Mortgage applications increased 9.3% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 5, 2016. The Market Composite Index, a measure of mortgage loan application volume, increased 9.3% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 12% compared with the previous week. The Refinance Index increased 16% from the previous week. The seasonally adjusted Purchase Index increased 0.2% from one week earlier. The unadjusted Purchase Index increased 7% compared with the previous week and was 25% higher than the same week one year ago. The refinance share of mortgage activity increased to 61.2% of total applications from 59.2% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.4% of total applications. The FHA share of total applications decreased to 12.3% from 12.9% the week prior. The VA share of total applications remained unchanged from 11.1% the week prior. The USDA share of total applications decreased to 0.6% from 0.7% the week prior.
WSJ – ‘doom loop’ fears cast pall over bank shares
Bank stocks led an intensifying rout in financial markets, amid concerns that global central banks struggling to boost growth will worsen an already tough environment for lenders. The Dow Jones Industrial Average closed down 254 points on Thursday, and US oil prices fell near $26 a barrel, in a broad flight from risk that sent haven assets climbing. Gold gained 4.5% to its highest level in a year. Bond prices rose, sending the yield on the 10-year US Treasury note, which tends to decline when investors get nervous, to its lowest level since May 2013. Selling continued in Asia Friday, with Japan’s benchmark stock index down more than 5% at midday to its lowest level in more than a year. Stocks in Hong Kong and Australia also fell. The recent pressure reflects concerns that investors have wrestled with for months, including falling commodity prices, a slowdown in China and heavy debt loads in emerging markets. What is new is that investors are now worrying that banks are being caught in the middle as central banks in Europe and Japan turn to negative interest rates to spur growth. Those policies, which charge lenders for reserves they keep on deposit with central banks, are crimping lenders’ profits and amplifying fears of a wide economic slowdown. At the heart of the concerns is an alarming conundrum: While hobbled banks may not be able to tolerate rates this low, limping economies may not be able to tolerate them any higher.
The “doom loop” that sent eurozone banks and countries into a spiral of mutual deterioration four years ago could now be encircling central banks and lenders. “The markets see this club of central bankers barreling down this path, which is really experimental for a number of reasons and doesn’t seem well thought out in terms of the impact it could have,” said Scott Mather, chief investment officer US core strategies at Pacific Investment Management Co., or Pimco. Bank shares plunged on both sides of the Atlantic, with Bank of America Corp. down 6.8% and Credit Suisse Group AG falling 8.4%. The KBW Nasdaq Bank Index of large US lenders fell 4.2%. For battered banks in Europe and beyond, negative rates come at the worst possible time. Regulations implemented after the financial crisis are making banks simpler and more resilient, but revenue streams have been cut off, and stock, bond and commodity trading is less profitable. Large fines at many banks for past misdeeds have held back capital building. Now, subzero rates are threatening their most traditional source of income: the difference between what a bank earns from lending and the amount it pays for deposits. Instituting a negative deposit rate drags down other interest rates in the wider economy, making borrowing cheaper. Investors said the recent rate moves into negative territory by central banks in Europe and Japan are an important ingredient in the cocktail of fears hammering bank stocks around the world. At the heart of concerns that European banks could stop paying interest, or coupons, on their riskiest debt, or will need to raise new equity, is a sectorwide decline in profitability that shows no signs of easing.
Economists at J.P. Morgan Chase & Co. warned this week that banks might respond to negative rates by hoarding cash and cutting lending, although that hasn’t been the case yet in countries with negative rates, including Switzerland, Denmark and those in the eurozone. The European Central Bank cut rates further into negative territory in December, while the Bank of Japan introduced a negative rate last month. Some smaller nations have gone further, with Sweden’s central bank lowering its main interest rate to minus-0.5% on Thursday. Meanwhile, on Thursday, Federal Reserve Chairwoman Janet Yellen said the US central bank is studying the feasibility of pushing short-term interest rates into negative territory should it need to give the economy a stronger boost. In a way, the move below zero was a gamble. The theory went like this: Banks would take a hit, but negative rates would get the economy moving. A stronger economy would, in turn, help the banks recover. It appears that wager isn’t working.
