Tag Archives: housing market

Homebuyers are stretching

Homebuyers are Stretching the Most in these Cities

Home prices continue to reach new highs, with the most recent data showing prices for existing homes at a median of $276,900 in June; new homes are even more expensive at a median of $302,100. The annual increase in home prices has been outpacing income growth since 2012. As a result, homebuyers have been stretching more and more to purchase their dream homes. Low interest rates have masked this to some extent, as they have subdued the monthly payment, but the recent increase in interest has reduced this mitigating factor.

A well-known rule of thumb says that the home price should not exceed three times the buyer’s annual income. When a mortgage is used to buy a house, the ratio of amount borrowed to income is the extent to which a borrower is leveraged. In this study, we compared leverage ratios across cities to see where borrowers are stretching the most to purchase a home.

They used Home Mortgage Disclosure Act (HMDA) data that includes over 7 million mortgages originated in 2017 to calculate the leverage rate of borrowers in the 50 largest cities in America. The median amount borrowed was divided by the median borrower income for all purchases in the HMDA database for 2017.

Key findings

  • California is known for its high home prices and high incomes. Unfortunately, the tech boom is not enriching everyone with cash, and 6 of the top 10 cities are in the Golden State, including the top four (Los Angeles, San Diego, San Francisco, and San Jose).
  • Los Angeles leads the way for stretched buyers, with the median homebuyer with a mortgage borrowing 3.75 times their annual income.
  • San Diego has similar income to Los Angeles, but cheaper homes give it the second highest leverage ratio of 3.62.
  • Home prices are much higher in the Bay Area cities which rank 3 and 4 for stretched borrowers, but higher incomes provide some relief and leverage ratios are 3.52 and 3.50 for San Francisco and San Jose.
  • The more affordable cities are clustered in the Rust Belt and southern U.S. states. Pittsburgh and Cleveland have the lowest leverage ratios at just 2.00 times annual income.
  • Houston is the largest city in the bottom 10 and has the highest loan amounts of the affordable cities. High incomes driven by the energy and health care sectors helps it to a benign leverage ratio of 2.17.

This means that the time spent commuting is a major consideration on where to relocate and purchase the next  home, the longer the commuting time – potentially, the less desirable a city or neighborhood becomes.Source: LendingTree Study

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 4.50 MBS) lost -23 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.  It was the second straight week of higher rates with MBS selling off a total of -39 basis points over the past two weeks.

Overview:  We had very strong economic data all week with big readings in Manufacturing (1/3 of our economy0 and Services (2/3 of our economy) and then ended the week with higher wage growth with the Year-over-year Average Hourly Earnings hitting 2.9%.

Jobs, Jobs, Jobs:
Non Farm Payrolls:
August was better than expected, 201K vs est of 191K.
July was revised lower from 157K down to 147K
June was revised lower from 248K down to 208K
The three month rolling average is now 185K
Wages:
The Average Hourly Earnings YOY rose by 2.9% vs est of 2.7%
Earnings on a MOM basis rose by 0.4% vs est of 0.2%.
Average Hourly Wages are now $27.16
Unemployment:
The Unemployment Rate was unchanged at 3.9%
The Participation Rate dropped from 62.9% down to 62.7%

Services: The ISM Non-Manufacturing (2/3 of our economy) was very strong and beat out forecasts with a 58.5 vs 56.8 estimate.

Manufacturing:
 The August ISM Manufacturing Index jumped to 61.3 vs est of 57.7. Its the best reading since January. Any reading above 60 is rare for this report and very robust. ISM Prices Paid
hit 72.1 vs est of 70.2…a very lofty level and yet another report that shows pricing pressures (inflation).

The Talking Fed: NY Fed Pres John Williams (voting member) said that steady inflation and low unemployment have created an economy that is “as good as it gets” for the U.S. but that “we can continue to be relatively patient and allow this economy to continue to grow.”

What to Watch Out For This Week:


The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

money into housing2

Homeowners Plan to Pump over $13B in Tax Savings into the Housing Market

Both current Home Owners and Renters plan to use their tax savings in the housing market.

Zillow estimates both homeowners and renters could put $13.2 billion in tax savings directly into the American housing market in 2018, using some of their tax cut to rent or buy a bigger home. Americans will likely spend almost double that amount – an additional $24.7 billion – on home renovations in 2018, and will add about $62.6 billion to their savings and investments, according to results of the most recent Zillow Housing Aspirations Report (ZHAR)

  • Zillow estimates homeowners and renters could put $13.2 billion in tax savings directly into the American housing market in 2018, using some of their tax cut to rent or buy a bigger home.
  • Americans will likely spend almost double that amount – an additional $24.7 billion – on home renovations in 2018.
  • Lower-income households are likely to spend a larger portion of their tax cut on housing: 12.2 cents on the dollar for households in the bottom income quintile, compared to 3.6 cents on the dollar for households in the top income quintile.

The Tax Cuts and Jobs Act (TCJA) enacted in December is likely to result in tens of billions of dollars being reinvested into housing in some form or another – despite the fact the legislation expressly limited a number of longstanding tax benefits for homeowners.

The net effect of the TCJA was to reduce most Americans’ federal tax liability and increase their after-tax income, in large part by lowering marginal tax rates and increasing the standard deduction. Many are likely to spend at least some of these gains, however small, on housing – despite new limits on tax benefits historically aimed at homeowners, including the mortgage interest deduction and deductions for state and local property taxes.

Source: Zillow Housing Aspirations Report

What Happened to Rates Last Week?


