Financial Commentary

Mortgage Finance Commentary: February 2010

The economy is growing again. In fact, growth in the fourth quarter of 2009 far exceeded most predictions due to strong growth in business inventories. However, the persistent and severe weakness in the job market and recurring doubts about the stability of financial markets are likely to keep households from increasing their spending aggressively, particularly on big ticket items like houses and cars.

Existing home sales fell back in December following the end of the first installment of the homebuyer tax credit in November. It is unclear how many purchases the extension of that credit will result in this spring, but it does seem that any increases will be paid for with weaker sales growth later in 2010. Inventories of existing homes continue to fall, although we expect that decline will be tempered as additional foreclosed properties are put on the market, and as potential sellers react to somewhat better housing market conditions in the months ahead.

Builders remain downbeat as new home sales are anemic. Housing starts are beginning to increase, but completions of new units continue to exceed starts, indicating that builders are still drawing down their pipeline, even though inventories of new homes are remarkably low in terms of the number of units on the market. The Wells Fargo/NAHB housing market index for February, a measure of homebuilder market perceptions and expectations, has stabilized and is starting to show minor improvement, but remains at historically low levels.

The Fed remains unlikely to raise rates anytime soon. However, they have clearly indicated that they are going to end their MBS purchase program, as well as ending a number of other liquidity facilities begun during the financial crisis. Yields on mortgage securities will need to increase to get private investors back into the market once the Fed stops its purchases. We expect that mortgage rates will rise by about a percentage point by the end of the year, to a little over 6 percent, primarily as a result of the Fed ending their purchases. The net result is that MBA projects that mortgage originations will fall to $1.3 trillion in 2010 from an estimated $2.1 trillion in 2009. Purchase originations will be essentially flat at $745 billion, as home prices stabilize, and home sales increase. Refinance originations will fall by more than 60 percent to $529 billion as mortgage rates rise through the year.

Housing and Mortgage Data Update

Privately-owned housing starts in January were at a seasonally adjusted annual rate of 591,000, an increase of 2.8 percent from an upwardly revised 575,000 starts in December. This is 21.1 percent higher than the January 2009 rate of 488,000. For total starts, this is the highest level since July 2009 when it was 593,000 units. Single-family housing starts in January were 484,000, an increase of 1.5 percent from an upwardly revised 477,000 in December. The January rate for units in buildings with five units or more was 100,000, which is the highest level seen since June 2009 when it was 101,000. Single-family completions (427,000) were lower than permits issued (507,000) for the second month in a row and only the second time since January 2006. Single family starts were higher than completions for the third time in the last 7 months, and only the third time since early 2006. Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 16.7 percent to a seasonally adjusted annual rate (SAAR) of 5.45 million units in December from 6.54 million in November, but were 15.0 percent above the 4.74 million-unit level in December 2008. For all of 2009 there were an estimated 5,156,000 existing-home sales, an increase of 4.9 percent from 4,913,000 home sales in 2008. This was the first annual sales gain since 2005. An NAR practitioner survey showed that first-time buyers purchased 43 percent of homes in December, down from 51 percent in November. Repeat buyers rose to 42 percent of transactions in December from 37 percent in November; the remaining sales were to investors.

Housing inventory at the end of December fell 6.6 percent to 3.29 million existing homes available for sale, which represents a 7.2 months supply at the current sales pace, up from a 6.5-month supply in November. Single-family home sales fell 16.8 percent to a seasonally adjusted annual rate of 4.79 million in December from a pace of 5.76 million in November, but are 12.7 percent above the 4.25 million level in December 2008. Condo sales were down 15.4 percent for the month, but were up 34.7 percent relative to last December. The months’ supply of condos increased to 9.6 from 8 in November.

New home sales in December dropped to the lowest level since March 2009 at a seasonally adjusted annual rate of 342,000, a 7.6 percent decrease from the November rate of 370,000. This is 8.6 percent lower than the December 2008 estimate of 374,000. The decline in December sales was due to a decrease in new homes priced under $300,000, while new homes sales of houses worth $300,000 or more was essentially flat. The months supply at 8.1 is at its highest level since June 2009. We expect that new home sales will increase over the next two quarters but pull back slightly in Q3 2010, before increasing gradually again through 2011.

U.S. house prices rose 0.7 percent on a seasonally adjusted basis in November 2009 from the previous month, according to the Federal Housing Finance Agency’s monthly House Price Index (Purchase Only). On a year-over-year basis, house prices rose 0.5 percent relative to November 2008, but remains 10.3 percent below its April 2007 peak. Regionally, the Pacific region showed a 2.3 percent increase from the previous month and a 2.9 percent increase from the same month last year. The next largest increase was the South Atlantic region with a 2.0 percent increase from the previous month although this was down 0.1 percent from a year ago.

The Case-Shiller 20-City Index declined 0.2 percent in December, matching a drop of the same magnitude in November. This decline was a 3.1 percent drop from a year ago. The 10-City Index decreased 0.2 percent from November, which also matched the change that month, and this was a drop of 2.4 percent from a year ago. The national index decreased 1.1 percent in the fourth quarter following a 3.3 percent increase in the third quarter. On a year over year basis, the national index is down 2.5 percent, but this is the smallest year over year decline seen since the first quarter of 2007.

According to MBA’s Weekly Application Survey, 30-year fixed mortgage rates averaged 12 basis points higher in January at 5.07 percent compared to December’s 4.95 percent. The 30-year rate hovered above 5 percent the entire month. On a seasonally adjusted basis, purchase applications declined by a little more than 2 percent over the month. Refinance applications fell by almost 14 percent.

The Federal Reserve’s mortgage purchase programs began to taper off, but continued to dominate the secondary market in January. The Fed has left the $100 billion remaining under its commitment to purchase $1.25 trillion in agency MBS.

We predict that mortgage originations will fall to $1.3 trillion in 2010 from an estimated $2.1 trillion in 2009. Purchase originations will be essentially flat at $745 billion, as home prices stabilize, and home sales increase. Refinance originations will fall by more than 60 percent to $529 billion as mortgage rates rise through the year.