Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on bigger issues.
The new low of 2.37% for the 30-year bond yield this week opens up significant downside potential for rates from a technical analysis perspective, according to a client note from Chris Flanagan at BofA Merrill Lynch Global Research.
It also increases the chances that a new low in mortgage rates will be observed sometime in 2015.
The current Bankrate 30-year mortgage rate of 3.80% is just under 45 basis points above the all-time low of 3.36% in December 2012, he writes. The historical pattern shows that mortgage rates tend to move lower much more slowly than Treasury yields but eventually catch up.
“Currently, the spread between the 30-year mortgage rate and the 10-year yield is 208 basis points, which, with the exception of the 2008 crisis experience, is near the wide end of the range of the past 15 years. The low end of the range in the past few years was 150 basis points,” Flanagan says. “Assuming the 10-year remains at about 1.75%, reversion to this 150 basis point spread would bring the mortgage rate down to 3.25%, which would be a new low for the rate. If additional downside in rates suggested by technical analysis is realized, the 30-year mortgage rate could potentially see a sub-3% handle sometime this year.”
Flanagan says the term "new low" has special meaning for mortgage rates and refinancing risk, as it typically translates into a media effect in which lenders effectively get free advertising from the media for their mortgage products and the benefits of mortgage refinancing.
“Given lackluster Q4 earnings for banks and somewhat dim prospects for the future due to a flattening yield curve, we think it is only a matter of time before banks ramp up capacity to take advantage of what could be yet another historic refinancing wave, a wave which may have already started based on the latest MBA refinancing index,” he says. “Although agency MBS have underperformed in 2015, we do not think the market has come close to pricing in the risk of substantially lower mortgage rates and the risk of a major refinancing wave. We remain underweight the sector and continue to recommend a down-in-coupon/long duration bias. As with late December, we would not confuse very short-term spread tightening possibilities with longer-term risks for the market. We think the surprise decisions by OPEC in November and the Swiss National Bank this week have meaningfully altered the risk landscape for agency MBS.”
On Tuesday, the National Association of Home Builders will release its housing market index for January. Last month, the index remained solid, at 57 for the December housing market index. Though slightly below November's 58 and on the low side of expectations, this was still the sixth reading in a row that the index was above breakeven 50. December's strength was centered in expectations for future sales, at 65 versus November's 66, followed by current sales which are at 61 versus 62. Continuing to trail in the distance was the traffic component, unchanged at 45 in a reading that underscores the lack of first-time buyers in the housing market.
The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes.
On Wednesday, we will see the housing starts report from the Census Bureau.
The November housing starts report showed single-family starts and multifamily starts moving in opposite directions. Housing starts in November dipped 1.6% after rebounding 1.7% in October. The 1.028 million unit pace was down 7% on a year-ago basis. November strength was in the volatile multifamily component. Multifamily starts rebounded 6.7% after declining 9.9% in October. In contrast, single-family starts fell 5.4% in November after gaining 8% in October. Housing permits declined a monthly 5.2%, following a 5.9% jump in October. The 1.035 million unit pace was down 0.2% on a year-ago basis.
On Thursday we’ll see the Federal Housing Finance Agency release its purchase-only house price index for November. The index showed unexpected strength in October, gaining 0.6% after no change in September. Analysts forecast a 0.2% rise for October. The year-ago rate firmed to 4.5% from 4.4% in September. Regionally, six Census regions reported gains in October while three declined. Housing may be showing improved demand but this is just one month's report.
The FHFA index covers single-family housing, using data provided by Fannie Mae and Freddie Mac. The index is derived from transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac.
Finally, on Friday, we will see the existing home sales report for December. Existing home sales had been showing some life but not in November, sinking a very steep 6.1% to a 4.93 million annual rate which was below the low end of market consensus.
November, a month when the nation's weather proved mostly mild and which should have given a boost to sales, ended 5 straight months of plus 5.0 million rates. November's weakness was broad based with all four regions showing single-digit monthly declines. But the good news is that the weakness in sales is not inflating supply which, due to a draw down of homes on the market to 2.09 million from 2.24 million, held steady relative to sales, at 5.1 months.
According to the FDIC, one bank reported failed in the week ending Jan. 16 – the First National Bank of Crestview in Crestview, Florida.