Monday, October 13, 2014

One Confounding Market

One Confounding Market
At the beginning of the year we mentioned that with stronger job growth would likely come higher interest rates. We certainly have stronger job growth. After a lull in August, job growth returned with a vengeance in September, with payrolls increasing by 248,000. This marked the seventh month of 200,000+ monthly job gains in the past eight months. The unemployment rate is now down to 5.9%.
We anticipated stronger job growth back in January, and that's been the case. So you can say that we got the equation half right. The other half – rising interest rates – we quite frankly got wrong. More jobs and more economic growth would lead to more loan demand and rising inflation expectations, and thus, higher interest rates. At the beginning of the year, 5% on the 30-year fixed-rate mortgage seamed a real possibility by the time we reached this time of the year.
But here we are in the early days of October and the rate on the 30-year loan is down to a 16-month low. Indeed,'s latest survey shows the national average dropped nine basis points week over week to 4.18%. Freddie Mac's survey shows the national average down to 4.12%, a seven-basis-point week-over-week decline.
The good news is that lower rates have spurred mortgage demand. The Mortgage Bankers Association data show refinance activity increased 5% last week, while purchase activity increased 2%. When the MBA reports on this week's activity (next week), we expect the percentage gains to be even higher.
So what's the skinny on mortgage rates?
They were actually trending higher through most of August. Market participants were focused on Federal Reserve language that suggested that rates (all rates) could start moving higher sooner than most market watchers anticipated.
But the most recent release of Fed meeting minutes (released this Wednesday) reveals Fed officials aren't so eager to get interest rates moving higher. The following sentence lifted from the minutes supports our contention: “The costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation.”
Fed officials even went as far as to stress "patience" in waiting for interest rates to rise. They are concerned with weak global economic growth and a stronger U.S. dollar. Rising geopolitical risk, such as what's occurring in Russia, the Middle East, and in Hong Kong also have the Fed on edge.

Here in our own backyard, a few structural issues remain. Though overall job growth has been robust for much of the year, the labor participation rate and unemployment rate among 25-to-54 remains a concern . There are still too many people in this important demographic who aren't working. At the same time, many of those who are working are dealing with stagnating wage growth.
So, it appears sub-5%, if not sub-4.5%, on the 30-year fixed-rate loan will be with us for some time to come.


Date and Time
Mortgage Applications
Wed., Oct. 15,
7:00 am, ET
Important. Refinance activity will get a boost on new year-low lending rates, but purchase activity remains anemic.
Producer Price Index
Wed., Oct. 15,
8:30 am, ET
0.2% (Increase)
Moderately Important. Price inflation in most segments of the economy remains a non-issue.
Home Builder Sentiment Index
Thurs., Oct. 16,
10:00 am, ET
59 Index
Important. Sentiment has moved meaningfully higher in recent months, but sluggish sales could temper enthusiasm.
Housing Starts
Fri., Oct. 17,
8:30 am, ET
1.017 Million (Annualized)
Important. Starts remain elevated, but we'd like to see more activity in the single-family component.


Low Rates as Far as the Eye Can See... That's Not Necessarily Good News
Many of our colleagues remain convinced that low-interest rates are vital to rejuvenating home sales (particularly in existing homes) and keeping housing starts on an upward trajectory. But we think that boat has long sailed. We say that because low interest rates are indicative of the issues we mention above: geopolitical upheaval, slow global economic growth, and weakness in employment growth in a key U.S. demographic.
In addition, low rates are indicative of banks that are flush with cash and simply aren't seeing the opportunities to put that cash to use. Bloomberg reports that banks have accumulated so much cash that deposits exceed loans by a record amount. Banks make money lending, and are motivated to make loans when the opportunity arises. Instead, they've been plowing money into low-yield Treasury securities. That tells us two things: A dearth of lending means there is still a dearth of economic growth. On the other side of the coin, bank demand for Treasury securities will help keep interest rates – mortgage rates included – low.
When Federal Reserve officials begin to back off their cautious talking points and begin to talk up the economy, interest rates will rise. But that will be a good thing, because we'll have an economy marked by more opportunities that can support higher interest rates and a more market-driven lending environment.

Article courtesy of Patti Wilson, American Momentum Bank.

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