September 25, 2017
Mortgage rates and Treasury yields rose again last week with a continuation of slightly tighter mortgage yield spreads even as the Fed announced plans to begin the unwind of the balance sheet in October. Mortgage applications for the week ending September 15 gave back almost all of their previous week’s 9.9% gain, falling 9.7%. Housing reports were generally disappointing last week as homebuilder confidence pulled back, starts and permits data were mixed, weaker than expected existing home sales, and a slower rate of home price gains.
- Mortgage yield spreads tightened last week:
- 15-year MBS yield spreads ended the week 1 to 2bps tighter to Treasuries and swaps
- 30-year MBS yield spreads ended the week 2 to 3bps tighter to Treasuries and swaps
- Curve slope measured by 2- and 10-year Treasuries was unchanged at 82bps.
- Investors were active last week in seasoned 15yr MBS, primarily in 2% coupons priced below par.
- Investors were also active in seasoned 30yr MBS, primarily in 3.5% to 4% coupons.
Trading in CMOs was steady last week with slightly tighter yield spreads in certain CMO structures. Depositories continue to focus on stable structures with 4- to 6-year average lives. Investors were active in CMOs backed by Relo collateral and in VADM structures offering extension protection.
Mortgage Rates and Refinance Activity
- Mortgage rates increased for the second consecutive week
- 15-year mortgage rates rose 4bps to 3.00%
- 30-year mortgage rates rose 3bps to 3.79%
- 15- and 30-year fixed mortgage rates have now fallen 24 and 27bps year-to-date; however; mortgage rates are 35 and 29bps higher than this time last year.
Mortgage applications for the week ending September 15 gave back almost all of their previous week’s 9.9% gain, falling 9.7% on declines in both purchase (-10.8%) and refinance (-8.5%) applications. Refinance activity remains at historically low levels and the Refi Index reveals that burnout dominates an unincentivized population of mortgage holders this year.
Last week’s calendar was housing-heavy including reports on homebuilder confidence, new starts and permits, existing home sales, and FHFA home prices.
- Homebuilder confidence pulls back
- Mixed starts and permits data
- Weak existing home sales; decline in the South impacted by hurricane in Houston
- FHFA HPI shows slower rate of home price gains
NAHB’s Housing Market Index Backs Off in September: The NAHB’s September housing market index disappointed as the index fell back to its weakest level post‐election; sales expectations tumbled and foot traffic slowed. The indices tracking both current sales levels and sales expectations fell and matched their lowest readings of the year. Also disappointing was another decline in the level of foot traffic from prospective buyers. The index slipped to its lowest level since before the election. The bottom line is that sales of new homes in coming months are likely to continue to struggle.
Starts Disappoint, But Permits Offer Some Hope: August’s housing starts data was weaker-than-expected with starts falling 0.8% MoM (exp. +1.7%). However, July’s starts were revised up from -4.8% to -2.2%. As a result of the positive July revisions, actual starts of 1.30 million SAAR actually surpassed economists’ expectations. Housing starts have now been negative for two consecutive months and in six of eight months of 2017. On a YoY basis, starts are now down to +1.4%. Weaker multi-family starts were, once again, the cause for the weakness in August, dropping 6.5% while single family starts rose 1.6%.
Building permits were quite solid, rising 5.7% in August (exp. -0.8%), while July’s permits were revised up from -4.1% to -3.5%. The strength in the permits data was a big 19.6% jump in multi-family permits, while single family permits actually pulled back 1.5%. On a YoY basis, new building permits are now up 8.3%, an encouraging indicator for the languishing starts data.
Existing Home Sales Slip in August: Existing home sales fell 1.7% unexpectedly in August (now down in four of the last five months) to a 5.35MM annualized pace; the weakest in a year. NAR said absent the 25% YoY decline in sales in Houston (Harvey), net sales were closer to flat. Affordability remains a concern ‐ the median price rose 5.6% YoY and inventory fell 6.5%, the 27th straight YoY decline. Houston led the 5.7% drop in sales in the South and a 4.8% decline in the West helped offset a 2.5% increase in the Midwest and a 10.8% surge in the Northeast. The number of months’ sales in inventory was unchanged at 4.2 and remains well below the 6 months the NAR considers balanced.
FHFA Home Price Index shows slower rate of home price gains: Home prices in July rose just 0.16% MoM, less than half the price gains expected. Looking by region, the farther west one goes (excluding the mountain states), the weaker the prices were. Pacific states saw a 0.5% drop MoM as did the northwest central states. Southwest central states, a region which includes Texas, saw a 0.1% MoM decline. Prices in all other regions were slightly higher.
Dan Stimpson, CPA
Senior Vice President