Wednesday, January 14, 2015

Is Sub-4% the New Norm?

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January 12, 2015

Is Sub-4% the New Norm?
Nearly everyone believes the Federal Reserve will raise the influential federal funds rates this year. The fed funds rate has been held near zero for the past five years. This rate matters because it influences other lending rates.
With so much chatter about the Fed raising interest rates this year, you would think rates would begin to rise in anticipation of the event. That's hardly been the case. The yield on the 10-year U.S. Treasury note has steady declined over the past year, and was recently quoted below 2%.
As the 10-year note goes, so frequently goes the 30-year fixed-rate mortgage (and other fixed-rate term loans). Sub-4% on the 30-year loan has been the norm in recent months.'s national survey, which tends to be higher than many local quotes, shows the 30-year loan averaged 3.85% this past week. That's the lowest it has been in 20 months.
Though the Fed might want to see rates rise, that simply hasn't been the case, at least for longer-term loans. This is extraordinary when you consider the U.S. economy has produced new jobs at a monthly rate of 200,000+ through 2014.
Consumer-price inflation just might keep all rates low through 2015. Falling oil prices have kept inflation risk at bay. Consumer-price inflation remains below 2% in the United States, and will likely remain below 2% through the first half of 2015.
Meanwhile in Europe, deflation, not inflation, is the overarching worry.
The European Central Bank (ECB) recently admitted that inflation will likely spend a large part of 2015 in negative territory. Eurozone inflation, 2% at the beginning of 2013, has drift lower since. Consumer-price inflation was below 1% for all of 2014.
Today, you can find European bonds that actually pay a negative rate of interest. The two-year German bond is quoted at a negative 0.12%. The price on the five-year German bond has risen to drive the yield down to zero.
If the choice is between a negative interest rate, like in Germany, or a nominally positive rate, like in the United States, many investors will choose the latter. This means more foreign money will likely flow into U.S. Treasury notes and bonds. This flow of money, in turn, will raise prices on U.S. notes and bonds and lower their yield.
We do offer a caveat on our outlook: Interest rates are akin to predicting the flight path of a butterfly. It's impossible to know where it is going at all times. But given recent events, we would not be surprised to see mortgage rates flutter at today's lows through the first quarter of 2015.


Date and Time
Mortgage Applications
Wed., Jan. 14,
7:00 am, ET
Important. Activity remains subdued, but the plunge in interest rates should spur demand.
Retail Sales
Wed., Jan. 14,
8:30 am, ET
0.1% (Increase)
Moderately Important. Overall sales growth has moderated because of fewer dollars spent on gasoline.
Import Prices
Wed., Jan. 14,
8:30 am, ET
2.5% (Decrease)
Important. Falling oil prices will keep inflation risk muted.
Consumer Price Index
Fri., Jan. 16,
8:30 am, ET
All Goods: 0.3% (Decrease)
Core: 0.2% (Increase)
Important: When food and fuel are stripped out, overall consumer prices are rising, though remain within the Fed's goals.


Housing's Comparative Advantage
Ultra-low mortgage rates are making homes more affordable. At the same time, the lending market is becoming more accommodating. Insurance premiums are being reduced on FHA loans. This means even cheaper financing will be available to a wider swath of potential home buyers.
Home-price appreciation is also moderating, and homes are appreciating at a more reasonable rate. Rent-price increases, on the other hand, are making it more expensive for people to rent. Data from Zillow show that rents have grown at twice the pace of income over the past 14 years. Zillow expects rents to outpace home-price appreciation over the next year.
This means homeownership will become even more appealing in 2015.
We've always believed most people prefer to own than rent. There is something about owning a home than can't be replicated by renting. Peace of mind is found in being able to paint the walls and drive a nail wherever you want without worrying about a security deposit. Pride of ownership really does have value.
But more than anything, ownership gets people off the price escalator. Rent never ceases to rise. When a home is bought and financed with a fixed-rate loan, what was paid last year will be paid this year, and years after that (property taxes and insurance aside).
When low lending rates are combined with the comparative advantages of ownership, there is no reason to not like the outlook for housing in 2015.
Article Courtesy of Patti Wilson, American Momentum Bank

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