Poor Baby Boomers. The industry
is so fixated on waiting for the "trophy generation" Millennials to
figure out what they want for housing (see updates a few paragraphs down) that
no one seems too concerned about older folks. But the National Reverse Mortgage
Lenders Association/ Risk Span Reverse Mortgage Market Index (RMMI) grew for
the tenth straight quarter. The RMMI, which evaluates trends in home values,
home equity and mortgaged debt of homeowners, aged 62 or older every quarter,
has reached its highest level since Q3 of 2007 at 183.87, a 2.5% increase from
Q2 of 2013. The index indicates that Americans 62 years old and older now
have more equity in their homes since 2007 and senior home values have grown by
more than $97 billion in Q3, whereas collective home equity continues to
increase, reaching a total of $3.84 trillion.
They aren't making any more Millennials either. Young adults
today, often called the millennial generation, are more likely to be foreign
born and speak a language other than English at home, compared with young
adults in 1980...and take pictures of themselves and broadcast them over the
internet. The U.S. Census Bureau pegs the Millennial group as age 18-34,
thus born between 1981 and 1997. That definition is good enough for me.
Maybe some of them will go to college for free. Orange County is
not exactly the hot bed of liberalism and progressive thought, and this article on free junior
college proves it. But it does raise some issues about the cost of a college
degree obviously impacting future home buyers.
Because overall, student loan debt lowers the likelihood of homeownership
by age 30 or so for a group of individuals who attended college during the
1990s. If you don't believe me, ask the Federal Reserve Bank of Boston
which published the most recent comprehensive study on the topic.
Remember, however, that our government earns income from all
those ex-college students making their debt payments. The last figure I saw
came from USA Today in late November 2013, and it noted that our government
("we're here to help") made a $41.3 billion profit for the 2013
fiscal year. There are companies out there, however, that are actively
refinancing student debt - such as San Francisco's Social Finance.
Yes, a frequent news item is the level of student loan debt
outstanding. The claim in the press is that student loans that young adults are
saddled with are preventing them from purchasing homes. What is the current
policy of how student loans are factored into a borrower's ratios? Here is
exactly what FNMA has to say: "Fannie Mae requires that all deferred installment
debt, including student loans not yet in repayment, be included in the
calculation of the borrower's debt-to-income ratio. In determining the
payment for deferred student loans, Fannie Mae currently requires that the
lender obtain a copy of the borrower's payment letter or forbearance agreement
or calculate the monthly payment at 2% of the balance of the student loan.
Research has shown that actual monthly payments are typically lower than 2%. In
addition, many student loan repayment structures now use an income-based
approach in calculating changes in the payment due over time. As a result,
Fannie Mae is modifying the monthly payment calculation from 2% to 1% of the
outstanding balance. In addition, for all student loans, regardless of their payment
status, the lender must use the greater of the 1% calculation or the actual
documented payment. An exception will be allowed to use the actual documented
payment if it will fully amortize the loan over its term with no payment
adjustments." Therefore even if the payment is deferred we still have to
factor in either the actual future payment or use the 1% calculation.
CNBC reports in 2014 renters paid 4.9% more than they did in
2013. Analysts say increases like this will eventually push Millennials into
home ownership. Here's a great short video from The RE Source and Dave
Savage of Mortgage Coach on working and winning with Millennials in
Real-Estate and Lending. The guys talk about what matters most, and how to
best communicate with this younger generation that currently makes up 36% of
the workforce.
Other countries are dealing with this as well. And they have a
few creative things going on overseas with regard to students and home buying.
For example, this from the UK.
