Some Changes At The Top

January 22, 2021 -- Now that the dust has settled, the serious business of government and governing will begin to come more into the forefront. This week, we saw the requested and accepted resignation of the Consumer Finance Protection Bureau's leader Kathy Kraninger, and her nominated successor is Rohit Chopra, a member of the Federal Trade Commission. Mr. Chopra previously worked at the CFPB in its early days, and was the bureau's student-loan ombudsman and later assistant director under Richard Cordray, who favored a more punitive approach to regulation than did subsequent Bureau leaders. With all the re-regulation of the mortgage market since the financial crisis of more than a decade ago, odds don't favor any significant changes to the mortgage process anytime soon from the CFPB.

It would appear that the successor to Steven Mnuchin at Treasury will be Janet Yellen, the former head of the Federal Reserve. She would be the first woman to hold the position, just as she was the first woman to helm the central bank. At her Senate confirmation hearing, she urged that the legislative body "act big" when it comes to a new stimulus program, and will be in the position of championing President Biden's proposed $1.9 trillion plan announced last week. The Treasury will of course be issuing more new debt to finance new spending, and this will come at a time of record levels of government debt already. Ms. Yellen's experience at the Fed and connections there will be useful in trying to eventually steer the government back toward something resembling a more balanced approach to tax and spending policy.

For the moment, it's not clear what if any changes may come at the Federal Housing Finance Agency, presently headed by Dr. Mark Calabria. whose current term as director doesn't expire until 2024. A Supreme Court case heard last month may decide whether or not the President has the authority to fire the FHFA director on an at-will basis. The agency presently has a structure akin to the one that was the CFPB, but that agency's construction was ruled unconstitutional last year. Dr. Calabria has been looking to release Fannie Mae and Freddie Mac from government conservatorship and back to private ownership as part of reforming the housing market, but the two remain wards of the federal government more than 12 years after crumbling during the housing market crisis.

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Although there is no longer any immediate likelihood of this re-privatization happening, Dr. Calabria and Secretary Mnuchin did recently complete an agreement that allows the secondary marketers to retain profits in exchange for increasing the Treasury’s stakes. The agreement stipulates that the GSEs not be allowed to pay dividends to shareholders until they build roughly $283 billion minimum in capital, or 4% of assets. The two currently hold just $35 billion in reserves but there was in place a previous $45 billion cap that would have likely been reached in just a couple more quarters. At the present pace of capital accumulation, the plan implies that it will take a fair number of years for Fannie and Freddie to build enough capital to be able to pay dividends to investors or exit government control. Under President Biden, who likely has designs on using the GSEs to do more in regard to affordable housing, it may be that we'll see no further push to re-privatize the GSEs anytime soon.

The last regulatory group that's important to the mortgage market should also see no immediate change, as Federal Reserve Chair Jay Powell's current term runs until next year, and at the moment, there's little reason to think that he wouldn't be reappointed. At the very least, it means that accommodative monetary policy, low rates and open-ended bond-buying programs are likely to continue. Under Powell, the Fed is using nearly an "all-in" strategy of for monetary policy, employing both conventional and novel tools to support the economy. As well, the Chair has also at times implored the Congress to provide greater fiscal support. With a new monetary policy framework in place, the Fed would appear to be supportive of greater levels of government spending to spur growth; in turn, this could stoke firmer inflation, something that has eluded the Fed for many years now.

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In all, there may not be much change to be seen for the mortgage market over the next few years even with the change in administration. The CFPB may take a more stringent enforcement stance for some aspects of the consumer finance market; the Treasury will likely continue to support high levels of spending and debt, even if there are no new revenues to offset the spend; the FHFA may or may not get a change in director, but Fannie and Freddie are going nowhere for years to come at a minimum, and the Fed will stay the course until unemployment gets down to around the 4% level and the level of core PCE inflation is above 2% for perhaps a year or more. Of course, that doesn't mean that investors will lose their say over time about where long-term interest rates need to be to provide adequate compensation to offset risk and inflation.

Of course, how investors perceive these things this ultimately influences mortgage rates. Low mortgage rates have been an important factor into heating up the housing market and revving up a sector of the economy that stumbled when the pandemic broke out last year. Just as QE policies had lowered mortgage rates and sparked a revival of housing coming out of the Great Recession, current QE-style programs helped mortgage rates fall to record lows on multiple occasions in 2020, allowing homeowners the chance to refinance and free up billions of dollars while also increasing purchasing power for homebuyers, sparking fresh demand for housing. Amid strong demographic tailwinds and pandemic-related changes to work, school and geographic needs, sales of both existing and new homes rose to levels last seen during the "housing boom" markets of the mid portion of the 2000s. Unlike then, this upturn is powered by much more well-qualified borrowers using traditional mortgage products, most with some form of government backing.

The housing market is certainly warm, but is it overheating? Probably not. Low rates and limited inventory amid strong demand have caused prices to rise very quickly, something on the order of 3-4 times the rate of income growth at a minimum. Falling mortgage rates have fostered this, since a lower rate allows for a given income to be able to carry a larger loan amount. However, it would appear that the bulk (perhaps all) of the declines in rates have occurred, and with the prospects for greater stimulus, increasing levels of vaccination and what should be declining levels of infection now that the holiday surge is passing that there are likely more reasons for mortgage rates to be steady to perhaps slightly higher as we go. Absent the falling-rate offset, higher home prices may start to bite into affordability a bit more, and that would provide tempering for price gains. - mortgage rates and existing home sales trends.

