In 2022, Keelin and his team closed $827 million in volume, with Keelin originating $322 million alone. He ranked 18th on Scotsman Guide‘s 2023 top LO list.
Competitive mortgage rates, products, services, and ultimately, being a servicing company are factors that appealed to Keelin when bringing his team to the Cleveland, Ohio-headquartered lender, he said.
“I wanted to take advantage of technology, systems to really provide like proficiency in our business, [and] the ultimate thing for me was to be able to scale the model, because we have a model that we go by, and we live by, which is the three C’s – cost-effective, communication, consistency,” Keelin said in an interview with HousingWire.
Being a consultant has helped Keelin retain and grow his client base, especially in his main markets of New Jersey and Florida.
For instance, if his client is putting 5% down as down payment and the property is under-appraised, Keelin would have a “fluid conversation” of all the possible scenarios.
“[If] the person is putting 20% down, we’re also having forward education with them that says, ‘As long as the house appraises within 15% of the purchase contract, then you’re at a 95% LTV, the negative is PMI, but we get you into the house are you comfortable,’” Keelin said.
Another strategy Keelin advises his team members is to have a diversified portfolio, targeting both first-time buyers and investors.
“They (investors) are not scared of interest rates. Interest rates are cyclical,” Keelin said. “So [they are]really focusing on getting that property at this time, because during recessionary periods, inflation periods, the price of goods goes up, which means values go up. So if you wait, what’s the cost of waiting?” Keelin noted.
“I’m always going to be hypersensitive to that first-time buyer, where every dollar makes sense. But there’s also the investor concentration… if you can meet all in the middle, you have a very fluid business model,” Keelin said.
Keelin closed $57 million in volume in the first quarter of 2023. This year, Keelin has a team goal to post $700 million in volume.
“If we continue to do those productive activities and stay in front of people, and are able to brand what we’ve been able to do in the past, as well as with what CrossCountry offers, there’s no reason that we can’t exceed those goals,” Keelin noted.
In other words, independent mortgage banks (IMBs) acting as buyers in M&A deals are being asked to assume the future R&W liabilities for past loans sold to Fannie Mae by the seller should the seller, at some point, be unable to honor the terms of the contracts. An R&W contract is a legal assurance that “a mortgage loan sold to Fannie Mae or Freddie Mac (the enterprises) complies with the standards outlined in the enterprise’s selling and servicing guides, including underwriting and documentation,” according to theFederal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.
It is not clear how many other lenders received the request from Fannie Mae. The industry sources who spoke with HousingWire indicated that so far they had not been approached by Freddie Mac with a similar request.
Officials from Fannie Mae and Freddie Mac did not respond to a request for comment prior to the deadline for this story.
The industry sources, who asked not to be identified, also alleged that in the conversations with “mid-level” Fannie officials, it was not clear whether the agency would formalize the request into an official policy requirement in the future or whether there were any consequences to the lenders should they choose not to honor the request to take on that added R&W liability risk. Still, there is a fear, expressed by more than one industry source, that no one “wants to get sideways” with the agencies.
“The mere fact that the request is being made, and the uncertainty as to what Fannie will do if it’s not honored, does create a chilling effect on M&A at a time when those deals are good for the industry and the borrowers,” one industry source explained. “That chilling effect won’t be so much a factor in small deals where the risk of assuming liabilities is far less, but it could definitely scare off buyers in large deals, which are the most impactful to the industry and consumers alike.”
Asset-only deals
That chilling effect is compounded by the fact that Fannie Mae’s request was allegedly extended to IMBs involved in asset-only purchase deals, industry sources indicate. Unlike a stock-purchase acquisition, in which the buyer typically does assume R&W liability for the seller’s loans — unless expressly specified otherwise — asset-only deals are designed to avoid the assumption of most liability risk.
“I’d say 90% of deals [involving the acquisition of an IMB] are asset purchases, not stock purchases,” said Brett Ludden, managing director and co-head of the financial services team at Sterling Point Advisors, which specializes in IMB merger and acquisition transactions. “In an asset deal, the buyer is specifying the assets it is acquiring … and explicitly states that it’s not buying any other assets, and it’s not assuming any other liabilities.”
The assets acquired in an asset-only purchase deal, according to one industry source, typically include computers, furniture and fixtures, leases, company databases and potentially a company name. Plus, such deals often involve incentives extended to certain high-performing or key employees of the acquired firm that encourage them to sign new employment agreements with the buyer.
“The seller continues to have an obligation to manage their company that they still own after an asset deal,” one industry source explained. “Whether they choose to wind that company down or whatever it might be, they still have to fulfill their contractual obligations.”
Sean A. Stephens, a certified mortgage banker and an attorney with the business and financial-services law firm of Garris HornLLC, said a key reason that a buyer structures an acquisition as an asset sale, versus a stock sale, “is so that the assets are transferred without taking on the seller’s liabilities.”
