Fannie Mae Expects Rates to Continue Higher

Fanie Mae Rates

Fannie Mae said today that they have not changed their original forecast- growth will pick up in the second half of 2013.  Consumer fundamentals – steady job creation, recovery highs in consumer confidence – are supporting an improving picture of economic activity.  

Rising long-term interest rates could be a problem but the economists still expect the improving fundamentals, ongoing housing recovery, should help boost growth inflation adjusted GDP  (whatever that means). It should average about 2.5 percent for the rest of the year and 2.0 percent for the entire year.

The 30-year fixed mortgage rate increased more than 110 basis points from the first week of May to the end of June before easing somewhat in early July.  While rates are still historically low the report calls the recent spike over such a short period of time “significant” and thus it could potentially hurt housing activity.

New Home sales were up for the third straight month in May to the highest level since July 2008.
While  mortgage applications have declined by about 9.0 percent since early May, pending home sales jumped during the same period to the highest level in more than six years,.  Since cash sales play such a large role in the market – near one-third of existing home sales over the last year – sales may be less sensitive to rate changes than in the past.

While some homebuyers may be knocked out of the market by rising rates, other may jump in as they see rates and prices rising.   Let’s see what happens

California unemployment rate falls

California Unemployment Stats 2013

The state’s unemployment rate fell to 8.5% in June, according to figures released Thursday by the state’s Employment Development Department. That’s down from 10.6% in June 2012, the steepest decline by any state during that time period.

It’s not even. Some parts of the state have double-digit unemployment rates. Among the top five worst cities for unemployment, Mendota in Fresno County and Westmorland in Imperial County tied for the highest rates, at 33.9%.

Also, the sectors are uneven. Many of the jobs created are in lower paying jobs- many part time. Companies are still reluctant to hire full time.

 Still it bodes for more good news for housing. We need increases in our average income rates to sustain recovery. When the hedge funds leave, we need people earning more money so they can qualify for higher rates.

Los Angeles actually saw their unemployment rate rise from 9.6 to 9.7. So did Orange, San Diego and the Inland /empire see their rates rise.

Will Rate Increases Impact Home Prices?

Mortgage Interest Payment

From May 3 to July 12th , interest rates really zoomed. Is it enough to stall the housing recovery? 

Fannie Mae’s Mark Palim says there is no historical precedent for knowing the impact on the housing market of an interest rate change, either up or down, because of a Federal Reserve policy of quantitative easing.

In studying the history of a correlation between rate increases and housing prices,  it suggests that while there is little correlation of rate changes with home prices, but rapid rate increases do contribute to a decrease in home purchase volume and an increase in the use of adjustable rate mortgages (ARMs).

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What is a portfolio lender?

Portfolio Lenders

Most banks initiate loans and then sell them off and merely remain as servicing agents.  A portfolio lender holds loans in its own portfolio.

The big bank boondoogle in the last few years was caused in part by the massive selling off of bad loans to unsuspecting agencies and pension funds. After all, if the bank did not have ownership anymore, what could go wrong?

The Federal reserve is trying to prevent another mess. It controls rules for what the banks hold and don’t hold. There are minimums of how much money they must retain in the form of assets. Recently they have increased the amount of capital banks must retain in proportion to money loaned out. These rules apply only to the biggest banks. It is forcing them to “portfolio” more loans. Maybe they will be more careful about who they loan to if they have to pay the piper.