November 6, 2017
Mortgage rates and Treasury yields five years and longer fell last week with unchanged to slightly tighter mortgage yield spreads versus Treasuries. Mortgage rates fell last week after rising the previous two weeks. Mortgage applications for the week ended October 27 fell 2.6% to the lowest level since February. The MBA Refi Index has fallen seven of the last eight weeks to 1297, slightly below the YTD average. While single family home construction activity has increased (+11.9% YoY), demand continues to exceed supply as the home-ownership vacancy rate recently hit a 16-year low. Home price appreciation accelerated in August from 5.83% to 5.92% YoY.
The House Ways and Means Committee’s tax plan reduces the mortgage interest deduction principal debt cap from $1mm to $500k on new home purchases, and eliminates state and local tax deductibility except for up to $10k in property taxes. The housing industry is lobbying against the plan saying it will cause a housing recession.
- Mortgage yield spreads were unchanged to slightly tighter last week:
- 15-year and 30-year MBS yield spreads ended the week unchanged to 2bp tighter to Treasuries and swaps.
- Curve slope measured by 2- and 10-year Treasuries flattened 9bps last week from 80bps to 71bps, the lowest level in a decade (Nov. 2007) and below the YTD average of 99bps.
- Investors were active last week in seasoned 15yr MBS, primarily in 3.5% coupons, which offer attractive yields and spreads in the sector.
- Investors were also active in new and seasoned 2.0% and 2.5% 15yr MBS, which offer limited extension risk and discount to par pricing.
- A combination of higher yield versus agency bullets and deference to convexity inspired activity in seasoned multi-family FNMA DUS with 5yr maturities, discount to par pricing, and approximately 2.5% yield.
Consistent with MBS and other spread products, CMO spreads were unchanged last week. CMO investors were active in various types of CMO structures including front end sequential and PAC structures offering extension protection. Depositories continue to focus on stable structures with 4- to 6-year average lives. Full coupon front sequential structures off of 30yr 3.5% collateral (“3.5 squared”) remained popular with financial institutions with wider spreads and better supply than many shorter structures.
Mortgage Rates and Refinance Activity
- Mortgage rates fell last week after rising the previous two weeks:
- 15-year mortgage rates fell 3bps to 3.11%
- 30-year mortgage rates fell 7bps to 3.81%
- 15- and 30-year fixed mortgage rates have now fallen 13 and 25bps year-to-date; however, mortgage rates are 37 and 32bps higher than this time last year.
- Mortgage applications for the week ended October 27 fell 2.6% to the lowest level since February, driven lower by a decline in both purchase (-0.8%) and refinancing activity (-4.5%).
- The MBA Refi Index continues to be historically low and range-bound, holding far below levels of 2016. The Index reached a year-to-date high the week ending September 8th at 1637; however, it has fallen seven of the last eight weeks to 1297. The current refi index is slightly below the YTD average of 1356, but is well below the average in 2016 of 2035.
Single Family Residential Construction +11.9%: Construction spending for the month of September beat expectations rising 0.3% MoM . However, August’s 0.5% growth was revised lower to just 0.1%. Construction spending is now roughly where economists expected but with a weaker August rate and a stronger September rate. Residential construction was boosted by a rare 0.6% MoM gain in multi-family activity, while single family activity rose 0.2% and home improvements fell 0.6%. Private residential (+9.6% YoY) continues to be the primary driver of construction activity, as single family (+11.9% YoY) activity has ramped up in 2017.
Home Prices +5.9% YoY: Although construction activity has increased this year, demand continues to exceed supply as the home-ownership vacancy rate recently hit a 16-year low. Home price appreciation accelerated in August from 5.83% to 5.92% YoY as reported by S&P CaseShiller Comp-20.
Dan Stimpson, CPA
Senior Vice President