“Risk mitigation is critical right now on all levels,” Stephens added. “In the M&A context, you have a lot of the small to midsized [IMBs] who are deciding whether they want to wind down or sell their business.
“… And, depending on their book of business, if this [alleged added R&W risk] is layered in, this could be an additional factor to consider in any M&A deal. Even if you are not buying those loans, because there could be recourse down the road, this could require additional due diligence on past loan production, which could result in more time, more cost and then possibly the renegotiation of purchase price depending on the results.”
Rising tide
Much of the problem with the rising tide of repurchase requests from the enterprises Fannie Mae and Freddie Mac stems from the huge volume of low-rate loans originated in 2020 and 2021 at a time when the industry was continuously working to build capacity to deal with the explosive origination growth. That capacity issue, industry experts contend, resulted in a higher rate of underwriting errors than in more normal times that the enterprises are still uncovering as part of their ongoing quality-control checks — sometimes months or even years after a loan was originated.
There is a concern among IMBs, however, that Fannie Mae and Freddie Mac are being too aggressive in pursuing the repurchase option on loans with minor underwriting defects that could be cured far short of a draconian buyback demand.
The Community Home Lenders of America (CHLA) said due to the rapid rise in interest rates over the past year, “our consensus member conclusion is that the average loss to the lender is now 30% on every loan repurchase.”
“This equates to a loss of over $100,000 on a $335,000 loan,” CHLA states in a recent press statement focused on the problem. “The loss is even greater for high-cost loans; 30% equates to a $218,000 loss for a loan at the conventional loan limit — and a $327,000 loss for a loan at the maximum nationwide loan amount. This is for one loan that is not even in default!”
In response to the problem, the CHLA recently sent a letter to the FHFA and the enterprises asking that the GSEs adopt a policy of offering some type of reasonable indemnification-payment remedy to lenders for all performing loans “in lieu of the practice of a repurchase demand.” The letter indicates that lenders would still be responsible for repurchasing defective loans that move to a nonperforming status.
“Given the complexity, we don’t want to get into details [of how the indemnification-payment program would work], but discussing the details would certainly be part of the discussion with the FHFA and the [enterprises],” said Rob Van Raaphorst, spokesperson for the CHLA.
Stephens, for his part, said, “We do see the indemnification in lieu of repurchase as a viable option when it’s available.”
Scott Olsen, executive director of the CHLA, said the industry group’s members are concerned about the potential impact of loan-repurchase demands from Fannie Mae and Freddie Mac, “and, you know, sort of anecdotally, they’re under the impression that the level of repurchase requests is increasing.”
Stephens echoes Olsen, adding that “generally speaking, as we get into 2023 [and starting at the end of 2022] we have seen more repurchase request activity occurring.”
“While we don’t know the exact percentage of loans leading to repurchase requests,” he added, “even if it’s the same percentage [of repurchase requests as in prior years], it’s going to result in more activity because of that sample size [2021 loan originations] being so large.”
Sterling’s Ludden stressed that if lenders are approached by Fannie Mae or Freddie Mac “with the expectation that they should be backstopping rep and warranty [liabilities] in an asset purchase, I would strongly recommend that they reach out to the Mortgage Bankers Association (MBA).”
“I’m sure they’re likely not the only lender [that is in that position],” Ludden added. “And I’m sure that the MBA can play a role in helping facilitate this conversation.”
MBA also did not respond to a request for comment prior to the deadline for this story.
“It is understandable that the GSEs want to take away all of their risk, but there should be proportion here,” one industry source added. “The GSEs are making profits in a difficult environment, and last I checked, they are supposed to take on some risk.”
Whether more IMBs acting as buyers in M&A asset-only deals will be approached by Fannie Mae, or possibly Freddie Mac, with a request to assume the future R&W liabilities of the seller is not known at this point. Potentially, the requests that have surfaced so far are little more than trial balloons that will disappear soon over the horizon.
Regardless, it seems tensions between mortgage lenders and the enterprises over the loan-repurchase issue are not going to disappear any time soon.
“… As to the timing, many of the originators out there were in a much better financial situation and could have absorbed a repurchase request two years ago, but since then finances have changed,” Stephens said. “Therefore, we have seen an uptick on requests to negotiate, appeal and to provide a comprehensive review of mitigation strategies that can be used to defend against repurchase-demand requests.”
“First, [ICE and Black Knight] concede that the constitutional issues they have raised as counterclaims are not required to decide the FTC’s request for a preliminary injunction,” the FTC said, arguing that ICE and Black Knight’s claims meet the standards for impertinence and immateriality.
