Mortgage Rate Update

Apr 2, 2018

The stock market, although continuing to show significant volatility, reacted favorably to a decision by China to not implement retaliatory tariffs on its imports of U.S. soybeans and commercial aircraft, easing fears of a trade war at least for the time being.  There were also reports that U.S. and Chinese officials were negotiating to protect intellectual property rights of U.S. technology companies while opening China’s markets to U.S. goods.  The volatility seen in stocks during the week, and especially in the technology sector, prompted investors to seek a safer haven in the Treasury market as the yield on the benchmark 10-year Treasury note reached its lowest level since early February.

 

In housing, Pending Home Sales rebounded in February by 3.1% after falling by a downwardly revised 5% in January.  Economists had predicted only a 2.5% gain for the month.  However, even with February’s gain, Pending Sales are 4.1% lower from the prior year as available inventory has shrunk while home prices have climbed.  The National Association of Realtors chief economist, Lawrence Yun, remarked “The minuscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity.”  Last Tuesday, Standard & Poor’s reported its S&P CoreLogic Case-Shiller national home price index advanced 6.2% in January from a year earlier in addition to a 6.3% annual gain in December.

 

As for mortgage activity, the number of mortgage applications increased according to the latest data from the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey.  The MBA reported their overall seasonally adjusted Market Composite Index (application volume) increased by 4.8% during the week ended March 23, 2018.  The seasonally adjusted Purchase Index increased by 3.0% from the week prior while the Refinance Index increased 7.0%.

 

Overall, the refinance portion of mortgage activity rose to 39.4% from 38.5% of total applications from the prior week.  The adjustable-rate mortgage share of activity remained unchanged at 7.0% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.69% from 4.68% with points decreasing to 0.43 from 0.46.

 

For the week, the FNMA 4.0% coupon bond gained 25.0 basis points to close at $102.609 while the 10-year Treasury yield decreased 7.28 basis points to end at 2.7407%.  The major stock indexes moved higher for the week.

 

The Dow Jones Industrial Average rose 569.91 points to close at 24,103.11.  The NASDAQ Composite Index climbed 70.77 points to close at 7,063.44.  The S&P 500 Index gained 52.61 points to close at 2,640.87.  Year to date on a total return basis, the Dow Jones Industrial Average has fallen 2.49%, the NASDAQ Composite Index has gained 2.32%, and the S&P 500 Index has lost 1.22%.

Economic Calendar – for the Week of April 2, 2018

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 4.0% Coupon Bond

 

The FNMA 30-year 4.0% coupon bond ($102.609, +25.0 bp) traded within a narrower 45.3 basis point range between a weekly intraday low of $102.188 on Monday and a weekly intraday high of $102.641 on Wednesday before closing the week at $102.609 on Thursday.

 

Mortgage bond prices were able to rise above their 25-day moving average resistance level ($102.34) that now reverts to nearest support, and continued higher toward their 50-day moving average ($102.69) where the next level of technical resistance is located.

 

The chart shows the bond is approaching the “overbought” level as it approaches the 50-day moving average, so while there is still room for price improvement, the bond may have a tough time breaking through this level.  If the bond can manage to move above the 50-day moving average, mortgage rates should improve slightly.  However, if the bond is turned away from this level, mortgage rates would hold steady near current levels.

 

 

 

 

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Big day today. Finally, at 2:00 am ET the FOMC statement: by 2:15 the 10 yr note rate +2 bp to 2.93%. At 2:30 Fed chair Powell had his news conference.

 

As expected, the Fed increased the Federal Funds rate by 0.25% to a range between 1.50% and 1.75%. As usual when the FOMC meets markets exhibit a good deal of volatility; the initial reaction sent the 10 yr note yield to 2.93% 4 bps higher than yesterday, MBS prices swung back and forth before settling. The 10 found support at 2.93% and by 4:00 back at 2.88% -1 bp. Fannie 4.0 30 yr coupon up 14 bps on the day and up 20 bps from 9:30. The stock market rallied initially then cooled, the DJIA ran up 237 points before giving back all of the knee-jerk reaction and went negative.

