior vice president and single-family chief credit officer at Fannie Mae.
Fannie and Freddie's foreclosure moratorium applies to enterprise-backed, single-family mortgages only, while the REO eviction moratorium applies to properties that have been acquired by an enterprise through foreclosure or deed-in-lieu of foreclosure transactions.
According to the GSEs, the suspension does not apply to tenants in homes that have not been foreclosed. The FHFA recommends those who may be struggling with their mortgage or facing possible foreclosure to review their options with their servicers as soon as possible. Homeowners impacted by COVID-19 are eligible for a forbearance plan to reduce or suspend their mortgage payments for up to 12 months, as mandated by the CARES Act. Recent data from Black Knight shows the number of new forbearances dropped in July as the overall delinquency rate, measuring mortgages with payments 30 days or more overdue, fell to 6.91% from 7.59%. However, the number of seriously delinquent mortgages - payments overdue by 90 days or more - soared to a 10-year high during July in a tally that counts forbearances.
By The Numbers (Source: Vantage Production)
A WILD WALL STREET RIDE - The S&P 500 was down 30.4% YTD (total return) as of 3/23/20, but 106 trading days later the index is up +6.5% YTD (total return) as of last Friday 8/21/20. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock's weight proportionate to its market value (source: S&P Dow Jones Indices).
JUST A SELECT FEW - The NASDAQ Composite is up +26.9% YTD (total return) through the close of trading last Friday 8/21/20. Just 5 stocks drive approximately 40% of the return of the cap-weighted index. The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system (source: NASDAQ).
GETTING IT ALL BACK - There have been 6 bear markets in which the S&P 500 has suffered at least a 30% decline in the last 75 years (1945-2020), the latest being a 34% tumble ending 3/23/20. In each case, the stock market eventually recovered 100% of the loss sustained, i.e., it closed above the previous bull market high. The average time the S&P 500 took to recover back to a new record price after the first 5 bears was 43 months, compared to just a 5 month bounce back needed after the 3/23/20 bear market low (source: BTN Research).
BAD COMPANY - As of the summer 2019, there were just 4 "advanced economies" in the world with a government "debt-to-GDP" ratio higher than the United States - Japan, Greece, Italy and Portugal. "Advanced economies" are defined as developed, industrialized and mature economies (source: International Monetary Fund).
OUR NUMBER - As of 6/30/20, the US government's "debt-to-GDP" ratio was 137%, i.e., $26.5 trillion of government debt divided by our $19.4 trillion economy (source: Treasury Department).
WHEN DEMAND DROPS - The world production of crude oil was 101 million barrels a day in 2019. The pandemic caused a global collapse in oil consumption, forcing the major oil players of OPEC and Russia to implement an output cut of 9.7 million barrels a day in April 2020. The drop in demand forced US oil producers to cut output by 2.4 million barrels a day since mid-March 2020 (source: US Energy Information Administration).
IT WILL TAKE TIME - Economists from the 2nd largest bank in the United States predict that the US economy will not recover to its pre-pandemic level until early 2023 (source: Bank of America).
FIND A NEW JOB - An estimated 33% of the pandemic-driven layoffs in the United States that occurred from March 2020 through May 2020 will be permanent, i.e., the workers will never return to their old jobs at their former employers (source: Brookings Papers on Economic Activity).
ONE HUNDRED - As of 9am ET on 8/21/20, 175,422 Americans had died from the COVID-19 virus. 100 days earlier as of 9am ET on 5/13/20, 83,557 Americans had died from the COVID-19 virus. Thus, 91,865 Americans have died in the last 100 days from the pandemic (source: NBC News, Meet the Press: First Read).
MOVING TO THE SUBURBS - The New York metropolitan area had a net loss of 6,786 households during the 2nd quarter 2020, while Los Angeles had a net loss of 6,347 households (source: RealPage).
PAYING LESS - Just 5% of US homeowners had implemented a forbearance plan with their lender as of the end of June 2020 allowing them to pause or reduce their monthly mortgage payments for a limited period of time, i.e., 4.2 million out of 86.0 million homeowners (source: Mortgage Bankers Association).
GATHERED EVERY MONTH - The calculation of our nation's "consumer price index" is based upon pricing data collected each month from 22,000 retail stores (e.g., department stores, groceries stores, gas stations, and restaurants) across 75 urban areas nationwide (source: Bureau of Labor Statistics).
GO BIG RED - Famous stock investor Warren Buffett turns 90 years old next Sunday on 8/30/20. Buffett, a 1951 graduate of the University of Nebraska, is worth $69 billion. Buffett has accumulated 84% of his net worth since he turned 65 years old, i.e., in the last 25 years (source: Fortune).
BUCS AND BRADY? - Super Bowl # 55 is scheduled to be held on 2/07/21 in Tampa, FL, the 5th time the city of Tampa has hosted the championship game. No NFL team in history has ever played in the Super Bowl on their home field (source: NFL).