In addition, FTC argued that putting aside ICE and Black Knight’s counterclaims and concession, the constitutional defenses are impertinent and immaterial to the issues the Ninth Circuit held that a court needs to resolve in deciding “whether to grant an FTC claim to preliminary enjoin a merger,” the agency said.
ICE and Black Knight didn’t respond to requests for comment.
In April, ICE and Black Knight requested that Federal District Court for the Northern District of California Judge Araceli Martinez-Olguin declare the FTC’s structure unconstitutional in separate filings.
The filings were in response to the agency petitioning a federal court to issue a temporary restraining order (TRO) and preliminary injunction (PI) that prevents ICE from going forward with the deal to buy Black Knight.
“It should enjoin the FTC from subjecting Black Knight to its unfair and unconstitutional internal forum,” Black Knight said in April.
Amid antitrust concerns of the ICE and Black Knight merger, the FTC sued ICE to block the proposed acquisition of Black Knight in March. The agency alleged the merger would reduce competition in key areas of the mortgage process and ultimately raise costs for lenders and homebuyers.
Prior to the the agency’s lawsuit against ICE, Black Knight agreed to sell its loan origination system, Empower, to a subsidiary of Canada’s Constellation Software Inc. in March and said it would address any concerns raised from the FTC.
“Rather than engage with and consider the divestiture, the FTC rushed to file an administrative complaint in the FTC’s administrative court in March 2023 that failed to account for the divestiture’s effect,” Black Knight said in its filing in April.
The FTC’s administrative hearing on the deal is scheduled for July 12.
To even get close to that level, we either have a massive housing credit boom, which will eventually turn into a bust, or we have a shortage of homes, meaning too many people are chasing too few homes.
We don’t have a massive credit boom as purchase application data is at historical lows; we haven’t had the same run-up in credit as we saw from 2002-2005. This is why I always draw the black line on the chart below — to show people that we haven’t had a credit boom for many years. If we had a massive credit boom-to-bust, inventory would have skyrocketed in 2022.
Instead, active listings are near all-time lows, which wasn’t the case from 2012-2019. This is why the days on the market are so low historically after 2020.
After the most significant home sales collapse recorded in U.S. history in 2022 and stabilization in sales data in 2023, total active listing NAR stands at 1.04 million, up from 1.03 million last year. The historical norm is between 2-2.5 million. In 2007, for context, we were a tad above 4 million.
NAR Total Inventory Data going back to 1982.
In Thursday’s existing home sales report, the data line I once loved turned on me again. Now I have to contemplate that the days on market can return to a teenager level even with home sales trending at a 10-year low.
From NAR: First-time buyers were responsible for 29% of sales in April; Individual investors purchased 17% of homes; All-cash sales accounted for 28% of transactions; Distressed sales represented 1% of sales; Properties typically remained on the market for 22 days.
As you can see in the chart above, days on the market falling isn’t a good thing, but it’s the reality of the world we live in after 2010. The U.S. housing market inventory channels have changed due to how the U.S. housing credit channels have changed. This is not, nor can it ever be, like 2008. If it was like 2008, you’re about four to six years too early in 2023. You would need years of credit stress building up, as we saw in 2005-2008, all before the job loss recession data.
One of my themes for existing home sales has been that after a big bounce in one home sales report, we shouldn’t expect too much to happen. We had that bounce in the March report as we saw one of the most significant month-to-month sales reports ever recorded in U.S. history. However, after that bounce, I didn’t think we would see much growth because that was an abnormal event.
NAR: Total existing-home sales slid 3.4% from March to a seasonally adjusted annual rate of 4.28 million in April.
When we saw that first jump in home sales from 4million to 4.55million, it was a historically abnormal giant sales print month to month. This is the tricky part of reading high-velocity economic data; when data historically moves slowly month to month, you have an easier trend to navigate.
However, when you have a collapse like we did in 2022 and then purchase application data started to improve starting from Nov. 9, 2022, that was a setup for a giant one-month sales print, and after that we should be in a range between 4 million and 4.6 million. While purchase application data has had more positive prints than negative prints this year, there isn’t the real net volume growth this year to break above 4.6 million with duration or break under 4 million with duration.
Since purchase application is very seasonal, and that seasonality is almost done after May, we should now be watching mortgage rates. Mortgage rates moving up and down have moved the market. Currently, rates have been rising; we saw that impact in this week’s purchase application data report, which was down 4.8% weekly.
However, everything still looks right regarding the 10-year yield and mortgage rates. My 2023 forecast was based on where I believe the 10-year yield will range, between 3.21%-4.25%,and so far the range has stayed true. That range means mortgage rates will be between 5.75%-7.25%. If jobless claims break over 323,000 on the four-week moving average, the 10-year yield break should be under 3.21% and send mortgage rates lower. However, we aren’t close to breaking that level on jobless claims.
