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Mortgage Market in Review – October 19, 2015

Market Comment

Mortgage bond prices finished the week slightly higher which nudged rates a little lower. Retail sales rose a weaker than expected 0.1%. On the inflation front the producer price index fell 0.5% versus the expected 0.2% decline. The core, which excludes volatile food and energy, fell 0.3% versus the expected 0.1% increase which helped rates improve. Consumer prices fell 0.2% as expected. However, the core rose 0.2% versus the expected 0.1% increase. This was not rate friendly. The Fed Beige Book noted sluggish manufacturing, limited wage pressures, and mostly improved credit conditions. Weekly jobless claims were 255K versus the expected 269K which was not rate friendly. Mortgage interest rates finished the week better by about 1/8 of a discount point.

LOOKING AHEAD

Economic
Indicator
Release
Date & Time
Consensus
Estimate

Analysis
NAHB Housing Index Monday, Oct. 19,
10:00 am, et
62.5 Moderately Important. A measure of single family housing. Weakness may lead to lower mortgage rates.
Housing Starts Tuesday, Oct. 20,
8:30 am, et
1135K Important. A measure of housing sector strength. Weakness may lead to lower rates.
Weekly Jobless Claims Thursday, Oct. 22,
8:30 am, et
258K Important. An indication of employment. Higher claims may result in lower rates.
FHFA House Price Index Thursday, Oct. 22,
10:00 am, et
Up 0.6% Moderately Important. A measure of single family house prices. Weakness may lead to lower rates.
Existing Home Sales Thursday, Oct. 22,
10:00 am, et
5.32M Low importance. An indication of mortgage credit demand. Significant weakness may lead to lower rates.
Leading Economic Indicators Thursday, Oct. 22,
10:00 am, et
Up 0.1% Important. An indication of future economic activity. A smaller increase may lead to lower rates.
10-year Treasury TIPS Auction Thursday, Oct. 22,
1:15 pm, et
None Important. TIPS will be auctioned. Strong demand may lead to lower mortgage rates.

Housing Affordability

Each month the National Association of Realtors (NAR) releases their Housing Affordability Index. The index measures the affordability of a home based on what a typical family earns. It assumes the borrower has a 20% down payment (80% loan to value) and a “front ratio” or housing ratio not to exceed 25% of gross income. It is based on a typical home at the national and regional levels based on the most recent monthly price and income data.

An index of 100 is defined as the point where a median-income household has enough income to qualify for the purchase of a median-priced existing single-family home. Housing prices and mortgage rates influence the index. Generational low mortgage rates coupled with lower home prices following the housing collapse left the index at an all time high in 2012. That changed over the past few years.

According to NAR, the housing affordability index hit 196.5 in 2012. That means that the typical family earned 196% of the income necessary to purchase the typical house. Put another way, the same family could afford almost twice as much house. Unfortunately rising home prices and slightly higher mortgage interest rates in 2013 caused that number to fall to 176.9. The figure for 2014 was 164.3 and the latest this year was 151.2.

Rising house prices coupled with rising interest rates could dent affordability. Now is a great time for buyers to take advantage of the current situation of low rates and affordable housing.

 


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