Last year I attended a school graduation where one of the
graduates showed up to the ceremony wearing prison stripes, holding a ball and
chain strapped to his leg, and a sign that read, "Class of 2014: Part of
the Debt Chain Gang." Some may think it's well within his rights to use
the event to create awareness....I however think a kindergarten school
graduation is no place for political discourse. But the facts are the facts:
young adults are being saddled with harder economic realities than generations
past. Some may even attempt to quantify their misery...and they have. It's
called the Youth Misery Index; the index adds together youth
unemployment, average graduating student debt (in thousands), and national
debt per capita (in thousands). Youth unemployment is at 18.1%, one of the
highest levels since World War II. Average graduating student debt has reached
$30,000. National debt per capita is $58,400....add it up and the Youth Misery
Index for 2014 comes out to 106.5. In 2013 the index was calculated at 98.6; in
2012 it was 95.1; in 2011 it was 90.6; at the start of the financial crisis the
index was 69.3....when the YMI was first calculated back in 1993, the American
youth's misery was 53.1. Fun with numbers.
Wells Fargo Securities, LLC Economics Group recently released an
article titled, "Making Sense of Household Formations", predicting
that household formations should strengthen along with the economy in the
coming years. Household formation drastically fell during the recession and
has remained low over the past few years. Between 2008 and 2010, only 500,000
new households were formed in the United States, compared to the typical rate
of 1.3 million per year. The downfall of household formations can be attributed
to an increase in loan debt, growth in college and trade school enrollment,
lack of job opportunities and weak income growth. These factors have led
Millennials to move back home with their parents for a prolonged period of
time. Data suggests that of those aged 25-34 years old, 13.9% live with an
older family member, an increase from 10.8% in 2005, which means more than 1.5
million young adults are living at home. The sluggish rate of household
formations may be the cause of the slow housing recovery. Fortunately, growth
in household formations should be seen this year, due to an improving job
market. Non-farm employment growth has increased and the unemployment rate has
dropped. Wells Fargo Economic Group predicts that household formations should
rise to 1.5 million in 2015. To learn more about Wells Fargo predictions, click
here.
Turning our collective gaze to the markets, the smartest guys in
the room believe that the Federal Open Market Committee (FOMC) will vote to
begin increasing interest rates sometimes this year. The FOMC is made up of
twelve voting members, including seven members of the Board of Governors, the
president of the Federal Reserve Bank of New York and four additional Reserve
Bank Presidents who rotate annually. There are currently two vacant seats, so
the voting power of the FOMC is predominantly in the hands of ten people. At
the FOMC's December meeting, there were mixed reviews of when interest rates
should increase. Some members recommended that interest rates should increase
early this year as the economy should reach full employment by the end of 2015
or 2016, whereas others believed rates should increase mid 2015-to later in the
year as inflation indicates indifferent demand.
That is all well and good, but there is a lot going on in the
day-to-day security markets. Investors are selling their higher coupon
securities and buying lower coupon securities, resulting in some wild price
movements out there. And overall MBS prices are lagging Treasury securities - who
wants to pay 106 for something that is going to pay off next week at 100 (par)
resulting in a 6 point loss? With 10y rate 1.76%, current coupon basis
60bps, and primary secondary spread 130bps primary residential mortgages rates
are being set ~3.625-3.75%.
Yes, mortgage rates are
mostly influenced by supply and demand. Not only are lenders producing lots
of mortgages, but (again) the New York Federal Reserve Bank announced readiness
sale for next Tuesday with four odd lot GNMA pools totaling a max of $23.7
million. Priming the pumps! And there are certainly thousands of analysts at
investors and Wall Street firms trying to second guess each other on
prepayments, market direction, coupon spreads, how the price of oil will change
things, and so on. Stay tuned!
Rate
Market Report:
Prior to 8:30 the 10 yr yield was at 1.71%,
slightly lower than yesterday’s 1.72% close. MBS
prices early on were down 20 bps from yesterday’s close. CPI hit at 8:30; the
overall price index was down 0.4% right on most forecasts, when food and energy
are eliminated CPI was unchanged from Nov. Yr/yr overall consumer price index
+0.8%, yr/yr core +1.6%. The decline was the biggest since Dec 2008, most due
to collapsing oil prices, the core is a more reliable picture. No sniff of
inflation in prices, similar to yesterday’s producer price index. The initial
reaction the 8:30 report pushed the 10 yr up to 1.74% and MBS prices down 23
bps. The Fed has poo-pooed the decline in crude; Yellen’s comments that the
drop in fuel won’t reverberate through the economy. Most all data released
recently, here and global, continue to show that inflation fears are wasted.