The recent banking crisis has put more pressure on the spreads, and the debt ceiling issues has put some market stress on shorter-duration bonds. We must watch this because mortgage rates in the 7%plus range have cooled the housing market noticeably last year and this year. Once rates moved from 5.99% to 7.10%, we saw three straight hardcore declines in the purchase application data.
One thing about all housing data going ahead, the year-over-year comps are going to get a lot easier because of the historic collapse in demand last year. This will occur in the second half of 2023 and get especially easy to see in the last two months of the year. So, when we see better year-over-year data in home sales and purchase application data, you need to put an asterisk on it and know this is primarily due to demand stabilizing and easier comps.
NAR: Year-over-year, sales slumped 23.2% (down from 5.57 million in April 2022).
All in all, the existing home sales report didn’t have too many surprises today, but a harsh reality is that because active listing growth is negative year to date, as we have shown in our weekly Housing Market Tracker, the days on the market are starting to fall again.
From NAR: “Roughly half of the country is experiencing price gains,” Yun noted. “Even in markets with lower prices, multiple-offer situations have returned in the spring buying season following the calmer winter market. Distressed & forced property sales are virtually nonexistent.”
For the rest of the year, it will all be about mortgage rates and that will be where the 10-year yield is going. Remember, higher rates impact the sales data just as much as lower mortgage rates have; this is why we keep track every week for you with the Housing Market Tracker.
Since 44.4% of the Consumer Price Index is shelter inflation, it’s a massive deal in economics that rents took off in the last two years. Without rents taking off, the CPI data would look much more tame, like what we saw from the years 2000-2019.
As you can see in the chart below, core CPI wasn’t exploding at all this century until COVID-19 hit us. More supply of apartments coming on line will be good news for mortgage rates going forward. The history of global pandemics has always been inflationary early on, as the production of goods gets hit immediately. Then things tend to cool down over time from their inflationary peak level.
Over the next 12 months, the CPI data will account for the real-time cooling down of shelter inflation. And just like the data lagged early on when shelter inflation took off; the opposite will happen over the next year.
Tuesday’s housing starts data does show some promise on the front of attacking inflation and helping lowering mortgage rates, so let’s look at the report and find out what I am talking about.
First, however, remember that the housing market is still in a recession, which I wrote about on June 16, 2022. Housing permits have been falling as the builders simply have too much supply to be confident in building homes again. The housing market is still in a recession until housing permits rise in duration. Even though the builder’s confidence index has been rising recently, it still hasn’t led to a significant uptick in housing permits.
From Census: Building Permits Privately‐owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,413,000. This is 8.8 percent below the revised February rate of 1,550,000 and is 24.8 percent below the March 2022 rate of 1,879,000. Single‐family authorizations in March were at a rate of 818,000; this is 4.1 percent above the revised February figure of 786,000. Authorizations of units in buildings with five units or more were at a rate of 543,000 in March.
As you can see in the chart below, this looks nothing like the housing peak in 2005 and the crash toward 2008. Back then, housing permits were collapsing as new home sales fell 82% from the peak. Currently, new home sales have been trending better as the builders are taking advantage of low existing inventory. Of course, once we get lower mortgage rates, that should help the builders sell more homes.
The big difference in this housing recession versus other cycles is that housing completions are still rising, which is unusual. However, because of the COVID-19 delays, we are still working through a backlog of homes under construction.
From Census: Housing Completions Privately‐owned housing completions in March were at a seasonally adjusted annual rate of 1,542,000. This is 0.6 percent (±13.3 percent)* below the revised February estimate of 1,552,000, but is 12.9 percent (±18.6 percent)* above the March 2022 rate of 1,366,000. Single‐family housing completions in March were at a rate of 1,050,000; this is 2.4 percent (±12.4 percent)* above the revised February rate of 1,025,000. The March rate for units in buildings with five units or more was 484,000.
As you can see below, completions are like a slow-moving turtle, but they are still rising, so while housing permits are falling, consistent with the housing recession, housing completions are a different story.
Now the data line that excites me the most, of course, is shelter inflation, meaning the growth rate of rent inflation, because it’s cooling down already. This is something I talked about on CNBC last September on the day the CPI report was being reported.
As shelter inflation and wage growth cool down, we are adding more supply, not subtracting. This is key for mortgage rates looking out for years to come. As you can see in the chart below, we have a historic number of 5-unit construction in the works. This is the best way to fight inflation — with supply, with more choices, and landlords having to compete with more supply, preventing them from raising rents faster. The goal should be getting these units out as fast as possible.
One thing that will likely happen soon is that 5-unit builds under construction will start falling, such as we see with single-family homes under construction. With the Federal Reserve wanting a job-loss recession and banking credit getting tighter, apartment construction should fall like it did in the recession of 1974. I just hope it doesn’t collapse down like it did in the recession of 1974. As we can see in the chart below, the single-family units under construction are already falling as they should.
