Mortgage Rates Edge Higher; Bump in House Flipping Raises Concern

For the first time in two months mortgage rates edged higher, but remain well below 4% as the housing industry prepares for the spring selling season.

Meanwhile, house flipping is at its highest level in eight years, causing at least one economist to express concern that the “housing market is in trouble.”

Freddie Mac’s just-released weekly survey of lenders shows the following average rates for the most popular home loan terms:

• 30-year fixed-rate mortgages averaged 3.64% with an average 0.5 point for the week ending March 3, 2016.  A year ago, the rate averaged 3.75%.
• 15-year fixed rates averaged 2.94% with an average 0.5 point. The same term priced at 3.03% a year ago.
• 5-year adjustable-rate mortgages priced at 2.84% with an average 0.5 point. Last year at this time, the same ARM averaged 2.96%.

“The market turbulence that kicked off the year subsided at the end of February, providing at least a temporary break in the flight to quality,” Sean Becketti, chief economist for Freddie Mac, said in a release. “Despite this welcome breather, [Federal Reserve] officials have been highlighting the downside risks to the economic outlook, and the market expects the Fed to refrain from any further short-term rate increases for now.”

Mortgage applications fell 4.8% for the week ending Feb. 26, according to the Mortgage Bankers Association weekly report, led by lower refinance demand.

Purchase applications were off 1%, as refi applications fell 7% from the previous week.

Overall, home purchase loan applications remain 27% higher than the same week one year ago.

Economist: A new sign that the ‘housing market is in trouble’

House flipping is back, big time. In a new report, RealtyTrac says there were more investors attempting to turn a quick profit on real estate in 2015 than in any year since 2007.

RealtyTrac defines a house flip as an arms-length sale of a home for the second time in a 12-month period.

“Not only is the share of home flips on the rise again, but we also see the flipping trend trickling down to smaller investors who are completing fewer flips per year,” Daren Blomquist, senior vice president at RealtyTrac, said in a release.

But the entry of more inexperienced players into the market leaves at least one economist concerned.

“When home flipping numbers go up, it is usually an indication that the housing market is in trouble,” said Matthew Gardner, chief economist at Windermere Real Estate in Seattle. “The problem with a rise in home flipping is that these sales artificially inflate home prices, making housing even less affordable for buyers and increasing the risk of a bubble.”

Average gross profits on home flips were impressive, topping $55,000, a 10-year high, RealtyTrac says.

Metro areas with the biggest year-over-year increase in house flipping were Lakeland, Florida (up 50%); New Haven, Connecticut (up 45%); Jacksonville, Florida (up 41%); Homosassa Springs, Florida (up 40%); and Akron, Ohio (up 37%), the report says.

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Mortgage lenders show UK house prices heading in opposite directions

The latest reports from two of the UK’s biggest mortgage lenders show house prices going in opposite directions in February.

While Nationwide building society said the average price of a house in the UK rose by 0.3% in February to £196,930, Halifax reported a 1.4% fall over the month, with the average price dropping to £209,495.

Both lenders base their house price indices on mortgages they have approved, with adjustments made to produce a value for a typical house and iron out any unusual trends in lending. However, the loan books and adjustments are not the same, resulting in different figures.

Halifax’s annual rate of change, based on a comparison of the three months to February with the same period last year, has been running higher than Nationwide’s for some months. Its monthly price movements have also tended to be more erratic, with the bank reporting a 1.7% increase in January before last month’s dip.

For February, Halifax said prices were up by 9.7%, while Nationwide’s figure for annual growth was 4.8%. Although this was higher than the 4.4% reported the previous month, the building society said it had remained in a fairly narrow range, between 3% and 5%, since the summer.

Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, said Nationwide’s index was showing lower price growth than other measures, which could be a result of the sample of mortgages it used.

“Nationwide’s measure of house prices underplays the extent to which the housing market is heating up again,” he said. “The latest growth rates of all the other main measures of house prices have been significantly stronger over the last six months.”

Richard Donnell, the research director at property firm Hometrack, said Halifax had understated the level of house price growth until the end of 2012, and its index seemed to have been catching up since then. He added that Halifax does “a lot of new-build lending so softer valuations on new build in London might [have an] impact”.

