What Dow 20,000 Means for Mortgages

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The Dow Jones Industrial Average crossed the 20,000 threshold for the first time Wednesday, but the post-election stock market rally has produced a mixed bag for mortgage demand and the industry's publicly traded companies.

The stock market gains reflect growing confidence in the overall economy. That suggests appetite for home loans will be higher, but could make mortgages less affordable.

The government bond yields that drive mortgage rates typically increase as stock prices rise. That's because as investors put more money into stock markets, they tend to shift it away from bond markets. When bond prices fall, their yields rise.

"It'll probably put some upward pressure on interest rates but I don't think it'll be substantial," Justin Caplan, president of strategic growth at Atlantic Bay Mortgage Group in Virginia Beach, Va., said of the stock market gains. "As long as people have confidence in the economy and jobs, it'll be very good for the housing market."

The 10-year Treasury yield that serves as a benchmark for long-term mortgage rates rose as the Dow hit 20,000. Yields closed at 2.47% Tuesday and were at 2.52% at 3 p.m. EST Wednesday. Prior to the election, the 10-year yield had been below 2% for much of 2016.

"At the margin, a strong stock market is indicative of what we call the 'risk-on trade,' where investors tend to sell the lower-risk [investments] like Treasuries and buys stuff like stocks or other riskier assets," said Brent Nyitray, director of capital markets at iServe Residential Lending in Stamford, Conn.

But mortgage rates don't necessarily move in lock-step with the 10-year. Case in point: the 10-year Treasury yield has increased nearly 40% since Nov. 3, the Thursday before the election. During that same period, interest rates on 30-year mortgages have increased 15.5%.

"Mortgage rates tend to be a little bit less volatile than rates on the 10-year, so you might get an extreme move on the 10-year and see mortgage rates move a little bit," said Nyitray.

The interest rate volatility has affected the stock prices of publicly traded mortgage technology companies, whose businesses are dependent on origination volume.

Production volume is expected to fall to $1.57 trillion in 2017 from an estimated $1.89 trillion in 2016, according to the Mortgage Bankers Association. That's likely contributing to the decline in stock prices for companies like Ellie Mae, CoreLogic and Black Knight Financial Services since the election. The stocks for title companies First American Financial and Stewart Information Services are also down since the election.

"Since the election there was an immediate and sustained divergence between the stock price performance of companies presumed to be impacted to the greatest degree with a downturn in mortgage volumes and those conceivably unaffected," Brandon Dobell, an analyst at William Blair, wrote in a Jan. 17 note.

Meanwhile, private mortgage insurers — a group that benefited from the suspension of the Federal Housing Administration's mortgage insurance premium cut — have enjoyed some of the biggest stock gains among the mortgage industry's publicly traded companies.

"We have a broadly constructive view on MIs given favorable valuations, benign loss trends on post-crisis underwriting, visibility around capital with [Private Mortgage Insurer Eligibility Requirements] uncertainty in the rearview mirror, and a generally favorable policy backdrop," FBR Capital Markets analysts Edward Mills and Randy Binner wrote in a Jan. 20 note.

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