While the housing starts data doesn’t look like too much is happening and still has a recessionary vibe, we have some positive data in these reports.
As the cost to borrowers rises and credit gets tighter, we should be grateful that we have many apartments under construction. Just imagine if rental inflation wasn’t cooling down in real time, and we didn’t have these apartments in the works — it would look like the 1970s again.
That is the last thing the housing market and the U.S. economy need, rent inflation taking off as it did in the mid and late 1970s. This would mean mortgage rates have room to go higher and stay higher.
As you can see in the chart above, after the burst in housing inflation coming from the 1970s, things started to calm down. You can also see why and how inflation wasn’t a problem this century until COVID-19 hit us. That is the history of global pandemics, inflation data gets wild as supply chains are broken, and then things get back to normal over time.
The numbers this week are unfortunate: inventory should be growing like it does at this time every year. But, the weekly inventory data can occasionally have big moves up or down that can deviate from the longer seasonal trend so I need to see a few more weeks of inventory declining before I make too much out of one week.
However, one thing is for sure, housing is not going to crash due to large-scale panic-selling — a scare tactic of late 2021 that didn’t work then or now. New listing data was trending at all-time lows in 2021 abd 2022 and now it’s creating a new all-time low trend in 2023.
Weekly inventory change (April 28-May 5): Inventory fell from 422,270 to 419,725
Same week last year (April 29-May 6): Inventory rose from 287,821 to 300,481
The bottom for 2022 was 240,194
The peak for 2023 so far is 472,680
For context, active listings for this week in 2015 were 1,081,085
Weekly housing inventory
According to Altos Research, new listing data declined weekly and is still trending at all-time lows in 2023. This data line can have some wild swings up and down, but for the most part, we do see the traditional seasonal increase in new listings data. We are roughly two months away from the seasonal decline in new listings.
Since the second half of 2022, after the big spike in mortgage rates, this data line hasn’t gotten much traction. Last year at this time, we saw some growth year over year, but this year it’s been different.
New listing weekly data over the past three years:
2023: 58,432
2022: 76,691
2021: 73,291
New listing data from previous years to give you some historical perspective.
2017 99,880
2016 88,105
2015 94,101
As you can see in the chart below, new listing data is very seasonal; we don’t have much time to get some more growth here.
The NAR data going back decades shows how difficult it has been to get back to anything normal on the active listing side since 2020. In 2007, when sales were down big, total active listings peaked at over 4million. We had high inventory levels while the unemployment rate was still excellent in 2007.
This proves that the mass supply growth we saw from 2005-2007 was due to credit stress, not because the economy was in a recession; the U.S. didn’t go into recession until 2008. Even though the labor market is currently showing signs of getting softer, there is no job-loss recession yet.
The total NAR inventory is still 980,000. As you can see in the chart below, there is a big difference between the current housing market and those looking for a repeat of 2008.
NAR total active listing data going back to 1982
People often ask me why there is such a difference between the NAR data versus the Altos Research inventory data. This link explains the difference and is worth a read.
While this was a disappointing week on the inventory growth side, I hope this is just a one-week blip. We can see what a difference a year makes in inventory data. For example, last year, from April 22-29, weekly active listings grew by 16,311. So far this year, after the seasonal bottom in inventory happened the week of April 14, the total growth in active listings since that week has been only 14,257.
Traditionally, we would see active listings starting to grow at the end of January. However, that growth has taken longer in 2023 than any other year in U.S. history and so far the active listing growth from April to May has been mild.
The 10-year yield and mortgage rates
Last week we had multiple land mines for the 10-year yield and mortgage rates to rise or fall with the Fed meeting and four labor market reports. Although the Fed raised the Federal funds rate, the bond market is sensing a slower labor market and mortgage rates fell.
Tracking the 10-year yield and mortgage rates are essential for housing inventory because when rates fall, buyer demand gets better, allowing more homes to be bought and getting a lid on inventory growth, which we have seen since 2012. The only two years we have seen the active inventory grow were 2014 and 2022 when softness in demand allowed inventory to grow.
The big difference between 2022 and 2014, as you can see in the chart below, is that the bottom in 2022 was an all-time record low; we can see year-over-year growth in total active listings. However, the increase in inventory this year from last still puts active listings near all-time lows.
NAR Total Active Listings
We have seen from 2022 that the monthly supply of NAR data has grown more visually in the data lines; this means homes are taking longer to sell than before. I wrote about this last week and talked about it in the HousingWire Daily podcast.
NAR Monthly Supply Data
Mortgage rates started last week at 6.73% and fell as the labor data and banking stress drove money to the bond market. We briefly broke under my key Gandalf line in the sand (between 3.37%-3.42%) intraday, only to close right at the line and rise by the end of the week. This line has been truly epic.
