From housing supply issues to geopolitical risks, there are many forces influencing markets right now. It has caused increased market volatility and given me quite a list to cover, so let’s jump right in.
Housing inventory continues to create headlines. In January, existing for sale inventory hit its lowest point in almost 20 years. In many markets, there’s only about 30 days of housing supply, which is extremely low.
This is great news for sellers as they’re usually greeted with multiple offers on homes. For buyers, this has made a rock-solid offer more valuable than ever. Movement Mortgage was built for purchase markets just like this. It’s one of the reasons we’re projecting year over year growth at Movement despite industry projections of a 20 percent decline in total originations.
Our commitment to upfront underwriting gives buyers more than a pre-qualification based on a credit score, but rather, a loan commitment based on a full underwrite of the credit package. Plus, our seven-day processing goal and quick closing improves the speed, efficiency and quality of a buyer’s offer with no last minute surprises right before closing.
At the same time, the lack of supply has made it difficult for some buyers to find their dream home. “Homebuyers are really going to be scraping the bottom of the barrel as far as housing choice is concerned,” says Ralph McLaughlin, chief economist for Trulia, a real estate data provider.
About 1.75 million homes were for sale nationally at the end of February, according to the National Association of Realtors. That’s down 6.4 percent from a year earlier. The supply of homes for sale has fallen on an annual basis for the past 21 months.
In addition, this week we received a report that housing starts dropped 6.8 percent in March, which indicates the supply issues won’t soon be solved with new construction.
What’s causing this inventory crunch? A list of factors. Among them:
- Since 2008, the average time homeowners have stayed in their houses before selling has doubled to nearly eight years, according to Attom Data Solutions.
- About 3.2 million owners can’t sell because their homes are still worth less than what’s owed on their mortgage.
- More investors have entered the market, and are enjoying the rewards of rising rents and property values, choosing to continue to own rather than sell. Attom says the percentage of single-family homes and condos owned by investors has increased to 35 percent, up from 30 percent on average over the last decade.
- Builders are not replenishing the stock of new homes fast enough, especially for affordable starter homes.
All told, these issues are keeping the home buying market competitive and property values high. Don’t expect any changes from that trend in the near term.
From housing competition to global strife. Financial markets hate uncertainty, and a handful of crises has given us plenty to be uncertain about. From France to Syria to North Korea — even here in the U.S. — political winds are keeping us guessing.
Hostilities continue to mount between the U.S. and North Korea, which has vowed to test nuclear weapons on April 25, the 105th birthday of its founder, Kim Il Sung.
North Korea has conducted several missile tests and recently paraded an arsenal of newly-developed nuclear missiles and launchers through the nation’s capital. Its latest attempt to launch those missiles from the coast of a North Korean port city last Sunday failed but that’s done little to calm the Trump administration, which refuses to back down from pressuring the Communist nation to dismantle its nuclear program.
North Korean dictator Kim Jong Un has openly declared plans to develop a weapon capable of obliterating the United States. President Trump has promised to rein in North Korea’s nuclear program if China can’t, and Vice President Mike Pence has issued statements galvanizing U.S. support around South Korea, another target of North Korea’s derision.
In Syria, the fallout of a U.S. missile strike has created a diplomatic tug-of-war. The U.S. blames Russia for failing to minimize the years-long conflict in Syria, and has accused its government of knowing about (and trying to conceal) Syrian chemical weapons attacks in advance. Russia has decried the American airstrikes as a violation of international law and a severe blow to the Russian-American relationship.
A much less violent, but equally turbulent conflict is the French presidential election on Sunday. National Front Leader Marine Le Pen faces independent candidate Emmanuel Macron, Republican François Fillon and far-left contender Jean-Luc Mélenchon. Le Pen, who champions strong anti-immigration policies, seemingly found an ally in Trump, whose election she hailed as a sign that the working class tires of the establishment and looks for fresh leadership to shape the future.
Le Pen, who many observers compared to Trump, would mark a stark change in direction for French politics and would introduce more uncertainty in the Eurozone. This week, we also saw Theresa May, Great Britain’s prime minister, accelerate her country’s general elections in a bid to increase support for Brexit.
At home in the U.S., tax and health care reform continue to dominate conversation. On Thursday, Treasury Secretary Steven Mnuchin announced that plans to reform the nation’s tax code will be released very soon. This caused the Dow Jones Industrials to surge 200 points.
Meanwhile, President Trump has brought the once-dead healthcare reform legislation back to the table. During a Tuesday speech in Wisconsin, Trump urged attendees to press lawmakers to support a law to repeal and supplant Obamacare so the path for tax reform would clear. One pro-Trump group, America First Policies, told the Washington Post it would launch a $3 million advertising campaign to back a dozen House Republicans who publicly supported the health care proposal that lost steam last month.
The result of all this turmoil has been a move to a “risk off” trade, meaning investors have moved money into safe havens such as US Treasury bonds. Recent economic indicators have shown some weakness, and inflation appears non-existent. The combination of all these factors have caused a heck of a bond rally over the last several weeks as prices rose and yields fell. The 10-Year Treasury is currently trading at 2.24%(see chart); 30 Year Mortgage rates, which tend to follow the yield on the 10-Year Treasury, have decreased approximately .375% in rate from the springtime highs as a result.
Market volatility has also been rising as these geopolitical conflicts and uncertainties keep investors guessing. The VIX, an index of market volatility, hit a five-month high on April 13, and has only retreated slightly since then.
That’s a lot happening all at once. For now, the uncertainty and volatility has put a damper on another rate hike this spring. The Federal Reserve has raised target rates once already this year and plans to hike twice more. But the market has put odds of a rate hike at the Fed’s next meeting below 50 percent. This is an important indicator as the Fed has never raised rates when the market consensus is sub 50.
Next up in MBS 101: Understanding Servicing Fees
For the last few weeks, I’ve discussed the basic components of mortgage-backed securities and how that affects the pricing and origination of an individual mortgage loan. We’ve already covered MBS 101 and guarantee fees. This week, I want to focus on servicing fees.
We have already learned that originators such as Movement sell individual mortgages into pools that are sold to investors such as Fannie Mae and Freddie Mac. A fee is charged on each of those loans to provide a guarantee to the investor that they’ll receive timely payments on the loan. But there’s another party that needs to be compensated: The mortgage servicer.
The mortgage servicer is responsible for collecting mortgage payments from the homeowner, managing escrow accounts and making sure payments are divided and sent to the appropriate parties (in some cases, e.g. scheduled remittance cycles, even when the borrower has not made the payment).
To compensate servicers for their work and potential cash outlays, each mortgage loan comes with a servicing fee. These fees are calculated as a percentage of each mortgage payment made by a borrower to a mortgage servicer as compensation for keeping a record of payments, collecting and making escrow payments, passing principal and interest payments along to the investor. Servicing fees for Fannie Mae or Freddie Mac loans in general are 0.25% of the remaining principal balance of the mortgage each month. Servicing fees for loans we securitize in Ginnie Mae pools can range from 0.19% to 0.69%.
The rights to servicing a loan and collecting these fees, known as Mortgage Servicing Rights (MSR), have a value associated with it based on many things that include interest rates, prepayments, loan performance, loan characteristics and costs to service. The originator can choose to hold onto these rights or sell them in the secondary market much like mortgage-backed securities.
Next week, we wrap things up with a bit more detail on mortgage backed securities.