My Mind on Mortgages

Mortgage rates are starting the day priced modestly worse from yesterday.

Mortgage-backed bonds (MBS’s) got off to a bad start this morning trading lower on a better than expected retail sales report.  The Commerce Department’s monthly report on retail sales showed that they increased in the month of February by .3%.  Analysts had been expecting a weak reading because of poor weather.

MBS’s actually pierced below technical support in early trading but have since found support at the 200-day moving average.  MBS’s were supported by a worse than expected read on consumer confidence from the University of Michigan survey.

At this point MBS prices are trading right at critical technical support.  Should the market close below the 200-day moving average I’d expect rates to increase by .125%-.25% next week.  However, should MBS prices rebound and reverse higher I expect rates to remain at current levels.

I have been recommending a locking position for a while now so this move higher shouldn’t catch anyone by surprise.

Current outlook: locking bias

Mortgage rates are mostly unchanged this morning.

The bond market is bracing for today’s $13 billion 30-yr bond auction by the US Treasury.  Both the 3-yr and 10-yr auctions drew strong demand earlier in the week but the longer duration of this issue has analysts concerned that there won’t be sufficient demand.  If their trepidation comes to fruition we may see mortgage rates pressured higher as well.

In other news this morning’s weekly jobless claims number declined.  On the surface this is good news (less people are filing for unemployment benefits) but analysts aren’t satisfied because the amount of people filing jobless claims declined by less than expected.  Based on last week’s jobs report it seems as though lay-offs are declining but employers have not yet begun to hire workers back.

From a technical standpoint mortgage-backed bonds (MBS’s) are trading up against technical support.  Should trading drop below current levels I wouldn’t be surprised to see rates get pushed back above 5.00% (5.12%APR).

Current outlook: locking bias

Mortgage rates reversed modestly higher this morning.

Mortgage rates are being pressured higher this morning in response to a higher open for stocks.  Stocks and bonds compete for the same investment dollar so when the equity markets rally it is often at the expense of bonds.

The US Treasury is set to deliver $21 billion in 10-year notes later this morning.  Yesterday’s $40 billion of 3-year notes went well.  The final leg of the treasury’s biweekly auction comes tomorrow when they’ll auction off $13 billion in 30-year bonds.

There is not much in the way of economic data today so we’ll continue to watch the stock market for leadership.  I don’t feel there is a compelling reason not lock so long as 30 year fixed prime rates are below 5.00% (5.01% APR).

Current outlook: locking bias

Readers of this blog are probably well aware of the fact that mortgage rates have basically remained in a tight sideways range since mid-January.  Followers of the stock market know that the equity markets have effectively traded sideways over that time as well.  The WSJ published this article today summarizing two opposing views of stocks from a couple heavyweights which seems to represent the polarizing opinions on Wall Street that keeps the market from having a clear direction up or down.  One of the viewpoints is from Robert Shiller who is a bear and argues that stocks are currently overvalued.  The opposite view is from his close friend Jeremy Siegel who I got to see speak in Portland a few months ago.  He argues that on a historical scale stocks look cheap right now.  What I find interesting is that effectively each uses historical data dating back to the 19th century to support their views.  In effect they are looking at the same data and drawing two completely different conclusions.

If you are a stock market fan then the article is worth a read.

Mortgage rates are priced slightly better this morning.

I noted in yesterday’s rate update that public support for Greece’s austerity plan pressured rates higher because of an unwinding in the “flight-to-quality” trade.  However, this morning that trade is gaining traction due to a surprise announcement by Fitch Ratings Service in which they raised concern over Portugal and the United Kingdom’s fiscal health.  These concerns are creating demand for relatively “safe” US debt which is helping yields.

Later this morning the US Treasury will auction $40 billion in 3-year notes.  The results of this auction can shape the direction of interest rates.  Tomorrow the US Treasury will auction $21 billion in 10-year notes and on Thursday we’ll get $13 billion in 30-year bond supply.

Rates remain very attractive so we’ll maintain a locking position.

Current outlook: locking bias

Mortgage rates are unchanged from Friday.