 

  • labor market has continued to strengthen and that economic activity has been rising at a moderate rate.
  • Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.
  • On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent.
  • The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong.
  • In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.
  • The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.

 

As far as more rate increases after a lot of back and forth from market participants it now looks like the Fed will do what we have been projecting; three hikes this year, not four as some were thinking. The initial reactions from media, as usual, talking in circles. Making more of the statement than is necessary. One thing not in the prepared statement, any inference or reference about the trade issues. Overall nothing new in the statement that has much direct significance. The same thing as usual; pending the economic performance and inflation will dictate what the Fed will do in the future.

 

The Fed increased its growth estimates somewhat for 2018; from 2.5% in Dec to 2.7% now; unemployment in Dec for 2018 was 3.9%, now 3.8%, 3.6 in both 2019 and 2020. Inflation in the data unchanged from Dec at 1.9%; also core inflation unchanged from Dec at 1.9%. The range of Federal Funds rate this year 2.1%, 2019 2.9%, 2020 3.4%.

 

Asked about whether there was a discussion in the meeting about the potential of trade problems, Powell said the belief at the Fed is that trade changes will not affect the Fed’s outlook for growth longer term. He remarked some members have spoken with business leaders and that businesses are not as confident as the Fed appears to be.

 

Feb existing home sales this morning were better than expected. Sales of single-family homes rose 4.2 percent in the month to a 4.960 million rate with this yearly reading at plus 1.8 percent. This offsets continued weakness for condo sales which fell a sharp 6.5 percent in the month for a year-on-year minus 4.9 percent. Supply increased to 1.590 mil +4.6%. On Friday, Feb new home sales will be released and expected to show improvement of 4.3% from Jan.

 

Tomorrow not much scheduled news; weekly jobless claims expected about unchanged from the prior week. Feb leading economic indicators thought to be up 0.3 percent.

 

Source: TBWS

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We won’t say that in recent years the process of finding a good contractor has become easier. Finding a communicative, astute, responsible contractor is still like finding gold. But home repairs still tend to attract con artists. If you know a few things to look for and avoid, however, you may be spared a less-than-HGTV-happy experience.

There are a number of reasons a relationship with a contractor goes south. Unrealistic expectations find homeowners assuming their builder can snap his fingers and — poof! — their dream remodel appears. Keep in mind very few contractors have the wherewithal to hire administrative employees, meaning they end up doing most of the scheduling and paperwork while trying to get your kitchen remodel done. So cut these guys some slack.

And then there are the Craigslist con artists who see a trusting, vulnerable homeowner with little-to-no knowledge about their home’s inner workings and bells go off. This is what we’re covering here — how to sniff one out before they turn your dream home into a nightmare. Here are a few danger signs.

Their credentials aren’t handy when you ask for them. Be a detective. In most states, skilled work, like the jobs performed by electricians and plumbers, must be completed by a licensed contractor. So don’t be afraid to ask to see a copy of your contractor’s license—a pro won’t be offended. You can jot down their full name and contractor number and access a database online through your local state contractor licensing board to verify they are legit as well as study any challenges made to their license as well.

Always, always ask to review their proof of insurance as well as a list of references. Even if you had a guy come into your home and suede shoe you into believing he was the best guy for the job, if he gets cagey or can’t produce credentials like these, set him loose. And there is no shame in calling his past clients and asking if they would hire him again.

The public has a bully pulpit these days with online consumer reviews. You can look contractors up on HomeAdvisor, Yelp!, or AngiesList to read about other homeowners’ experience with them. If you see tons of 5 star reviews of them with only a few exceptions, usually the contractor can explain what might have gone wrong with those few jobs. If all he does is badmouth the homeowner, however, you may not want him on your team.

If your contractor hands you a bill before he gets started, don’t panic. It’s not uncommon for pros to ask for a portion of their initial quote up front—but typically, it’s no more than 30 to 50% of the quote. He uses this money to purchase the building supplies without dipping into his own pocket to get the job started. If it makes you feel better about it, ask him for receipts for the materials purchased. However, what he should not do is ask for the entire estimate amount on the spot. It makes it way too easy for him to cut and run. Anyone worth his salt knows better than to ask for 100%.

There is no longer an excuse for not being able to reach your contractor. His mobile phone is his best friend, and texting should have become an art form to him by now. So if he is tough to reach, it may be time to say buh-bye. Of course, you can’t expect him to answer the phone every time it rings, but he should make an effort to get back to you promptly.

If he doesn’t have your back, confront him. You are paying for a pro to handle emergencies, so his problems should not become yours. Trust is king here, and if you find it faltering, your good feelings may turn into stomach acid. There is no shame in firing a contractor and looking for another one well into the project, either. Just expect a few headaches until you can find another one.

As for bidding the job, if it seems too good to be true it usually is. A deal is a deal, except when it comes at the cost of quality, materials, or skill. Make sure you collect at least three separate bids for a home remodeling project. You may love something different about each contractor, but it’s still a necessary exercise to get a feel for the average price of this kind of work. It will also give you a sense of your contractors’ trustworthiness, creativity, and his desire to keep things as cost-effective as possible so you might hire him for future projects as well. If a bid seems uncharacteristically low, it may be a sign something is wrong. It may indicate his using recalled materials, hiring a less-than-skilled crew or his intention to do the work as quickly—and shoddily—as possible. Whatever the reason, you’ll probably wind up paying for it later, so it’s best to avoid these kinds of unrealistic quotes even if they tell you their overhead is lower than everyone else’s. By the way, working exclusively out of a pick-up truck means they can disappear like a stench in the wind.

Delays do happen in the construction business. Estimates are off, materials need to be reordered, and unpredictable weather happens. It’s always wise to think of that completion date more of a goal than a promise. However, a contractor who keeps missing deadlines without explanation is not one you want working on your home. Do yourself a favor and give him the boot. Even though your memories of your remodel might be less than pleasant, in the long run, your wallet will thank you.

 

Source: TBWS

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2018 COST VS VALUE REPORT

 

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House flipping is not for the faint of heart, and with today’s lack of housing inventory, competition is fiercer than ever. Compared to last year, the biggest difference in 2018 is that the increase in buyers might push home values even higher. In this market, finding a buyer usually isn’t the problem. Finding an affordable property to flip is.

 

With house flipping careful planning and patience reign supreme. If low inventory means you’re doing fewer flips this year, you’d better make sure your flips are second to none.

 

Experts point out what to keep in mind when flipping a home so that you are not caught flat-footed. First, set a maximum for the price home in which you would consider investing for the short term. Don’t leave out closing costs, a budget for staging, and carrying costs — things like insurance and taxes. In fact, it’s even more prudent to expect the worst while hoping for the best when flipping.

 

Next, set a budget for renovations. Best not to compare yourself to reality (fantasy) TV flippers, who can buy the worst home in the best neighborhood and gut it entirely. They have more resources and capital in their hands than most house-flippers, since they are tasked with entertaining you as they renovate. Have you ever watched the credits at the end of each show? You’ll see vendors doing things for free just to see their names scrolling past. Even in the real world, however, this is where relationships come in. Establishing a great buddy-contractor, one dedicated to helping you do high quality flips within a reasonable period of time (without taking on a bunch of side jobs at the same time) will go a long way to permitting you to sleep at night while your flip is in process.

 

Location, of course, is key. Choose a house in an up-and-coming neighborhood that may be on the brink of gentrification. Study these neighborhoods by driving around as well as pestering the planners at City Hall to check out what businesses, schools, facilities and infrastructure may be planned for the area.

 

The most important piece of homework you’ll do, however, is to study recent comparably-priced homes and sales in the neighborhood — homes that have closed escrow within the past 3-6 months, asking prices on homes currently for sale, DOM (days on market) and study keenly the ones that never sold to analyze why they failed to find love. A great exercise is to go to every open house you can on weekends in the area you are considering to check out demand as well as the buyer demographic.

 

Savvy house flippers are super sleuths. They look for houses not yet on the market, going straight to an owner, a bank auction or a housing wholesaler for a better deal. But often you can partner up with a good Realtor who specializes in the area in which you are considering investing. He or she knows the market like the backs of their hands, and may offer you expertise in exchange for being the listing agent after you pound that final nail.

