The Teflon Market Revisited

A View from the Beach

A View from the Beach

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May 3, 2016 –

 

The Teflon market has struck again. No matter how deep the correction, the stock market has bounced back from adversity again and again. Consider this–in February of 2009 the Dow was below 8,000, a drop of around 50% during the financial crisis. In October of 2013, it was near 16,000, higher than it was before the crisis started. The recent rebound may not have been as impressive, but the Dow did drop from just over 18,300 in February of last year to just over 16,000 later in the year and back down to near 16,000 early this year.

It is just a few months later and the Dow crossed the 18,000 barrier again in mid-April. The rebound was not only sharp, but it was quick. We are not saying that the gains of stocks are miraculous, but certainly the resiliency of the markets is impressive. One reason for this impressive performance? Low interest rates. It is no coincidence that stocks did not perform well earlier this year when many thought rates were going up. Rates are now lower than expected and thus stocks are doing fine.

A coincidence or correlation? We may never know. However, we do know that the Federal Reserve Board is watching the economy carefully, and the number one economic indicator is right around the corner. This week we have the employment report. Large job gains could prompt the Fed to raise rates in June and, if that happens, stocks might lose some of their momentum. Only time will tell with regard to this scenario. For now, the Teflon market lives on with low interest rates leading the way.

20140309-080538.jpgThe Markets. Rates rose in the past week; however, the survey was compiled before the bond markets reacted to the Federal Reserve’s decision to hold rates at their current level. Freddie Mac announced that, for the week ending April 28, 30-year fixed rates rose to 3.66% from 3.59% the week before. The average for 15-year loans was also higher, moving to 2.89%. The average for five-year adjustables increased to 2.86%. A year ago, 30-year fixed rates were at 3.68%, close to today’s levels. Attributed to Sean Becketti, chief economist, Freddie Mac –“Treasury yields marched higher this week. As a result, the 30-year fixed rate jumped 7 basis points to 3.66 percent. The Federal Reserve’s decision to leave the Federal funds rate unchanged triggered a 9 basis point drop in the 10-year Treasury yield on Wednesday, however the drop occurred too late to impact this week’s survey.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages
Updated April 29, 2016
Daily Value Monthly Value
April 28 March
6-month Treasury Security  0.39%  0.47%
1-year Treasury Security  0.56%  0.66%
3-year Treasury Security  0.93%  1.04%
5-year Treasury Security  1.28%  1.38%
10-year Treasury Security  1.84%  1.89%
12-month LIBOR  1.179% (Mar)
12-month MTA  0.410% (Mar)
11th District Cost of Funds  0.670% (Feb)
Prime Rate  3.50% (Dec)
REAL ESTATE NEWS

Speakers at a recent meeting of lenders in Atlantic City, N.J., said they expected hundreds of thousands of first-time buyers to enter the housing market in the coming years, and talked about what lenders are doing to try to satisfy the coming demand for home loans. David Stevens, a former federal housing official who now leads the trade group, the Mortgage Bankers Association, said household formations will increase to about 1.6 million a year between 2015 and 2024, compared with the increase of 1.2 million a year between 2010 and 2014. Millennials and minorities will drive this demographic boom, with two-thirds of new household formations coming from minority groups, Stevens said at the conference. People form new households either by marriage or by moving out of Mom’s house (or both). These new households either rent apartments or houses or buy places of their own. The popular wisdom suggests they will become renters first. But Stevens believes ownership may soon come first, especially for those not saddled with student loans. If ownership doesn’t come first, then at least it will follow soon after an initial rental period, he predicts. “The homeownership rate will go up again,” he told the conference. “Younger renters want a home.” The ownership rate has plunged since the crisis of 2008. But in tandem, the rental sector has become tight and less affordable. Which means owning a home rather than leasing one is now a better option, in many places. Source: The Chicago Tribune

When you and a spouse or partner apply together for a home loan, could you be leaving money on the table by paying too high an interest rate? New research from the Federal Reserve suggests the answer could be a costly yes when one individual has a much lower FICO credit score than the other. That’s because lenders generally are required to price loan applications based on the lower FICO score, not the higher. If you’ve got a 780 score — sterling credit on FICO’s 300 to 850 scale — but your partner has a sub-par 630 score, the lender will likely charge an interest rate keyed to your partner’s lower score. The so-called “minimum FICO” rule is followed by lenders and major investors such as Fannie Mae and Freddie Mac. The net result of this risk-based-pricing practice, according to researchers, is that large numbers of joint borrowers have essentially paid more than necessary for their loan during the past decade. Examining an unusually large and detailed database of nearly 604,000 conventional home loans from 2003 through 2015, economists found that “nearly 10 percent of prime borrowers who applied for their loans jointly could have lowered their interest rate at least one-eighth of one percentage point if the loan was applied for by the applicant with a higher credit score and an income high enough to qualify for the loan.” To avoid the minimum FICO rule, one of the partners must have sufficient income to qualify for the entire loan amount alone. Why would both apply if one could qualify for a lower rate? According to industry experts, many married and unmarried couples may feel a strong psychological need to have both names on the note, even though both could be on the legal title to the house without both being on the loans. Also if one partner has a low FICO, he or she would likely see an increase in the score as the couple makes regular monthly payments. Source: Ken Harney, The Nation’s Housing

Having a playroom for kids is becoming an increasingly important factor in young families’ home buying decisions, even more so than other traditional features, some real estate professionals say. Buyers today — especially millennial buyers — want everyone to have a private space of their own to decompress under one roof, and the bonus room/playroom outweighs a large yard in their buying decision,” Patty Blackwelder, a buyer’s agent with Twins Selling Real Estate in Northern Virginia, told MarketWatch. “The first item that seems to fall off the list is the large yard.” For listings that don’t have a playroom, buyers may be looking for where they could add one. For example, formal living rooms could be repurposed as a playroom. If buyers sacrifice yard size for such an amenity, they may turn to their agent to ask where the closest playground is. “What’s interesting is, given the choice of a large backyard or space inside for everyone, they will take the smaller backyard and space for everyone,” Blackwelder says. “Even if the house is on a main road, they will take that — as long as a playground is nearby.”Source: MarketWatch

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