The consequences are deeply worrying. Weak banks may now drag the economy down further. And with the economy weak and deflation—a damaging spiral of falling wages and prices—looming, central banks that have gone negative will be loath to turn around and raise rates. Moreover, central banks have few other levers to escape that doom loop. The ECB has instituted a bond-buying program, but President Mario Draghi last month indicated he was ready to launch additional monetary stimulus in March. Japan’s decision to implement negative rates follows three years of aggressive monetary easing, aimed at ending two decades of low inflation and stagnant growth. The pushes into negative territory also amount to a sort of competitive currency war that no one seems willing to call off. Major economies around the world are desperate to spur inflation; one way to do that is to cut interest rates, which typically would make their currencies less attractive. Lower currencies raise the prices of imported goods and boost the fortunes of exporters. Switzerland, Sweden and Denmark have all used negative rates to help ward off inflows of foreign funds that push up their currencies. Economists said an aim of the Bank of Japan’s move to negative rates last month was to weaken the yen. It hasn’t worked: The yen shot up Thursday and is stronger than it was before the rate cut.
The move below zero compounds the miseries for lenders in those countries. Banks traditionally make a profit by lending at higher interest rates than the rates they pay on deposits, a difference called the net interest margin. Low rates have already squeezed that margin, and banks’ funding costs from other sources, such as bond markets, have surged this year. German banks earn roughly 75% of their income from the margin between rates on savings accounts and the loans they make, according to statistics from the Bundesbank, the country’s central bank. Plunging rates dragged German banks’ interest revenue down to €204 billion ($230 billion) in 2014 from €419 billion in 2007, according to the Bundesbank. Negative rates cost Danish banks more than 1 billion kroner ($151 million) last year, according to a lobbying group for Denmark’s banking sector. The impact is showing up in lackluster bank earnings. Shares in Italy’s UBI Banca SpA tumbled 12% Thursday after it reported net interest income below expectations. Bank analysts said further surprises to investors’ expectations on bank margins are possible. U.K. banks HSBC Holdings PLC and Standard Chartered PLC are poised to benefit from higher US rates, but further rises by the Federal Reserve are looking less likely.
For now, one factor working in banks’ favor is that negative rates touch only a small piece of their balance sheets. Even for the cash they do have at central banks, a host of rules exempts portions of those reserves from the negative-rate penalty. So far, just 2.2% of banks’ assets in the eurozone are subject to negative rates imposed by the ECB, according to Alex Dryden, a global market strategist at J.P. Morgan Asset Management. In Japan, the figure is just 0.9%. “Negative interest rates on a benchmark basis are not the final frontier. Only when negative rates begin to impact consumers and the real economy will we be entering a topsy-turvy world,” Mr. Dryden said. More deeply negative rates would force banks to make a choice: Either suffer an even greater hit to their margins or risk scaring off customers by passing on negative rates to them. Either outcome would mean more pain for the banking sector. Philippe Bodereau, global head of financial research at Pimco, said he doesn’t expect that to happen in the eurozone, because the ECB will be wary of sparking a crisis in the banking sector that spreads to the real economy. “We would be very surprised if the ECB went into a deeply negative interest rate as this would raise concerns over financial stability,” he said.