 

When readying a flip for sale, those in the know advise you to concentrate on kitchens, bathrooms, systems, paint and flooring. Don’t get too fancy. New appliances and fixtures, as well as a bit of discount granite can go a long way to making a gem out of an ugly duckling. Buyers prefer hard surface flooring to carpeting, but there are so many inexpensive (gorgeous) options to tile and real hardwood. You’ll find buyers focusing how the house makes them feel as well as how their lives fit into it instead of whether the floors are real wood.

 

Lastly, set your expectations realistically. House flipping in general is not a get-rich-quick scheme, even if one good sale might pay off all your credit cards. Football games are won ten yards at a time before players do their happy dance in the end zone. The most cost-effective way to flip is to look at tidy profits rather than a fantasy. Steady house flippers stay the course, establishing a reputation for being prudent investors, all of which impresses local residents as well as real estate agents and makes it easier and easier to find financing.

 

Source: TBWS

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U.S. home prices increased 6.3 percent compared with December 2016, according to the much-watched S&P CoreLogic Case-Shiller national home prices index.

 

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The major stock market indexes were able to register a modest move higher this past week due to a late rally on Friday that erased losses recorded on Tuesday and Wednesday when the indexes displayed increased intra-day volatility.  Mid-week, investors were worried over recent market volatility, rising interest rates, and the S&P 500 Index breaking below its 50-day moving average of 2,726.

 

The economic calendar was relatively quiet with the notable exception of Wednesday’s release of the minutes from the Federal Reserve’s January FOMC meeting.  The minutes showed a majority of FOMC members expect inflation to increase in 2018 with most members believing in stronger economic growth that will raise the “likelihood that further gradual policy firming would be appropriate.”  The stock and bond markets reacted negatively to the release with the yield on the benchmark 10-year Treasury note moving up to a four-year high on Wednesday to 2.94% before pulling back to 2.866% by Friday’s close to finish flat for the week.

 

However, stocks seemed to get a boost late Friday after the Fed released its semiannual Monetary Policy Report to Congress, indicating the Fed expects inflation to remain below their 2% target in 2018.  New Fed Chair Jerome Powell will be testifying about monetary policy before Congress this week.

 

Elsewhere, the National Association of Realtors reported Existing Home Sales fell 3.2% month-over-month during January to a seasonally adjusted annual rate of 5.38 million compared to December’s rate.  On a year-over-year basis, the decline in sales was an even worse 4.8%, the largest annual decline since August of 2014.  Although the inventory of homes for sale at the end of January increased 4.1% to 1.52 million units, it is 9.5% lower than the same period a year ago and remains a headwind for future Existing Home Sales.  Unsold inventory is at a 3.4-month supply at the current sales rate compared to 3.6 months a year ago.

 

Low inventory is also leading to higher home prices.  The median price for all categories of homes in January was $240,500, 5.8% higher than the same time a year ago and the 71st straight month of year-over-year gains in home prices.  The median price for existing single-family homes increased 5.7% from a year ago to $241,700.

 

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The number of mortgage applications showed a decrease according to the latest data from the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey.  The MBA reported their overall seasonally adjusted Market Composite Index (application volume) fell by 6.6% during the week ended February 16, 2018.  The seasonally adjusted Purchase Index decreased by 6.0% from the week prior while the Refinance Index decreased 7.0%.

 

Overall, the refinance portion of mortgage activity increased to 44.4% of total applications from 46.5% in the prior week.  The adjustable-rate mortgage share of activity increased to 6.4% of total applications from 6.3%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.64% from 4.57% to its highest level since January 2014, with points increasing to 0.61 from 0.59.

 

For the week, the FNMA 4.0% coupon bond was unchanged to close at $102.469 while the 10-year Treasury yield decreased 0.71 basis points to end at 2.866%.  The major stock indexes moved modestly higher on the week.

