Economical Updates May 5, 2017

Prices Continue to Rise

The first March home price data shows month-over-month appreciation at the fastest pace in 11 months. The CoreLogic Home Price Index (HPI) rose 1.6% compared to February, the largest gain since last April.
After more than a decade of decline, the homeownership rate set a record low of 62.9% in the second quarter of 2016. It ticked up the next two quarters, but was down again in the first quarter of this year. It was only a 0.1% dip, but still, a disappointing break in the flow. There were, however, some pluses in the U.S. Census Bureau report.
First, the homeownership rate is still higher than a year ago. Second, the large and persistent gap in homeownership between white and minority households narrowed slightly. Both black and Hispanic homeownership rates were up by more than a percentage point year-over-year.
The Census Bureau report, which also tracks vacancies and rents, noted that Q1 marked the first time since 2006 that owner households grew faster than renter households. The former grew by 850,000 units while renter households rose by 365,000.
Rates Stay Low
The Federal Reserve Open Market Committee (FOMC) left rates alone at its May meeting. Officials signaled their belief that recent indications of decelerating growth (the 1st quarter GDP grew by a paltry 0.7%) were temporary and that they would stay with their plan for two more rate hikes this year.
The FOMC decision is always interesting, but it has little to do with mortgage rates. Over the next few years they are more likely to be impacted by a potential reversal of QE, quantitative easing. To refresh your memory, in 2009, the Fed launched QE, buying huge numbers of mortgage-backed securities (MBS), an effort to keep rates low and mortgage money flowing. The MBS issued by Fannie Mae and Freddie Mac (the GSEs) are collateralized by pools of conforming mortgages and those from Ginnie Mae by FHA/VA backed loans.
The Fed stopped investing new money several years ago, but continues to reinvest as mortgage balances are paid down or securities mature. It now holds $1.75 trillion in MBS, 30% of the total market.
Per the Urban Institute, it is a given the Fed will divest, probably soon and the path they chose is critical. Gradually cutting back on reinvestment would be the least disruptive option, or they could abruptly stop reinvesting, letting their portfolio run off through mortgage paydowns. Finally, they could sell the whole portfolio on the open market. Any of these options will reduce demand for the securities, and will probably raise rates, but the Fed’s management of the process will make a big difference. We’ll keep our eye on this.