Over the weekend French President Nicholas Sarkozy publicly voiced France’s support for Greece as it tries to navigate its way out of the financial mess they find themselves in.  His support is likely to take some more wind out of the “flight-to-quality” trade which has helped mortgage rates over the past couple weeks.

There isn’t much in the way of significant economic data until Thursday this week.  Until then I’ll be tracking the stock market, technical trading patterns, and US Treasury supply.

The US Treasury is set to auction $74 billion in 3-year, 10-year, and 30-year securities.  In addition, they will auction another $136 billion in Treasury bills (securities with durations one year or less).  Click HERE to understand how this can impact mortgage rates.

Given that rates are still very attractive I will maintain a locking recommendation.

Current outlook: locking bias

Mortgage rates are slightly worse this morning.

This morning’s all important jobs report was better than expected (click HERE to learn why this report is so impactful).  The markets were bracing for weak jobs numbers due to poor weather last month but the report indicated that only 36,000 jobs were lost in the month February.  The unemployment rate remains at 9.7%.  A better than expected jobs report is typically bad for mortgage rates.

In other news Greece’s parliament approved the budget plan that was announced yesterday which is designed to help Greece close its budget gap.  The approval puts Greece one step closer to improving their financial health which would likely push yields higher here in the US.

The results of the jobs report often has an impact on the trend in rates for the coming weeks.  Hopefully readers followed our advice yesterday and locked ahead of the jobs report.  If not, I still believe locking in is the best move.

Current outlook: locking bias

Last September I wrote this article for my newsletter in which I introduced my readers to the Irving Fisher’s equation of exchange which reads MV=PT where M= money supply, V= velocity of money, P=price level, and T= quantity of goods and services transacted (real Gross Domestic Product [GDP]).

The thesis of the article was that due to the Federal Government’s extraordinary efforts to stimulate the economy the nation’s money supply has grown rapidly so we need to be cautious of inflationary pressure; and therefore higher interest rates in the future.

In this morning’s WSJ Kelly Evans sets the record straight by arguing that not only is inflationary pressure an immediate concern for our economy but quite the opposite policy makers should continue to look for ways to boost the money supply to avoid deflation. 

In the article she uses the “M2″ definition of money supply.

The nation’s money stock, known as “M2,” includes physical currency, bank deposits and households’ money-market holdings. The money stock’s growth, which historically averages around 5% a year, has stalled over the past 18 months since the credit crisis intensified in late 2008.

As measured by M2 she has a point.  However, in time it is possible that the Fed’s ballooning balance sheet could work it’s way into the M2 measure of money supply.  Furthermore, as economic activity picks up we will also see the velocity of money (V) increase along with GDP (T).  Therefore, when you look at the equation of exchange that only leads to higher price levels and interest rates.  We’ll have to wait to find out.

Pricing on mortgage rates improved modestly yesterday afternoon.

Blackrock Inc., the world’s largest money-management firm, announced yesterday that they would be increasing their asset allocation of US Treasuries in their client’s portfolios due to an uncertain economic outlook.  This is a perfect example of a “flight-to-quality” trade where investors purchase relatively “safe” US Treasuries because other investments carry too much risk.  The additional demand helps drive down interest rates.

A day after Greece unveiled their plan to cut its budget deficit they auctioned off €5 billion in 10-year notes.  The auction was met with favorable demand but that has a lot to do with the fact that they are paying an addition 3% of interest above comparable German notes.

None of the economic data released today missed expectations and therefore the markets continue to trade sideways ahead of tomorrow’s jobs report.  The market is already expecting weak jobs numbers (70,000 in jobs losses and unemployment @ 9.9%) so a soft number is not likely to improve rates.  From a technical standpoint mortgage-backed bonds are overbought so I expect rates to move higher before they move any lower.