CoreLogic – deciphering the code of the millennials – part I
In a recent CoreLogic Insights Blog, Chief Economist Frank Nothaft discussed the impact of millennials on the housing market. As a follow-up, this edition will share perspectives on where millennials purchase homes based on CoreLogic research data. Millennials are a key demographic for real estate marketing. The millennial population size exceeds the baby boomer population and is now at the prime home-buying age. However, current trends show that many in this demographic are choosing to rent rather than purchase a home so it’s important to understand their buying behaviors in order to tap into this large pool of prospective homebuyers. To review these behaviors, CoreLogic analyzed over 70 metrics associated with mortgage purchases by millennials across the nation over the past year. The research shows that millennials are buying in markets they can afford, and specifically, where there are good paying jobs and home prices are low. CoreLogic ranked all counties with a population greater than 200,000 to determine the percentage of millennial mortgage applications. Millennials are more likely to purchase homes in the middle of the US where home prices are more affordable rather than along the coasts where homes prices are higher. The amount that millennials make is not as much of a factor as the affordability of the housing market. This is most likely due to the higher percentage of millennial first-time buyers with limited equity for the down payment. The top ten counties have a higher mean millennial income level compared to counties with comparable housing markets. Additionally, the top ten counties contain mortgages in which the borrower has a higher front-end ratio, which highlights affordability as the driving factor for millennials.
One might anticipate that the top millennial home buyer markets would have a higher rent-to-mortgage monthly cost ratio such that it would be cheaper to pay rent than monthly mortgage. On the contrary, the rent-to-mortgage cost ratio is similar in the top ten and the bottom ten counties. This suggests the monthly mortgage payment is not a factor keeping millennials from purchasing homes but rather the initial cost. Many millennials face the challenge of having low to no credit or not having the down payment to qualify for the loan. It is also probable that many millennials do not even apply for loans because of a false perception that they will not qualify. Another factor is that millennials are more likely to purchase a home when they move away from their hometown. More specifically, when moving to an area with a higher concentration of millennials. Two main factors that contribute to people moving are job opportunities and college with job opportunities being the main driver. Although there are a few counties in the top ten list known for colleges, a majority of the areas are not college destinations. For example, Denver is not a college town but does have more job opportunities than other regions in the area. However, there are many nearby areas with colleges (Boulder, Fort Collins, and Colorado Springs), which contributes to millennials leaving their hometown. Denver is the closest region known for high paying jobs and is a great opportunity for millennials to stay in Colorado after graduation. Millennials are also purchasing homes in counties that neighbor larger cities such as Utah and Weber UT, Weld, CO, and Clay, MO. As millennials move to larger urban areas, many are finding more affordable housing in bordering counties and choose to purchase there while still taking advantage of job opportunities and amenities in the larger metropolitan area.
Understanding the specifics of where this important demographic group is buying homes sheds light on the patterns and trends that will determine the millennials’ impact on the housing market. One thing is for certain, they aren’t their parents when it comes to buying a home.
Consumer sentiment falls
Consumers are feeling less optimistic than expected so far this month as they weigh inflation rates and the pace of wage gains, a survey said Friday. The Index of Consumer sentiment hit 90.7 in February’s preliminary reading, according to estimates by the University of Michigan. Analysts expected a reading of 92, down from January’s preliminary 93.3 and even with January’s final reading of 92, according to Thomson Reuters consensus estimates. “While slowing economic growth was anticipated to slightly lessen the pace of job and wage gains, consumers viewed their personal financial situations somewhat more favorably due to the expectation that the inflation rate would remain low for a considerable period of time,” the survey’s chief economist, Richard Curtin, said in a statement. A closely-followed barometer of economic health, the survey measures consumers’ attitudes toward current economic conditions and future expectations. Both edged downward for the month, though Curtin said a less favorable outlook for the economy during the year ahead was balanced by steady longer term prospects. Consumers’ assessment of current economic conditions ticked down slightly to 105.8, from 106.4 at the end of January. The index of future expectations dropped to 81 from 82.7. February’s falling consumer sentiment came despite retail sales gaining momentum in January, spurred by a stronger labor market, Reuters reported from separate data. “No one would have guessed forty years ago, when high inflation was the chief cause of pessimism, that consumers would someday base their optimism on ultra-low inflation transforming meager wages into real income gains,” Curtin said.