Mortgage backed securities (FNMA 4.00 MBS) lost -40 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.

Overview: Inflation concerns drove rates higher last week. Inflation is the number one enemy of long bond investors as it eats away at the real rate of return. We have solid economic growth and are seeing increased wages and input prices in some regional Fed manufacturing surveys which pressured MBS last week.

Retail Sales: We had a mixed bag for the April data but the real story is the upward revisions to March. April Headline Retail Sales matched market expectations of a monthly gain of 0.3%. But March was revised upward from 0.6% to 0.8%. When you strip out Autos, Retail Sales improved by 0.3% vs est of 0.5%. However, March was revised higher from 0.2% to 0.4%..so actually without that revision, April matched market expectations.

Manufacturing: The regional Empire Manufacturing Survey was much stronger than expected (20.1 vs est of 15.0). Of particular interest is that the survey responders were very concerned about import tariffs in April, but no so much in May.

Inflation Nation: Joining the recent PCE report that shows inflation over 2.0% (net of a drop in auto prices), the NY Fed’s UIG inflation metric shows inflation to be 3.1% and the Atlanta Fed’s Sticky Inflation metric shows inflation to be 2.5%

Philly Fed: The May Philadelphia Fed Business Outlook Survey jumped to a very robust reading of 34.4 vs est of 21.0 and included a new 45 year high for new orders, selling prices increased by 7 points which is the highest levels since 1981

Leading Economic Indicators: The April reading hit 0.4% which matched expectations and March was revised upward from 0.3% to 0.4%. The report showed a rise in the factory work week but contained no surprises.

The Talking Fed: Dallas Fed President Robert Kaplan thinks we are at full employment. He said “Our judgment at the Dallas Fed is that we are either at or already past full employment.”

April New Housing Starts were lighter than expected (1.287M vs est of 1.310M) But March was revised upward from 1.319M to 1.336M. Building Permits were higher than estimates (1.352M vs est of 1.350). The prior month was also revised upward, from 1.354M to 1.377M. Single-family permits rose 0.9 percent to an 859,000 rate.

What to Watch Out For This Week:


The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets. Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

More Taxes = More Homes For Sale?

More Taxes = More Homes For Sale?

Sounds bizarre but Vancouver, British Columbia is going to try just that.

You see, they have the same problem that we have here in the U.S.A, tight inventory. With inventory levels so low, they have been struggling to find a way to get inventory controlled by “hoarders” back into the market place.

Vancouver is slapping thousands of empty homes with a new tax as part of a government effort to tame the out-of-control Real Estate bubble that just won’t quit there and is being closely watched by many U.S. metro markets to see if it works.

Approximately 4.6% or 8,481 homes in Vancouver have stood empty or underutilized for over six months in 2017, down from 10,800 in 2016 according to declarations submitted to the municipality by homeowners. Empty properties will be charged a 1% tax on the assessed value – not much, but with average detached home prices hovering below C$1.8 million, attached units going for C$715K and condominiums at C$571K, 1% is still a large sum of money.

The problem of a hot housing market and tight inventory levels gets even worse as foreign buyers move in which effectively takes a residence out of the market and it sits vacant as thousands of home buyers are scrambling to find a home for sale. According to local sales agents, investors from Hong Kong, Mainland China and other parts of Asia have been acquiring as much as 40% of the units going up for sale and just sitting on them afterwards.

What Happened to Rates Last Week?


Mortgage backed securities (FNMA 4.00 MBS) lost -7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.

Overview: We continue to see very strong economic data with Jobs (ADP Private Payrolls and BLS Non-Farm Payrolls) as well as a very upbeat economic review by the 12 districts of the Federal Reserve. Both of those are providing pressure on mortgage rates. But the resignation of Gary Cohn and the uncertainty of tariffs and a potential trade war is providing support for rates.

Jobs, Jobs, Jobs: We had Big Jobs Friday! You can read the official BLS report here.
Here is the Tale of the Tape:

Jobs – Non Farm Payrolls:
February 313K vs est. of 200K
January was revised upward from 200K to 239K
December was revised upward from 160K to 175K
The more closely watched rolling 3 month moving average increased to 242K which is very robust.

Wages: Monthly Average Hourly Earnings increased by 0.1% over the prior month. Market was expecting 0.2%.
YOY Average Hourly Earnings increased by 2.6% form this time last year. Market was expecting 2.8%.
The national average hourly rate for private non-farm workers increased to $26.75
Hours Worked picked up by 0.1% to 34.5 which was higher than expectations of 34.4

Unemployment Rate: The February Unemployment Rate hit 4.1% which is the same rate as January. The market was expecting a small improvement to 4.0%.
The Participation Rate had a very rare increase and hit 63.0% vs est. of 62.5%
The February ADP Private Payrolls came in hotter than expected (235K vs est. of 195K), plus January was revised higher from 234K up to 244K (10K).

Productivity: The revised 4th QTR data was revised a little higher. Non-Farm Productivity was revised from -0.1% up to 0.0% and Unit Labor Costs were revised higher from 2.0% to 2.5%.

Geo-Political: President Trump’s Senior Economic Advisor Gary Cohn resigned presumably over his objection to the proposed tariffs.

The Talking Fed: On Wednesday we got the Fed’s Beige Book. This is prepared specifically to be used in the decision making process during the March Fed policy meeting. It is a compilation of all 12 Fed districts on their views of how each of their fiefdoms are doing economically. You can read the official release HERE.
Overall, the picture is stable growth and concern over impending wage inflation.

What to Watch Out For This Week: