Morning Report: CoreLogic: Half of MSAs are overvalued 4/3/18

Vital Statistics:

Last Change
S&P futures 2589 14
Eurostoxx index 368.88 -2
Oil (WTI) 63.15 0.14
10 Year Government Bond Yield 2.76%
30 Year fixed rate mortgage 4.41%

Stocks are rebounding after yesterday’s bloodbath. Bonds and MBS are down small.

No economic data today. Neel Kashkari speaks at 9:30 this morning.

The replacement for LIBOR begins trading today, when the New York Fed begins listing its new Secured Overnight Financing Rate. The NY Fed will also publish a couple other rates: the Broad General Collateral Rate and the Tri-party General Collateral Rate. Details can be found here. The appeal of SOFR will be that it is based on arms-length transactions and not quotes from banks that may or may not be real.

Prepayment speeds collapsed in early 2018 as rates rose, according to Black Knight Financial Services. Prepayment speeds are generally a proxy for refi activity, which has dried up as more of the refi opportunities are out-of-the-money. From this point onward, refi activity will be driven by home price appreciation more than interest rates. As home prices rise, the opportunity will be cash-outs, FHA with MI to conventional without MI, and ARMS into 30 year fixed. As the yield curve flattens, the relative decrease in the monthly initial ARM payment decreases.

Home equity topped $5.4 trillion last quarter and beat the record set in 2005. 75% of that is in mortgages that are out-of-the-money, or below the current 30 year fixed rate mortgage.

Home Prices rose 1% in February and are up 6.7% YOY, according to CoreLogic. They are forecast to be flat in March and up 4.7% YOY. Much of the torrid growth has been in the West / Mountain states, especially WA, NV, ID, and UT. Affordability has fallen and home price appreciation is expected to slow going forward. About half the MSAs are now overvalued, as home price appreciation and mortgage rates have outstripped income growth.

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