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Reports from lenders have shown strong activity in the mortgage market since the start of the year, and despite reporting a fall for February, Halifax said prices were rising “at a robust pace”, driven by a significant imbalance between supply and demand.

The bank’s housing economist, Martin Ellis, said: “While this position is likely to continue over the coming months, there are some tentative signs that the supply situation may be beginning to improve.”

Nationwide’s chief economist, Robert Gardner, said recent activity was likely to have been driven by the new stamp duty surcharge on second homes, which comes into effect in April. “This is likely to have brought forward a significant number of purchases, which in turn will probably result in a fall back in approvals during the spring/summer,” he said.

Looking further ahead he predicted further increases in property values. “We expect the underlying pace of activity to increase in the quarters ahead as improving labour market conditions and low borrowing costs provide ongoing support.”

Hansen Lu, a property economist at Capital Economics, said the monthly figures from both lenders suggested that the increased activity in the market “may, at least so far, be having only little impact on prices”.

He said this could be because prices were already so high that buyers were unable or reluctant to keep bidding up prices. “Other buyers, especially those purchasing for the first time, may be delaying until competition in the market cools after the April stamp duty deadline – helping to keep a lid on price growth,” he added.

Howard Archer, the chief UK economist at IHS Global Insight, predicted that prices would rise by about 6% over the year. However, he added that the EU referendum on 23 June posed a “potential major downside risk to housing market activity and prices”.

He said: “A vote for Brexit would be liable to see a marked hit to UK economic activity over the rest of this year and in 2017 amid heightened uncertainties, which would likely weigh down heavily on the housing market.”

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The 'secret' mortgage rates banks don't want you to think about

There's a secret mortgage interest rate the banks aren't keen to discuss.
It's the "test rate" banks use when calculating whether a borrower can afford a loan.
The test rate is higher than the mortgage rates the borrower will pay, if they pass the test.

PETER MEECHAM/FAIRFAX NZ

Mortgage broker Karen Tatterson says the public should understand mortgage affordability "test rates".

Mortgage brokers are privy to the test rates of banks, but banks don't publish them on their websites, and all the big banks refused to reveal theirs.

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Currently, the test rates of the major banks run from 7.05 per cent to 7.4 per cent, brokers say.
That compares to floating mortgage rates of 5.6 to 5.75 per cent.
The test rates are used internally by banks when calculating whether a prospective borrower has the income to service the loan
in case mortgage rates rise.
The banks say the use of test rates that are significantly higher than mortgage rates shows they are responsible lenders, but the secret rates are also an indicator to borrowers of how tomorrow's mortgage rates may be different from today's.

Matthew Nauer​ from BNZ said: "When a customer comes to us to talk about a home loan there are many factors we take into consideration."
"And yes, part of that is looking at their ability to make their loan repayments, should interest rates rise, irrespective of the actual current rate. It goes hand in hand with being a responsible lender."
An ASB spokesman said: "Loan decision criteria assess our customer's ability to meet their loan repayments based on likely future interest rates".
Mortgage brokers are split on whether the public would benefit from banks publishing the "commercially sensitive" test rates.
The benefits would include borrowers having a more clear-eyed view of what future rates could be.
That could focus more borrowers on the value of paying off more of their loan while mortgage rates were low.
Mortgage broker Karen Tatterson​ from Loan Market said the public would also benefit from knowing more about how banks assess loan applications.
"I believe that clients need to be made aware that when they are considering their options for borrowing money the interest rates used to calculate repayments are not those the banks use to calculate affordability," she said.
It could help dispel the notion that when mortgage rates fall, people can automatically borrow more as their repayments would be lower.
Tatterson​ said knowing that different banks had different criteria - for example the test rate for the ANZ is 7.05 per cent currently compared to 7.4 per cent at ASB - could encourage people to shop around, or use a mortgage broker to do it for them.
Too often people who had been knocked back by their bank did not try elsewhere, Tatterson​ said.
Mortgage broker Campbell Hastie from the Go2Guys said the test rates of the past had provided little guide to where interest rates had headed.
When mortgage rates were over 9 per cent in 2008, test rates were higher, but hindsight showed the actual rates did not reach those levels in the following years.
Though regularly reviewed, test rates have tended to move in relatively infrequent steps, reflecting that at least part of their setting reflects medium to long term bank expectations for interest rates.
ANZ said the rates also took into account movement of interest rates through interest rate cycles, which again could be something borrowers should think about.
But Hastie said test rates were only one part of the affordability calculation- for example different banks may require different levels of surplus after a prospective borrower's monthly costs were calculated.
They also reflected banks' willingness to lend at different points in time.
"When they take a competitive position in the market, then maybe they will drop the rate," he said.
Hastie said prospective borrowers were only interested in getting a loan, and their monthly repayments, if they got it.