Mortgage rates fell to a low of 6.43% then ended the week at 6.5%. The spreads between the 10-year yield and 30-year mortgage rates have been terrible for a long time and have gotten worse during the banking stress. While credit is stlll flowing for conventional loans, mortgage pricing has been bad. Mortgage rates in a regular market should be 5.25% today but are at 6.5%. Can you imagine the housing market at 5.25% today when we found stabilization with rates ranging between 5.99%-7.10% this year?
In my 2023 forecast, I said that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to 5.75% to 7.25% mortgage rates.If the economy gets weaker and we see a noticeable rise in jobless claims, the 10-year yield should go as low as 2.73%, translating to 5.25% mortgage rates.
Of course, the banking crisis has added a new variable to economics this year. However, even with that, the labor market, while getting softer, hasn’t broken yet. We have been in the forecasted range all year, even with all the drama from the banking crisis, which isn’t good news for the economy.
My line in the sand for the Fed pivot has always been 323,000 jobless claims on the four-week moving average. This has been my big economic data line for the cycle since I raised my sixth and final recession red flag on Aug. 5, 2022. While the labor market is getting less tight, it’s not broken yet.
From the Department of Labor: Initial claims for unemployment insurance benefits increased by 13,000 in the week ended April 29, to 242,000. The four-week moving average also rose by 3,500 to 239,250.
Purchase application data
Purchase application data has been the main stabilizing data line for the housing since Nov. 9, 2022, with 16 positive prints versus seven negative prints, after making some holiday adjustments. For 2023, we have had nine positive prints versus seven negative prints.
The MBA purchase application data line has been very rate-sensitive: when the 10-year yield and mortgage rates rise, it typically produces a negative weekly print, and when they both fall, we get a positive print. This past week we saw a 2% week-to-week decline in the data line.
The year-over-year decline in purchase application data was 32%; as I have noted, we are working from the mother of the all-time lowest bars in 2023. As we can see in the chart above, just having 16 positive prints since Nov. 9 has stabilized the data — it’s been hard to break lower than the levels we saw back in 1996.
The year-over-year comps will get noticeably easier as the year progresses, especially in the second half. This data line looks out 30-90 days for sales, and we are almost done with the seasonality. I always weigh this report from the second week of January to the first week of May. Next week for the tracker, I will report on how 2023 demand looks based on this index.
Traditionally, purchase application volumes always fall after May. Now, post-COVID-19, this index has had some abnormal late-in-year growth data. So, after May, I will address this issue with seasonality and whether we will see some growth later in the year, as we have seen in previous years.
The week ahead: It’s Inflation week!
All eyes are on the CPI report this week, coming on Wednesday, and we have the PPI inflation report on Thursday. The entire market knows the headline inflation growth rate peaked last year, so watch out for the core inflation data, excluding shelter inflation. Of course, core CPI is primarily driven by shelter inflation, and we all know by now that it will cool off, especially as the year progresses. However, the Fed and the markets focus on service inflation, excluding shelter.
I am keeping an eye on the car inflation data as that might be stubborn this week, keeping core inflation higher than it should be.
The bond market never bought into the 1970s inflation premise, so the 10-year yield is closer to 3% than 5%. Since the entire marketplace is keeping an eye out on credit getting tighter, I will be watching the Senior Loan Officer Opinion Survey on Bank Lending Practices on Monday. This will provide more clues into how fast credit is getting tighter in the U.S. economy, which is key at this expansion stage.
So, we will have some economic data to see if the 10-year yield can break lower and send mortgage rates lower as well. So far, the Gandalf line in the sand has held up against some brutal attacks this year, but we shall see if we can break under that line of 3.37% and head lower in yields. Why is that important? Because the 10-year yield and mortgage rates have always danced together, and if the 10-year yield heads lower, mortgage rates will follow it.
Like in March, the energy index posted a significant decrease, and was down 5.1% compared to a year prior.
“CPI data show that inflation is down significantly from the 9.1% level reported last summer, but inflation is still running far above the Fed’s target rate of 2%,” Lisa Sturtevant, Bright MLS’chief economist, said in a statement. “The lackluster inflation report comes as the Fed has raised interest rates 10 times in an attempt to slow the economy and cool price growth. There has been a lot of speculation about why we aren’t seeing inflation come down faster. Maybe the conventional models explaining the relationship between interest rates and inflation simply don’t work in this unusual, post-pandemic economy. Maybe holding firm on a 2% target—a threshold that has a pretty arbitrary origin story—doesn’t make sense in today’s economy.”