 

The Dow Jones Industrial Average moved 90.61 points higher to close at 25,309.99.  The NASDAQ Composite Index added 97.93 points to close at 7,337.39 and the S&P 500 Index gained 15.08 points to close at 2,747.30.  Year to date on a total return basis, the Dow Jones Industrial Average has risen 2.39%, the NASDAQ Composite Index has gained 6.29%, and the S&P 500 Index has advanced 2.76%.

 

This past week, the national average 30-year mortgage rate was unchanged at 4.53%; the 15-year mortgage rate increased to 3.90% from 3.89%; the 5/1 ARM mortgage rate increased to 3.54% from 3.49% and the FHA 30-year rate was unchanged at 4.33%.  Jumbo 30-year rates increased to 4.55% from 4.53%.

 

Economic Calendar – for the Week of February 26, 2018

 

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 4.0% Coupon Bond

 

The FNMA 30-year 4.0% coupon bond ($102.469, unchanged) traded within a 65.6 basis point range between a weekly intraday high of $102.547 on Friday and a weekly intraday low of $101.891 on Wednesday before closing the week at $102.469 on Friday.

 

The bond traded in a “V” pattern during the holiday-shortened (Presidents’ Day) week.  After selling off hard on Wednesday following the release of the January FOMC meeting minutes, the bond rebounded off of support at the $102 level to erase Wednesday’s loss.  The bond ended the week unchanged and just below overhead resistance found at $102.49.

 

The economic calendar heats up this week with Wednesday, March 1 being a significant news day.  Personal Income, Personal Spending, and key inflation data from PCE and Core PCE Prices will be reported and could trigger a sizeable market reaction.  In all likelihood, bond prices will be driven more by economic news this week than by technical factors.  There was a weak buy signal on Friday and even though bonds are “oversold” they are bumping up against resistance, so it will take tame inflation numbers on Wednesday for bonds to have a chance to move higher.  If PCE and Core PCE Prices jump higher, bonds will sell off and move back toward support resulting in slightly higher mortgage rates.

 

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It looks like a no-brainer. Spiff up your house, do a little self-staging (well, box up your figurine collections), throw a sign up in your front yard and save yourself thousands of dollars when selling your home. What the typical FSBO (for sale by owner) seller may not take into account, however, is that it means making dozens (if not hundreds) of decisions — some of which can have legal, costly consequences.

 

First, it should be known that although you don’t see real estate agents standing sentry at each of their listings, selling a home can become a full-time job when doing it on your own. There are a few pros and cons to consider before going down the FSBO path — one that looks nothing like the yellow brick road.

 

The most common reason people sell on their own is, of course, to avoid commissions, which are paid at close of escrow (settlement) time. Commissions average between 3-6 percent of the home’s purchase price and are typically paid by the seller from the proceeds of the sale. In an agent-employed sale, the buyer and seller have their own agents, with the commission split in some fashion between the two.

 

A pro to selling a home on your own may also mean you don’t have to listen to an agent tell you how to prepare your home to sell, which sometimes takes an investment in staging, updating, etc. if your home is 10 years old or older. In more competitive markets, that investment may be much higher in order to compete with other listings that are similarly prepared. Savvy agents tell their sellers to consider this investment in order to sell quickly and at the highest price possible, but you are responsible for both the price at which you offer your home as well as the final price you settle on.

 

If you do your homework, it means doing a feasibility study (looking at comparable closed sales within the last 3-6 months, current listings and what those listings featured that your home doesn’t, and considering how your house stacks up in terms of size, updates, and location.) The key here is the ability to put emotion aside, look at your home as an asset — a product, so to speak — and not the place where cherished memories and painstaking remodels took place.

 

Negotiating a contract with buyers or their agent is an area most consumers have little to no experience with and must think long and hard about. Holding firm at a price that is unrealistically high may mean having a home on the market for much longer than typical listing periods (usually 3-6 month terms). Numerous price changes (many owners lower the price in desperation to get their homes sold) can tip agents off to a lack of knowledge on the owners’ part, making them vulnerable to buyers’ offers being all over the map.