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EU referendum: Fears of Brexit vote triggering interest rate hike fuels mortgage activity

Britons are rushing to secure new mortgages ahead of the EU referendum over fears a run on the pound in the event of a Brexit will cause the Bank of England to hike interest rates, according to a lender.
Several investment banks, including Goldman Sachs and Citi, predict that a 'leave' vote will see investors flee and clip a fifth off the value of sterling, which has already fallen since Prime Minister David Cameron formally announced the 23 June date of the referendum.

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The Bank of England is looking to raise its base interest rate from the all-time low of 0.5%, where it has sat since 2009, to stimulate the economy while it recovered from the financial crisis. Policymakers have so far held back because of concerns about the state of the global economy, in particular debt-laden emerging markets and turmoil in the Chinese stock market. But a run on the pound sparked by a vote for Brexit may force them into action sooner than they would have liked.
Since campaigning in the EU referendum began, lender deVere Mortgages said it has seen a 30% increase in the number of enquiries from potential customers. "We attribute this uptick largely to the fact that the In Campaign has been keen to point out, and effective in doing so, that mortgages could become more expensive if Britain leaves the European Union following June's referendum," said Mike Coady, Managing Director of deVere Mortgages.
"If the UK votes to leave the EU, Britain's very large trade deficit may cause a run on sterling and, as such, require the Bank of England to introduce higher interest rates to stem it. Of course, this would have the consequence that mortgages will become more expensive as lending rates rise.
"Clearly, no one can predict the outcome of the referendum, but it seems that the possibility of the fallout of Brexit is fuelling a surge in mortgage enquiries. People are rushing to apply for and lock-in a mortgage now as a precaution in case interest rates go up and mortgages become more costly. I believe we can expect this surge in mortgage enquiries to intensify as we approach the vote."

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'I missed credit card payments at university and it cost us a mortgage'

Applying for a mortgage involves jumping through a lot of hoops – and, as one couple discovered, small blips in your financial history going back many years can derail an application.
Whenever a mortgage application is made, the lender runs a detailed credit check on the applicant, looking back at their credit history for the past seven years.
The aim is to establish whether an applicant is a safe bet, based on the level of responsibility displayed in their history of servicing and repaying debts.
When it comes to mortgages, because of the large sums involved, even small inconsistencies can be a red flag for lenders.

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This is something that Louis Corcutt, 26, and his partner, Jess, 28, now understand only too well. The pair have recently bought a home in Oxford, but their journey to property ownership was less than smooth.
With a £50,000 deposit on a £299,000 house, and stable combined salaries of £55,000, all the signs looked promising.
Mr Corcutt, who works in business development, said: “We went through a mortgage broker, who initially gave us a list of loans we could look at, so we knew what we could borrow and what we could afford.”
After looking at some properties, the couple put down an offer on one they liked. When it came to arranging the mortgage, however, the provider they had earmarked as a potential option declined them on the basis of Mr Corcutt’s credit history.
“After being rejected I went to find my credit report to find out what the problem was – the lender had told me it was something on my record, but didn’t say what,” Mr Corcutt said.
“I managed to track it down and work out what it was. When I was at university I had a credit card, and I was waiting for a maintenance loan to come through so didn’t make some payments.”

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The item flagged was only months from falling off Mr Corcutt’s credit history, which is limited to seven years, but still led to the couple being turned down for the loan.
Although they were able to get a mortgage in the end, Mr Corcutt said the experience was “extremely frustrating and in the end it did mean we got a slightly worse rate”.
When a borrower has been rejected by one lender, there is always the risk that others might follow suit. The first mortgage application involved a “hard” credit check which led to a rejection, something that can in itself affect a buyer’s ability to borrow.
A hard check is a type of inquiry that can have a direct impact on an individual’s credit score.

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