Current outlook: locking bias

For many people saving for a rainy day is hard enough as it is.  Add on top of that all the other financial objectives a person is typically concerned with (i.e. retirement, college savings, paying down debt) saving for a down payment on a home can be difficult.  Because of this I often have clients who are interested in accessing funds in their retirement accounts to come up with money for a down payment.  In order to do this it’s important that homebuyers be educated on their options.  Therefore, I have put together this post to summarize the important points of using 401K, IRA, and Roth IRA funds towards the purchase of a home.

One quick note that is generally applicable to all three sources.  Typically funds derived from a retirement plan used towards the purchase of a home may only be used as a down payment and may not be used to pay closing costs or other debts in order to qualify for a new mortgage.

401K

Rules for each 401K plan are slightly different so homebuyers need to talk with their plan administrators to make sure they can use their 401K.  Technically, a person cannot generally withdraw money from their 401K to use towards the purchase of a home.  Instead most 401K plans will allow participants to borrow money from their 401K and pay it back with payroll deductions.  For funds being used to purchase a home the repayment period can be longer than the normal required period of 5 years but check with the plan administrator to make sue the payments won’t be onerous .

The plan will usually assign an interest rate to the loan but because the participant is paying and receiving the interest on the effective cost of borrowing is 0%.  However, while the loan is outstanding keep in mind that it is  not receiving investment appreciation so the true cost of tapping into a 401K is the “opportunity cost”.  Homebuyers wishing to use their 401Ks should consider the impact this will have on their future ability to retire.

Typically the maximum a person can borrow from their 401K is the lesser of $50,000 or 50% of their vested balance.  If the vested balance is less than $20,000 then sometimes they can borrow up to the vested balance or $10,000 whichever is greater.

It’s important to note that a person does not have to be a first-time homebuyer to use 401K funds.  It’s also important to note that because the homebuyer will pay back the 401K loan with payroll deductions then it is generally not possible to access funds in a 401K with a previous employer.  The homebuyer must currently be working for the plan sponsor.

IRA

IRAs are different from 401Ks in that a person is  able to take distributions instead of having to take out a loan.  The question then becomes whether or not the distribution will be a deemed a “qualified” or “non-qualified” distribution.  A “qualified” distribution IS NOT subject to a 10% penalty while a “non-qualified distribution” is subject to a 10% penalty.

In order for a distribution to be qualified the homebuyer must be a first-time homebuyer which the IRS defines as a person who has not owned real estate in the previous 24 months.  Distributions of up to $10,000 are eligible  to use towards the homebuyer’s down payment only.  The $10,000 cap is a lifetime limit so once a person has utilized the $10,000 they may not use it again.

So long as the contributions to the IRA were tax deductible for the homebuyer then the distribution will be taxed as ordinary income.  If the distribution does not meet the criteria of being a “qualified” distribution then it will also be subject to a 10% penalty.  Since the homebuyer will typically incur income tax liability for an IRA distribution it’s important they account for that when budgeting out their money from the time of distribution to the following April 15th when taxes are due.

Roth IRA

The rules for Roth IRA distributions used towards the purchase of a home are similar to the aforementioned traditional IRA guidelines in that it is only available for those who meet the IRS’s definition of a first-time homebuyer and is only available up to $10,000.  However, there are a couple key differences.

One key difference is that for a distribution to be “qualified” it may not be made inside  a 5-taxable-year period which begins January 1st of the taxable year for which the very first contribution was made to any Roth IRA the homebuyer owns.  In other words, for a first-time homebuyer who wishes to take a “qualified” distribution from their Roth IRA account anytime in 2010 must have made their very first Roth IRA contribution (to any Roth account) no later than the 2005 tax year.

The other key difference is taxation.  Because Roth IRA contributions are not tax deductible at the time of contribution “qualified” distributions are not treated as taxable income.  However, if the distribution is not deemed to be “qualified” then it will be subject to a 10% penalty and depending on the contributions made and distribution taken may also have income tax implications.

I hope this summary enables homebuyers out there to make better decisions with their money.  Please remember that I am not a tax professional and tax code is subject to change.  It is best to discuss your options with a knowledgeable professional when you are close to make such a decision.  It is also important to consider the impact that the decision will have on your ability meet your retirement accumulation goals.