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Posts tagged with: "MORTGAGE30US"

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New details on mortgage rates

What impact does a FICO score have?

FRED now offers Optimal Blue Mortgage Market Indices, which provide a more-detailed look at mortgage rates. These indices are computed daily from actual mortgage closings and cover about 35% of the U.S. market.

The FRED graph above compares the weekly rates from Freddie Mac (red line) and from Optimal Blue (blue line). The latter also covers mortgages that aren’t managed by Freddie Mac, but with the restriction that they must be “conformable”—that is, the loan amount can’t exceed the limit for the property and its location.

In the second graph, we see that the loan amount influences the loan rate: The closer your loan is to the full value of the house, the more you have to pay. But the difference doesn’t look too large or unpredictable. Keep in mind, though, the composition of the loans for these two series may change for reasons that may correlate with the size of the loan: for example, the creditworthiness of the borrower.

So our last graph looks at different levels of creditworthiness—specifically, the FICO score of the borrower. The differences between the series don’t look dramatic, but borrowers definitely care about them. The difference between the rate for the highest score and the rate for the lowest score is about half a percentage point, which actually can add up significantly over 30 years.

How these graphs were created: For all graphs, start from the relevant release calendar. For the first, select the conforming series, and click “Add to Graph.” From the “Edit Graph” panel, use the “Add Line” tab to search for and select the average 30-year mortgage. For the second and third graphs, select the relevant series in the release table and click “Add to Graph.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: MORTGAGE30US, OBMMIC30YF, OBMMIC30YFLVGT80FGE740, OBMMIC30YFLVLE80FB680A699, OBMMIC30YFLVLE80FB700A719, OBMMIC30YFLVLE80FB720A739, OBMMIC30YFLVLE80FGE740, OBMMIC30YFLVLE80FLT680

Back and forth between buying and building houses

What's behind two different responses in the housing market?

Monetary policy affects interest rates, which affect mortgages, which affect decisions in the housing market. That may be easy to understand, but the housing data may not have such clear-cut patterns. Let’s see what FRED has to show us.

The red line in the graph is the average 30-year fixed-rate mortgage (right axis) from the early 1970s to 2019. The blue line in the graph is the ratio of housing starts built by contractors over housing starts built by owners (left axis) for the same period.

From 1985 to 2007, this ratio was generally flat, around 1.5, implying contractors built approximately 60% of housing starts. But during episodes of macroeconomic turbulence, the ratio has diverged from its historical average. But not in a consistent way… In the late 1970s and early 1980s, this ratio declined sharply, to below 1.0. This implies individual owners built more housing starts than developers during this period. But during the Great Recession, this ratio increased sharply, to over 2.0, peaking at 2.6 in 2016, which implies contractors built 72% of housing starts.

Why would the ratio plummet in the late 1970s and rise sharply in the late 2000s? In both cases, GDP declined and unemployment rose, but this housing measure behaved differently.

Maybe you’ve already seen it, but a clear difference between these two episodes is the level of mortgage rates: Rates were much higher in the 1970s and 80s and much lower leading up to and through the Great Recession. As mortgage rates go up, the ratio goes down and vice versa. A potential reason is that, as the price of mortgages increases, the cost of purchasing a new home from a contractor increases relative to the cost of building one’s own home. And, if the costs are basically the same, many would-be homeowners might choose to build their own home rather than purchase one that someone else built.

The late 1970s was a period of high inflation; in an effort to reduce inflation, the Federal Reserve imposed higher interest interest rates, which included mortgage rates. In contrast, during the Great Recession, the Federal Reserve slashed interest rates and, by extension, mortgage rates. It looks like homeowners respond to changes in these interest rates: building their own houses to try to economize on the financing during periods of high rates and purchasing new houses from contractors during periods of low rates.

How this graph was created: Search for “New Privately Owned Housing Starts” and select “Contractor-Built-One-Family Units, Thousands of Units, Seasonally Adjusted.” From the “Edit Graph” panel, under the box “Modify frequency,” select “Semiannual.” Use the “Customize Data” option to search for “New Privately Owned Housing Starts in the United States by Purpose of Construction, Owner-Built One-Family Units” and select “Thousands of Units, Seasonally Adjusted.” This latter series is now labeled as b. Under “Customize data,” type a/b into the “Formula” box and select “Apply” to get the ratio of the two series. Now select “Add Line” and search for “30-Year Fixed Rate Mortgage Average in the United States, Percent, Semiannual, Not Seasonally Adjusted.” Under the box “Modify frequency,” select “Semiannual.” Under “Format,” under the option for “LINE 2,” select “Y-Axis Positon” as “Right.”

Suggested by Matthew Famiglietti and Carlos Garriga.

View on FRED, series used in this post: HOUSTCB1FQ, HOUSTOB1FQ, MORTGAGE30US

Dating the financial crisis using fixed income market yield spreads

How would you answer the question, “When did the Great Financial Crisis begin?” Some date the beginning of the crisis according to the events surrounding the failure of Lehman Brothers in mid-September 2008. But at that point, financial markets had already been in turmoil for more than a year, as certain time series from the summer of 2007 show. So how do you date the crisis?

One way to date the recent financial crisis is to identify significant breaks in the dynamics of yield spreads from U.S. fixed income markets (thought to be at the core of the crisis) using appropriate statistical techniques, like I do in a forthcoming article (working paper version) along with coauthors Massimo Guidolin and Pierangelo De Pace. With a particular definition of financial crisis in mind, this procedure allows us to identify the weeks of August 3, 2007, and June 26, 2009, as the beginning and the end of the crisis, at least from the perspective of fixed income yield spreads.

While some of the spreads we use are based on proprietary data, several can be constructed from FRED data. In the graph, we plot the spread between Moody’s seasoned Aaa corporate bond yield and Moody’s seasoned Baa corporate bond yield, as well as the spread between the 30-year fixed-rate mortgage average in the United States and the 30-year Treasury constant maturity rate.

Even just eyeballing the graph gives a sense of the degree of comovement of these spreads at least for the period beginning in 2007. Moreover, the spreads show an upward shift in their level approximately in the second half of 2007 as well as a downward shift approximately in mid-2009.

How this graph was created: In FRED, enter “Moody’s” in the search box. This will return a few Moody’s series: I first selected the Baa corporate bond yield and then added the Aaa corporate bond yield. The spread is then the difference between the two: a-b. A similar transformation was applied to the 30-year Treasury constant maturity rate and the 30-year fixed-rate mortgage average in the United States.

Suggested by Silvio Contessi

View on FRED, series used in this post: AAA, BAA, DGS30, MORTGAGE30US


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