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Mixed economic signals could spell a choppy housing market ahead

While no one really knows if a recession is looming, there are enough signals to warrant getting prepared for bad times ahead.

By Jeff Lazerson


What I think: Speculation is rampant among my column readers about where the economy is headed along with matters influencing long-term mortgage rates, and the readers’ overall real estate riches.

While lots of ideas are being tossed around, the hottest topics are about the Fed and the presidential election.

If, when, and how often will the Fed will reduce short-term rates in the foreseeable future? And, does a drop in fixed mortgage rates always follow a prime rate drop?

How much will mortgage rates rise right after the presidential election, just over 14 short months from now?

I think it’s too early to tell how many moves the Fed will make. But, looking back, the prime rate has moved 17 times between January 2008 and today, eight moves down and nine moves up.

There’s no clear pattern when comparing the 10-year Treasury rate (which is directly related to 30-year mortgage rates) on the day of Fed moves and 15 days later. The 10-year moved lower eight times, moved higher eight times and was unchanged once.

And, there was no directional consistency. Sometimes when the Fed dropped short-term rates, the 10-year worsened (rates rose), and sometimes the 10-year improved. I found the same spastic results when the Fed raised short-term rates.

Presidential elections likewise don’t appear to have any discernible impacts. Rates have improved three times following recent presidential elections and worsened twice.

There you have it. Clear as mud.

How about some better, more clarifying data to digest?

1. The U.S. Purchasing Managers Index reported manufacturing dropped below 50%, its first contraction since September 2009. What might this say about our currently very strong employment numbers?

2. Mortgage delinquencies are up in the second quarter of 2019, according to the Mortgage Bankers Association. “Delinquency rate is a leading indicator,” said Mike Fratantoni, chief economist at the MBA. “We are worried about a U.S. recession in the first half of next year.”

3. Last week, The Wall Street Journal reported that JP Morgan Chase, Credit Suisse Group AG and Citigroup Inc. are arranging non-QM mortgage bonds (previously called sub-prime or Alt-A loans). This market peaked at $1 trillion in the meltdown days. First-quarter 2019 finds $2.5 billion in these mortgage bonds, according to the article.

4. Mortgage police are at the doughnut shop. According to a recent Reuters article, Consumer Financial Protection Bureau enforcement actions have fallen by around half under the Trump administration. Mortgage lenders in cahoots with realty companies are steering unsuspecting consumers into costlier loans. This week the MBA reported independent mortgage banks saw 2019 second-quarter net gain profit numbers totaling $1,675 per file, its highest since the third quarter of 2016.

5. More consumers may be struggling. “At least double the number of people (are) seeking information about bankruptcy,” said Newport Beach bankruptcy attorney Michael Nicastro.

Cash on hand and cash flow are king.

We don’t know how deep or how long the recession will be. Many an email and phone call from homeowners blindsided by the Great Recession speculated that had they had enough cash reserves they would have either weathered the storm or had been able to find another job to keep the mortgage servicer at bay.

Mortgage broker Jeff Lazerson can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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Jeff Lazerson - Mortgage Columnist since 2011