Morning Report: Some perspective on rising mortgage rates

Vital Statistics:

 LastChange
S&P futures392920.3
Oil (WTI)59.61-0.84
10 year government bond yield 1.33%
30 year fixed rate mortgage 2.98%

Stocks are higher this morning as bonds continue to sell off. Bonds and MBS are down a few ticks.

Loan Depot reported earnings yesterday. Origination volume increased in the fourth quarter to $37 billion, however gain on sale margins came in hard, falling form 4.98% to 3.38%. Granted the third quarter of 2020 was probably an industry-wide high water mark for margins and there is some seasonality playing out. But as rates rise, I suspect we will see more competitive behavior from originators which will compress margins going forward. Granted, the fourth and first quarters are always the seasonally slow period.

You can see how much the average 30 year fixed rate conforming loan fell during the fourth quarter: Chart from Optimal Blue

Mortgage rates fell dramatically in December so we are really just back where we were last fall, when Black Knight estimated that 32.4 million borrowers could save 75 basis points on their mortgage rate by refinancing. Assuming an average mortgage amount of $300k, that works out to $10 trillion of potential refi volume. The MBA’s origination numbers often include some double-counting (both the lender and the aggregator count the same loan in their volume numbers), so the MBA’s estimated volume numbers are really a bit high. In October, the MBA was forecasting that 2020 would come in around $3.2 trillion. It will take years to chew through $10 trillion of potential loans Punch line: despite the recent increase in mortgage rates, there is still plenty of business to be done. The sky is not falling, at least not yet.

I am somewhat skeptical of the big inflation scare that seems to be gripping markets. The Fed was unable to get inflation up in 2019, when the economy was picture-perfect and unemployment was sitting around 3.5%. I have a hard time imagining they will be able to do it with a higher unemployment rate and a lower labor force participation rate.

Existing Home Sales rose 0.6% to a seasonally-adjusted annual rate of 6.7 million in January, according to NAR. This is up 23.7% compared to a year ago. The median home price rose 14% compared to a year ago to $303,900. “Home sales continue to ascend in the first month of the year, as buyers quickly snatched up virtually every new listing coming on the market,” said Lawrence Yun, NAR’s chief economist. “Sales easily could have been even 20% higher if there had been more inventory and more choices.”

Housing inventory fell to 1.04 million units, which works out to be 1.9 month’s worth of supply at the current sales pace. This is the lowest number since NAR started tracking that stat in 1982. Properties remained on market for 21 days.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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