 

Professional real estate agents make it their business to know neighborhoods, consider location, and see what is going on not only while a home is being listed, but also where that neighborhood may be going in terms of future growth and attractiveness to the buying public (new schools, new commercial corridors bringing jobs to the area, etc.) and will market the home giving buyers all the information they have gathered in order to get the best price and terms possible.

 

Another aspect many FSBO sellers don’t consider is that they are the sole point of contact for potential buyers and it’s their job to determine which buyers are serious and which are wasting their valuable time. Are buyers making appointments to see their home with a mortgage preapproval letter in their hands? And if they say they’re paying cash, how does a FSBO seller verify their funds?

 

Good real estate agents are more than a friendly face on a sign swinging on post in a front yard. They know what appeals to buyers in a specific marketplace, have access to the Multiple Listing Service (MLS), used by agents nationwide to share listings information and get referrals from their happiest former clients as well. They are also versed on many of the legal ramifications of selling a home that can open up owners to a plethora of litigious possibilities — disclosures about the condition of the home, soils reports, flood maps, etc. — all of which are revealed in exhaustive descriptions to buyers before sign on the dotted line.

 

We’re betting the average FSBO seller doesn’t read legalese for fun. So if you’re not considering working with an agent, it’s wise to hire a real estate attorney, even if you have some legal expertise yourself. Every state has its own requirements for real estate transactions and some are far more demanding than others. Be sure to make yourself the consummate expert and make it your own business to understand what can happen if you aren’t.

 

Source: TBWS

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It’s a no-brainer. You can fold laundry to it, play your own music in the background or walk away from it. Then you can come back 55 minutes later and see the “big reveal” of a home that was renovated on a reality real estate TV network. It’s gorgeous, of course, and people are giddy over the results. Who wouldn’t be?

The formula for each show like this is the pretty much the same every time. Find fixer-upper. Buy fixer-upper. Choose a budget with or without the buyers (if you are an investor, you do this for yourself). Show all the unexpected stuff that happens along the way as the home gets made over. Who knew there would be lead paint applied to and asbestos behind the walls of a 100-year old house? Then show the gratifying final product — one that looks NOTHING like the original on the inside (fully staged, of course) and sometimes on the outside.

But how about those budgets and timelines they present, usually listed right there on the screen? After all, what you’d pay for materials and labor in Waco, TX, does NOT equate what you’d pay in LA, New York, or Miami, so are these shows just leading us down the rosy path to dream home budget disaster? Does pricing include labor? How much of the stuff you see is furnished by sponsors, home staging professionals, or contractors hoping to get noticed and willing to give away their services? Do these 7-8 week timelines they talk about happen only when the show employs multiple crews working around the clock — something we plebes could never arrange nor afford? Since the credits at the end of the shows do not include these disclosures, we’ll never know.

Doing a bit of research, here is what we found:

Renovation costs on reality TV shows are usually unrealistically low. Contractor quotes for gutting houses on these entertaining shows coming in at around the $50,000 to $60,000 for some savings-strapped homeowner or clever house flipper would probably soak the rest of us to the tune of $100 to $200K. In neighborhoods close to major cities, renovation costs for an entire house flip would rarely be less than six figures unless the house was a tiny bungalow or a condo.

The average cost of a kitchen remodel alone (new cabinets, appliances, countertops, etc) — WITHOUT relocating appliances, plumbing, or changing the room’s footprint —is about $30,000 according to Home Advisor. So when you watch these shows and see walls coming down to make way for new kitchen islands, sinks being moved necessitating jack-hammering concrete foundations and fancy vent hoods with marble backsplashes being installed, you can bet the price would be triple for you and me, and there would be no remaining budget for that new fireplace fascia, the gorgeous new master bath or a state-of-the-art laundry room they include in the show.

So if you’re in the market for a great deal on a house to live in, remodel or flip, pay no attention to the man behind the curtain of a reality real estate TV show when it comes to pricing and timelines. Values are not what they seem (nor profits), and expectations are wildly out of line with reality. These shows (while fun to watch to gather ideas for projects you’d like to tackle in your own home) are crafted for entertainment value first and foremost. In the meantime, they do get the laundry folded.

