Homeowners are once again taking cash out

Home values are rising and homeowners are taking advantage of that, finally tapping into that equity again in the form of cash-out mortgage refinances. They are doing so, however, by pulling the most conservative amounts in history.

Prior to the historic housing crash of the last decade, homeowners used their homes like ATMs, pulling out as much cash as the bank would allow, which at the time was essentially all of it and more. This led to millions of borrowers falling underwater on their home loans as home prices fell, and leading to 7.1 million homes so far ending up in foreclosure, according to Black Knight Financial Services.

Lending standards have tightened significantly since then, but borrowers are clearly much more risk averse. They are taking cash out again; 42 percent of mortgage refinances last fall involved borrowers taking cash out of their homes, not just lowering their interest rates. That is the highest share since 2008, according to Black Knight.

The average cash-out amount was over $60,000, but the average loan-to-value ratio after the refinance was 67 percent, the lowest level on record. Borrowers left 33 percent equity still in the home which is still a very healthy level.

With rents rising, many are taking out cash to purchase rental properties or make some upgrades to their current homes as there is simply not enough quality inventory available.  So, many are not selling..they are staying put and improving instead.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.50 MBS) gained +27 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve from the prior week.  30 year fixed rates fell to their lowest levels of 2016 so far.

While Friday’s jobs data pressured MBS pricing (higher rates)on an intra-day basis, the overall trend for the week was upward momentum on MBS trades (lower rates) due to lower Oil prices and weaker ISM data.  This has the bond community hedging towards very low risk and very low inflation for most of 2016 which means very low rates.

Jobs, Jobs, Jobs:
Tale of the tape:
Non-Farm Payrolls – January 151K vs est of 190K
Non-Farm Payrolls – December – revised from 292K down to 262K
Non-Farm Payrolls – November – revised from 252K up to 280K
Non-Farm Payrolls – rolling 3 month average 231K
Unemployment Rate – 4.9% vs est of 5.0%
Average Hourly Earnings – 0.5% vs est of 0.3%
Average Weekly Hours Worked – 34.6 vs est of 34.5
Labor force Participation Rate: Increased from 62.6% to 62.7%

Ok, now that you have all the data laid out for you…what does it mean and how are long-bond traders viewing it?  The answer is that we view this as a very solid report that confirms that the labor market slack is tightening but that this will do little to nothing to change the Fed’s trajectory of rate hikes (if any) this year.

The net revisions to Dec and Nov was basically a wash and this reading of 152K will be revised as well.  More importantly, we look at the trend line which is well above 200K.

The big key is Average Hourly Wages which jumped up 0.5% (the Unit Labor Costs on Thursday jumped 4.5%).  This is had the most impact on rates as it is inflationary and also shows economic strength…two things that bonds don’t like.

The Unemployment Rate dropped below 5.0% for the first time since May 2008 and what a long strange trip it has been since then.  Lately the Unemployment rate (particularly in early to mid 2015) was dropping mostly due to a drop in the Participation Rate (which basically means if you don’t have a job and are not looking for work…then you are not counted as Unemployed).  But in this particular case, the Participation rate actually increased AND the Unemployment Rate fell….that is encouraging.