Stockton report – even reverse mortgages can end in foreclosures
On a slew of TV commercials, the reverse mortgage may sound like the ticket to a modest but relatively stress-free retirement. But in real life, these mortgages have been a route to foreclosure for more than 1,200 New Jersey residents over the last decade, a new report from Stockton University’s William J. Hughes Center for Public Policy has found. David Carr, a political science professor, is the author of “Reverse Mortgages in New Jersey: A Bridge Over Troubled Waters.” He found that since 2005, more than 29,000 people in the state have gotten reverse mortgages, or loans that the homeowner doesn’t pay — the lender instead gives them a monthly check as a portion of the equity they’ve built up in their homes over the years. Those payments are tax free, but homeowners have to keep up their property taxes, insurance and other maintenance expenses, or else face foreclosure. Also, once a reverse mortgage has started, Carr emphasizes, the owner has to maintain that home as a principal residence.
If the owner leaves for a year or more, “even for medical reasons,” including to go to an assisted-living facility, “the reverse mortgage loan may become due and payable,” Carr’s report warns. Ocean County leads New Jersey by far with the number of reverse mortgages, according to the research.
WSJ – farmland values fall in much of central US
Farmland values dropped across much of the US Midwest in the fourth quarter, according to reports from the Federal Reserve on Thursday, a symptom of continued weakness in the agricultural sector fueled by several years of depressed crop prices. Average farmland prices in the Federal Reserve Bank of Chicago’s district, which includes Illinois and Iowa, fell 3% from a year earlier and slipped 1% from the third quarter of 2015, officials said. In the St. Louis Fed’s district, which is composed of parts of Illinois, Indiana and Missouri, prices for farmland fell 2.5% compared with a year ago, as farm incomes slid, the bank said. In the Kansas City Fed’s district, which includes Kansas and Nebraska, nonirrigated cropland values sank 4% from a year before, while the average price of irrigated land declined 2%, the bank said. Irrigated farmland, which is common in the region, depends on man-made water systems for moisture rather than rainfall.
The three Fed reports reflect a continuing downturn in the US farm economy, which has been marked by listless crop prices and softer demand for agricultural land after prices for both shot higher for much of the past decade. The yearslong farmland boom was fueled by drought and growing demand for grain from ethanol producers and foreign importers. But last year, US farmers collected bumper corn and soybean crops for the third-straight season, adding to already-plentiful world supplies at a time when a strong dollar and stiff global export competition are damping demand for US supplies. Revenue for farmers has declined as a result, prompting the US Department of Agriculture this week to project that net US farm income will fall this year to the lowest level since 2002. Midwestern bankers surveyed by the Fed banks in St. Louis and Kansas City said farm income dropped in the fourth quarter, and many lenders in all three districts expect land values to soften further in the current quarter as crop prices and farm profits remain subdued. “Sustained weakness in corn, soybean and wheat prices has had a particularly negative effect on farm income because these three crops account for about 70% of harvested crop acreage in the Tenth District States,” the Kansas City Fed said in its report on Thursday.
Average values for ranchland, used for grazing livestock, were flat to lower in parts of the Midwest, according to the St. Louis and Kansas City Fed districts. The St. Louis Fed said ranch or pasture land prices fell 5.3% in the last three months of 2015 versus prior-year levels. That figure represents the largest drop since the second quarter of 2014, the bank said. The Kansas City Fed said ranchland values in the fourth quarter showed zero growth amid a sharp drop in cattle prices and reduced profit margins in the livestock sector. “The downturn in crop and livestock prices helped stretch the slide in agricultural land values for at least another year,” wrote David Oppedahl, senior business economist at the Chicago Fed. The Chicago and Kansas City Fed districts said credit conditions for farmers declined in the fourth quarter, with repayment rates for loans excluding real estate softening, while demand for farm loans stayed strong or notched higher in many areas. In the Chicago region, Mr. Oppedahl said, an index of loan repayment rates fell to the lowest level since the first quarter of 1999, while the volume of the farm loan portfolio said to have “major” or “severe” repayment difficulties rose to 5%, or 2.1 percentage points higher than year-ago levels. “No improvements in the short-term prospects of the farm sector were anticipated by the survey respondents,” wrote Mr. Oppedahl, adding that Midwestern lenders said “controlling costs and utilizing risk-management tools would be critical to the health of farms in the coming year.”