 

Source: TBWS

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The major stock market indexes experienced a rapid decline with each losing about 5% in volatile trading.  Surprisingly, the bond market also lost ground as investors failed to seek the “safe haven” bonds usually provide when the stock market sells off in such dramatic fashion.  This past week’s selloff was again associated with fears about rising interest rates.  Congress didn’t help matters much by passing a two-year budget deal that will increase spending by approximately $390 billion over the next two years while extending the debt ceiling until 2019.

 

The growth in spending will force the government to borrow over $1 trillion in the coming fiscal year and the likelihood of increased Treasury borrowing also fueled fears of higher bond yields and interest rates.  Investors were already expecting a rise in Treasury debt issuance due to the recent changes in the U.S. tax code and the lack of fiscal discipline shown by Congress intensifies concerns about rising yields and interest rates.

 

The Fed Funds Futures market still expects the next rate hike will occur at the March FOMC meeting as Fed officials downplayed this week’s sell off by continuing to underline a course of gradual rate increases.  The probability of a March rate hike currently stands at 71.9%, down slightly from last week’s 76.1%.

In housing, the number of mortgage applications showed an increase according to the latest data from the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey.  The MBA reported their overall seasonally adjusted Market Composite Index (application volume) increased by 0.7% during the week ended February 2, 2018.  The seasonally adjusted Purchase Index remained unchanged from the week prior while the Refinance Index increased 1.0%.

 

Overall, the refinance portion of mortgage activity decreased to 46.4% of total applications from 47.8% in the prior week.  The adjustable-rate mortgage share of activity increased to 6.1% of total applications from 5.7%.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance increased to 4.50% from 4.41%, with points increasing to 0.57 from 0.56.

 

For the week, the FNMA 3.5% coupon bond lost 29.6 basis points to close at $99.938 while the 10-year Treasury yield increased 1.55 basis points to end at 2.8566%.  The major stock indexes continued to crater during the week.

 

The Dow Jones Industrial Average fell 1330.06 points to close at 24,190.90.  The NASDAQ Composite Index dropped 366.46 points to close at 6,874.49 and the S&P 500 Index lost 142.58 points to close at 2,619.55.  Year to date on a total return basis, the Dow Jones Industrial Average has retreated 2.14%, the NASDAQ Composite Index declined 0.42%, and the S&P 500 Index has dropped 2.02%.

 

This past week, the national average 30-year mortgage rate rose to 4.50% from 4.45%; the 15-year mortgage rate increased to 3.86% from 3.79%; the 5/1 ARM mortgage rate increased to 3.45% from 3.42% and the FHA 30-year rate climbed to 4.30% from 4.25%.  Jumbo 30-year rates increased to 4.55% from 4.50%.

 

Economic Calendar – for the Week of February 12, 2018

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

 

The FNMA 30-year 3.5% coupon bond ($99.94, -29.6 bp) traded within a 117.20 basis point range between a weekly intraday high of $100.969 on Monday and a weekly intraday low of $99.797 on Thursday before closing the week at $99.938 on Friday.

 

The bond made a nice reversal by opening and trading higher last Monday before running into what proved to be stiff resistance at the 61.8% Fibonacci retracement level at 100.929.  The bond subsequently pulled back and traded lower for the rest of the week even though the stock market was undergoing a sharp correction, the magnitude of which has not been seen for a couple of years.  The bond remains oversold while seeking a bottom and if support levels can hold we should see rates remain relatively stable this coming week.

 

On Friday, the S&P 500 index moved down to test its 200-day moving average, which appeared to be a technical “line in the sand” that triggered automated buying programs to kick in resulting in sharp rebound off of session lows.  It will be interesting to see if Friday’s rebound off of the key 200-day moving average will have staying power and signal a turn higher in the stock market.  A number of momentum indicators flashed buy signals from oversold positions as a result of Friday’s trading action so we could see stocks attempt a rally off of Friday’s bounce.

 

The economic calendar picks up some strength this coming week and investors will be closely watching a couple of inflation reports – the consumer price and producer price indexes.  The markets have recently become fearful of the prospects of inflation so these two reports could trigger strong market reactions in both stocks and bonds.

 

 

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