Deflation remains a major fear in Europe and in the US the Fed has not been
able to pull inflation close to its target.
No matter how you cut it, inflation is a
myth. The Fed is expected to begin increasing rates my mid-year based
on Yellen’s recent press conference. The decline in energy prices and no
pricing power in any industry is troubling the Fed now; increasing the FF rate
too soon may derail the economy. All of that bullish talk coming from the
Street that everything is good has been questionable, now reality may sway the
Fed to hold rates low much longer than most expect. Federal Reserve Bank of
Boston President Eric Rosengren said this week that he wants to hold off on
raising rates until there is more evidence of firming inflation. “We need to
see evidence to make us confident that it’s going to move back,” he said on
Wednesday. “Based on the data right now, I’m not particularly confident.”
Dec industrial production
declined 0.1% as was expected. Dec capacity utilization at 79.6% from 80% in
Nov. The two reports at 9:15 had little influence in the markets. At 9:55 the
U. of Michigan consumer sentiment index, expected at 94 from 93.6, as reported
sentiment.
The price of crude oil has stabilized in
the last few sessions, as it settles interest rate markets won’t
decline much more before a round of long covering will push rates back up a
little. Any decline in prices in treasuries and MBS markets won’t alter the
wider bullish outlook. The same technical observation is occurring in the stock
market. Stocks and bonds are currently stretched to excess; we are looking for
both markets to reverse in the next few sessions.
The trade today is positioning for the long
three day weekend; MLK birthday. Already the 10 yr note rallied
earlier driving the yield to 1.70% earlier this morning but now +4 bps to
1.76%. Stock indexes were trading down 70 points in pre-opening trade. In less
than 30 minutes the index that opened lower, down 17, the index rallied to +50,
reversed again and at 10:10 -55.
High volatility in financial markets is a
catharsis for traders and investors as stocks decline along with
interest rates. High levels of uncertainty will not abate for weeks. Both
stocks and bonds and MBSs are presently overdone, we expect interest rates will
move a little higher as a result, we see the same thing for equity markets.
Mortgage prices very volatile; lenders won’t pass on all of market gains.
We haven’t changed our bullish outlook but as
noted yesterday and again here; the rate markets are about to reverse with
prices working lower before the bullish trade resumes.
PRICES @ 10:15 AM
- 10 yr note: -14/32 (44 bp) 1.77% +5 bp
- 5 yr note: -11/32 (34 bp) 1.23% +6 bp
- 2 Yr note: -3/32 (9 bp) 0.46% +0.5 bp
- 30 yr bond: -26/32 (81 bp) 2.40% +4 bp
- Libor Rates: 1 mo 0.168%; 3 mo 0.253%; 6 mo 0.358%; 1 yr 0.622%
- 30 yr FNMA 3.0 Feb: @9:30 103.00 -30 bp (-33 bp from 9:30 yesterday)
- 15 yr FNMA 3.0: @9:30 104.81 -39 bp (-16 bp from 9:30 yesterday)
- 30 yr GNMA 3.0: @9:30 103.71 -47 bp (+1 bp) from 9:30 yesterday
- Dollar/Yen: 117.26 +1.09 yen
- Dollar/Euro: $1.1544 -$0.0089
- Gold: $1268.10 +$3.30
- Crude Oil: $47.12 +$0.87
- DJIA: 17,268.26 -52.45
- NASDAQ: 4569.72 -1.10
- S&P 500: 1990.61 -2.06
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