Existing home sales in December edged 0.7% higher, rising to an annualized rate of 6.76 million for the month. For 2020 as a whole, 5.64 million sales took place, a figure a little above our expectations for the year, but when we wrote our 2020 forecast in late 2019, we didn't foresee the pandemic or its effects on interest rates and housing markets. Regardless, sales of existing homes for the month were at their highest annualized rate since 2006, with the median price of a home sold 12.9% above year-ago levels, with nominal prices just a little below all-time highs.

Driving those prices -- which have now seen year-ago-comparison increases in each of the last 106 months according to the NAR -- are the thinnest inventories of unsold homes as tracked by the National Association of Realtors since 1982. The NAR release noted that "Total [for sale] housing inventory at the end of December totaled 1.07 million units, down 16.4% from November and down 23% from one year ago." With prices high and nothing to buy -- and now mortgage declines leveling off -- the housing market is likely to be an increasingly challenging one for potential buyers until more supply comes on line. Although typically thin during the holidays, the current amount of supply is pegged at just 1.9 months at the present rate of sale, down from 2.3 months in November, and will remain extraordinarily tight even is this level doubles before spring (which seems unlikely).

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New construction can pick up some of this demand, and likely will in 2021. New construction of residential housing rose by 5.8% in December to a 1.669 million annual rate, the highest level since 2006. Single-family starts led the uptick, climbing by 12% to a 1.338m level, while those for multifamily dipped by 13.6% to a 331,000 pace of initiation. Even with the gain for the month, permits for future activity suggest there's more where that came from, as they rose 4.5% overall to a 1.709 million (annualized) rate. Builders are busy now and look to be busy for the foreseeable future, too.

That said, they are a little less ebullient than they had been, according to the National Association of Home Builders. The NAHB's Housing Market Index remains at a very elevated level, just somewhat less so than a few months ago. For January, the index value was 83, down three points from December, and a two-month slide has chopped seven points off November's record high. That's much the case with subindexes, too, with the one covering current single-family sales easing two points to 90 (recent record: 96) and expectations for the next six months (-2 points to 83, six points below record levels). A more pronounced decline was reported in the index of traffic levels at model homes and showrooms, which shed 5 points to land at 68, its lowest figure since August, but all of these figures remain way above their neutral thresholds of 50, so the new housing market remains in good shape as we head toward the spring market (if things work out with the vaccine and such, we may have one this year).

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Jan 15Dec 18Jan 17
6-Mo. TCM 0.10% 0.09% 1.57%
1-Yr. TCM 0.11% 0.09% 1.54%
3-Yr. TCM 0.22% 0.18% 1.58%
10-Yr. TCM 1.13% 0.93% 1.82%
Federal Cost of Funds 0.925% 0.958% 1.092%
30-day SOFR (daily value) 0.08534% 0.07667% n/a%
FHLB 11th District COF 0.466% 0.503% 0.693%
Freddie Mac 30-yr FRM 2.79% 2.66% 3.60%
Historical ARM Index Data

Applications for mortgages remain high, but did dip a little in the week ending January 15, falling by 1.9%. A 4.7% decline in applications for refinancing was the culprit, a move precipitated by the first meaningful rise in mortgage rates since last year (since partially diminished). Applications for purchase-money mortgages gained 2.7% for the week, the third increase in the last four weeks. Mortgage rates holding fairly steady at these levels will see slowing refinance activity over time as the pool of potential candidates at a given interest rate level becomes sated, but there remain many millions of mortgages said to be "in the money" for refinancing yet.

Although there are changes to policymakers and regulators in Washington, the regulatory machines and structures don't change easily or quickly. For the moment (and to quote the Who) it feels a little like "meet the new boss, same as the old boss", at least as far as mortgages and the mortgage markets are concerned. If there's a change of director at FHFA, we might see a greater amount of mission shift or "creep" toward the new administration's goals, but we probably won't even know if there can be an at-will change of director for months yet, so that's tomorrow's concern.

That's much the same story for mortgage rates, too. If we get to a point where inflation is running warm for a a while period and if we get to a place where unemployment is closing in on pre-pandemic levels for a good while, we'll then see investors injecting concerns into mortgage pricing, and that only if the Fed isn't still snapping up billions of dollars of mortgages every month. At present, wandering around just above all-time record lows is about all mortgage rates can do, and we think we'll see another couple of basis point decline in the average offered rate for a conforming 30-year FRM when Freddie Mac reports next Thursday morning.

Looking further forward is our latest Two-Month Forecast , where we reveal our expectations for mortgage rates from now up until to mid-February. What do we think early 2021 will bring? Have a look and see.

2021's just got to be better than 2020, right? Maybe, but it all depends on how you look at it. To see our take on mortgage rates, home sales, home prices, the Fed and more, check out our 2021 Outlook

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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