Despite the annual dip, the CPI rose on a month-over-month basis, posting a 0.4% monthly increase in April, compared to a 0.1% monthly increase in March. Major contributors to this increase included used cards and trucks (4.4%), motor vehicle insurance (1.4%), and energy (+0.6%, thanks to a +3.0% jump in the gasoline index).
Shelter was again a major contributor to this increase, rising 0.4% month over month, thanks to a 0.6% increase in the rent index and a 0.5% jump in the owners equivalent rent index. This increase, however, is slightly better than the 0.6% monthly increase recorded in March. The data also suggests that the economy is close to peak rent inflation—lower monthly rent prices have been recorded for two consecutive months, and the price growth for new leases is still decelerating.
Indexes that declined month over month in April included airline fare (-2.6%) and new vehicles (-0.2%). The food index remained unchanged on a monthly basis.
Despite inflation remaining at levels higher than the Fed would like, economists believe the Fed should at least pause its rate hikes.
“Pausing would also allow housing costs a chance to catch up. Housing plays an outsized role in the CPI, accounting for between 30 and 40% of the inflation measure each month. But shelter costs—including both rents and owner’s equivalent rents—can track several months behind other prices. We know home price growth and rent growth have been decelerating, and prices and rents have even been falling in some markets,” Sturtevant said. “Looking back at historic data, the shelter component of the CPI definitely tracks behind trends in the overall inflation metric. For example, in the inflation run-up in the late 1970s, the rate inflation peaked in March of 1980. However, the CPI’s shelter component did not begin to fall until July of that year.”
Lawrence Yun, the National Association of Realtors’ chief economist, took a stronger stance during the “Residential Economic Issues and Trends Forum” at NAR’s ongoing Legislative Meeting.
According to Yun, the Fed’s rate hikes have hurt regional banks and the housing market.
“Inflation will not reignite – inflation will come down closer to 3% by the year’s end,” Yun stated. “Inflation has calmed down while rents are still accelerating. Rent growth will decrease because apartment construction – entry units coming on the market – is already in the pipeline. We are already moving in the right direction towards consumer price inflation.”
Yun also noted that he is forecasting mortgage rates to fall closer to 6.0% in 2023 before dropping below 6.0% in 2024. He also anticipates new and existing home sales to bottom out in 2023 before rising again in 2024.
In reflection of the current spring housing market, Sturtevant shares a similar view.
“The spring housing market has been slower as higher interest rates have eroded buyers’ purchasing power and both buyers and sellers are watching an economy that is growing more uncertain,” she said. “The Fed’s rate hikes may, indeed, be having the intended impact but we might just need to pause, take a breath and let the effects move through the economy.”
The impact of credit tightening by Fed officials has been unclear in the wake of both higher interest rates and turmoil in the banking system following the collapse of Silicon Valley Bank and Signature Bank in early March. Federal regulators also seized First Republic Bank and sold it to JPMorgan Chase Bank earlier this week.
Bonds rallied immediately after the news, sending yields down, as the market interpreted the Fed’s hints as an indication of a pause in tightening.
“The 2-year and 10-year US Treasury yields are down 2-3 basis points, which could help mortgage rates as the market digests the news and adjusts,” Jack Macdowell, chief investment officer at the Palisades Group, said.
On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.43%, according to HousingWire’s Mortgage Rates Center.
“If the economy picks up steam and the banking crisis doesn’t worsen, that might force the Fed to re-start rate hikes. However, for now, they seem OK to pause here,” Mohtashami said.
Danielle Hale, chief economist at Realtor.com, was on the same page with Mohtashami about Wednesday’s rate hike decision, noting that it is unlikely to cause mortgage rates to shift dramatically.
If economic indicators are lukewarm going forward, it should lead to a more sustained, gradual decline in mortgage rates — as the Fed is less likely to continue rate hikes, Hale noted.
“However, above-expected hiring, price growth or other economic activity could lead to upticks in the mortgage rate in anticipation that tighter Fed policy will be needed,” Hale said.
A hike in short-term rates is only indirectly impactful for mortgage rates, as mortgages are priced off of long-term rates. But when the Fed raises interest rates, it becomes more expensive for families to take out loans for home purchases.
The Mortgage Bankers Association (MBA) also expects the Fed to push a pause button on the rate hikes in June, noting that the Fed’s statement was consistent with a plan to pause rates at this level.
“Although recent speeches by Fed officials had indicated an increasing amount of disagreement regarding the next steps for policy, this was another unanimous vote,” Mike Fratantoni, chief economist at the MBA, said.
The expectation of continued rate hikes has kept Treasury yields higher, even with expectations of an economic slowdown. This, in turn, has kept mortgage rates higher, Shampa Bhattacharya, senior director at Fitch Ratings, noted.
“The home purchase market is more sensitive to a reduction in mortgage rates at current rate levels, with the refinance option still out of the money for a vast majority of homeowners (…). Purchase mortgage application data as well as active listings have shown positive weekly growth recently in response to somewhat lower rates, though applications remain down 28-30% year over year,” Bhattacharya said.
Impact on housing and residential lending
It’s unclear what the Fed’s next decision will be, but the MBA is hoping for a rate hike pause.
“If the central bank pauses its hike in June, potential homebuyers and their mortgage lenders may be breathing a sigh of relief,” Fratantoni said.
While tighter credit conditions are expected to slow the pace of economic activity, the housing sector is already operating under tight credit, Fratantoni noted.
The MBA doesn’t expect the tight credit headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does, the MBA said.
Looking ahead, Hale expected the rest of May to be a rocky ride for interest rates, including mortgage rates.
“The Fed continues to remain vigilant, watching for signs that financial sector stresses have impacted the real economy. Most likely, this factor will remain a wild card for the next few meetings, as data continue to roll in,” Hale said.
If the Fed does raise rates again next month, home buyers will be scared of purchasing for several reasons, Dutch Mendenhall, founder at RAD Diversified REIT, noted.
Because there is still a relative low inventory of houses for sale, higher interest rates with higher home prices mean buyers may not find the house they want in the current price range.
“Additionally, higher rates create higher debt-to-income ratio calculation, resulting in qualifying for lower mortgage amounts,” Mendenhall said.
However, a higher interest rate environment can provide more opportunity for cash buyers.
“Without having to worry about interest rates, cash buyers can be very attractive to sellers, as they know they can go to closing quickly, and as a result, cash buyers can find themselves in a much better position to negotiate a better sale price,” he noted.
Regardless of whether mortgage rates will trend down or enter into a recession, potential buyers have a window of opportunity, Jerimiah Taylor, vice president of real estate and mortgage services at OJO, said.
“The spring market has been hotter than expected in many markets, and if you add the fuel of lower rates on what’s already happening, expect prices and competition to increase quickly,” Taylor said.
But a series of bank failures over the last two months — including First Republic Bank this week — and several months of data that suggest its monetary policy tightening has worked, have spurred concerns that the economy is headed toward a recession and the Fed will pause rate hikes after the May meeting.
In cutting some language about inflation targets, the Fed gave hints on Wednesday that it might be done hiking rates. But Federal Reserve Chair Jerome Powell said in a press conference that no decision has been made and the Federal Open Markets Committee (FOMC) is closely monitoring economic data.
It represents a shift or sorts. For months, the central bank said it needed to make additional changes before it took its foot off the gas.
In fact, traders on Wednesday were placing bets that the Fed will be forced to cut rates at least twice before the year closes as economic growth falters.
The Fed says its current forecast doesn’t project rate cuts, and the Fed itself hasn’t ruled out raising rates again if inflation doesn’t tamp down.
“The U.S. banking system is sound and resilient,” the FOMC said in a statement Wednesday. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
The FOMC noted that it was still targeting a 2% inflation rate, and in doing so, will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The Fed reiterated that it would continue to reduce its holdings of Treasury securities, agency debt and agency-backed mortgage-backed securities. “The Committee is strongly committed to returning inflation to its 2% objective.”
Investors have been “expecting the May hike, and the Fed does not want to do anything to create more uncertainty in the markets,” said Lisa Sturtevant, the chief economist for BrightMLS. “But the shakiness in the banking sector has made it more likely that the Fed will pause future rate increases. Even with that pullback, it is far from clear that we have seen the end of interest rate increases this year. Turbulence in the banking industry has grabbed the headlines in recent weeks, but inflation still remains persistently high.”
Ahead of the Fed meeting, mortgage applications picked up this week as rates dropped slightly. On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.43%, according to HousingWire’s Mortgage Rates Center.
The traditional spring home buying season is showing some signs of picking up, but it remains well below historical averages. Existing home sales in particular have been paltry in 2023, largely due to low levels of inventory. Single-family inventory for the week ending April 28 jumped to 422,270, up from 414,010 the week prior, offering real estate agents and mortgage loan officers hope that the ice is melting.
There are still too many variables to know whether rates will drop or settle into the mid-6% range that they’ve been in for weeks. The debate in Congress over the debt ceiling could send borrowing costs soaring, but a clear indication from the Fed that hikes are ending could lower mortgage rates.
Lawrence Yun, the chief economist for the National Association of Realtors, condemned the May rate hike.
“The latest interest rate hike by the Federal Reserve is unnecessary and harmful. Consumer price inflation has been decelerating and will continue this trend,” he said in a statement. “After the awful 9% consumer price inflation in the summer of last year, the latest data shows 5% inflation. It will be even lower as the heavyweight component to inflation, which is housing rent, will inevitably slow down given the 40-year high robust construction of new empty apartment units. In addition, there is significant additional monetary policy tightening already occurring.”