A Prophet on Interest Rates, But What Does This Mean for Housing?

MARKET RECAP A Prophet on Interest Rates, But What Does This Mean for Housing? Interest rates are like the weather: They change frequently. More important, if you can get it right predicting them, you can look like a genius. But if you get it wrong? Well, you look like something else. So far, we've got it right on interest rates. At the beginning of the year, we proffered that the 30-year fixed-rate loan would likely vibrate between 4.25% and 4.5%. Leaving points aside, that's pretty much been the case, at least based on the national average-rate data compiled by Bankrate.com and Freddie Mac . Of course, we want to keep our chest pounding to a mild thump: We also said 5% on the 30-year loan was in the cards by the end of 2014. The 30-year loan hasn't exactly shown signs of bolting north. To the contrary, the rate has been steadily declining over the past month and is about where it was in November. That said, we're sticking with our 5% prediction, even if we are almost half way through 2014. We like how the job numbers are trending, which is higher. We suspect when we get a first glimpse of second-quarter economic data, the numbers will be significantly improved from the first quarter. Job growth, after all, is reflective of economic growth. But what about housing? We like the outlook for housing – a lot. We expect sales and prices to trend higher. What's more, we would not be put off by rising interest rates as long as the economy is grinding forward to support higher job and wage growth. (Wage growth, by the way, is indicative of rising labor productivity, and that, too, has been rising.) To restate the obvious, we are unconcerned with rising interest rates. Indeed, we welcome them when they come accompanied with rising economic activity. The lower rates that have bubbled to the surface in recent weeks are something of an anomaly, in our opinion. When signs of sustained growth become more evident, you can be assured interest rates will rise. But housing will rise too. When we look back to the early 2000s, and a little beyond, we find that mortgage rates were a percentage point or two higher. But it was no big deal. The economy was humming along, and so was housing. In the meantime, we are still struggling a bit. Last week, we were pleasantly surprised to see purchase applications soar 9% and take the lead over refinances in total mortgage activity. Unfortunately, momentum petered out. On Wednesday, the Mortgage Bankers Association reported purchase activity had dipped 1% for the seek of May 9; this despite mortgage rates falling to a six-month low. Then again, one week does not a trend make. We're already looking forward to early June, when the employment situation for May will be released. If we get another month of 200,000-plus gains in payrolls (which we expect), we'll feel much more assured everything will work out fine this year for both the housing and mortgage markets.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 21, 7:00 am, ET	None	Important. We expect purchase activity to gain on lower rates and an improving job outlook.
Federal Reserve FOMC Meeting Minutes	Wed., May 21, 2:00 pm, ET	None	Important. The Fed is expected to affirm its commitment to QE tapering and to hold short-term rates low.
Existing Home Sales (April)	Thurs., May 22, 10:00 am, ET	4.7 Million (Annualized)	Important. Sales are finally showing positive momentum on improved inventory and a strengthening economy.
New Home Sales (April)	Fri., May 23, 10:00 am, ET	430,000 (Annualized)	Important. Sales are gaining pace on builder incentives and improving consumer confidence.

 

Pressure Builds for Change We Can Believe In What happens in Washington D.C. frequently confounds more than clarifies. New rules and regulations tend to raise the level of frustration more than ally it. Let's be honest, many people have been frustrated by mortgage underwriting standards. They're viewed as overly stringent. It's difficult to argue with the perception, but the fact is that many private lenders have at least marginally eased underwriting standards this year. Then again, standards can be eased only so far, because they must still adhere to guidelines mandated by Fannie Mae and Freddie Mac. These to government-sponsored organizations guarantee two-thirds of mortgages originated. The good news is that Fannie and Freddie are loosening rules that have forced banks to buy back billions of dollars worth of home loans. These rules have kept lenders cautious about making home loans to borrowers with imperfect credit, because lenders could wind up absorbing losses if the loans default. At the same time, these regulations have raised the cost of originating mortgages. These rules have been particularly tough on the entry-level market – homes priced under $300,000. In other words, the important first-time buyer has been under-served. We need the first-time buyer to grow the market. The good news is that new Fannie and Freddie guidelines will enable us to better serve and grant more credit to all potential borrowers going forward. This can be only a positive for housing.

This is Terrific News.......Sort of. Keeping you updated on the market for the week of May 13, 2014.

MARKET RECAP This is Terrific News... Sort of We've been pounding the table for job growth since, well, it's been quite a while now. The good news is that it appears our demands are being addressed. The economy is finally showing signs of trending higher. We say that because April payrolls increased 288,000 , far exceeding economists' estimates. This 200,000-plus gain comes on top of the 203,000 jobs added in March and the 222,000 added in February. We've noted frequently in the past that the economy needs to continually add 200,000-or-more jobs each month to sustain economic growth. April's payroll report is surely welcomed news. The April job gains were sufficient to drop the unemployment rate to 6.3%. This means the Federal Reserve will very likely continue with its planned tapering of quantitative easing (further removing support for mortgage rates). With the economy improving, QE is less needed. With that said, a few clouds still linger on the horizon – labor participation being the grayest. Ninety-two million people are out of the labor force and 9.8 million are still officially unemployed, according to the Bureau of Labor Statistics . These are high numbers, to be sure, but there is at least one mitigating factor: more baby boomers are retiring, thus leaving the work force for good. Still, the unemployment rate among younger adults remains elevated, and these people are key drivers of the entry-level housing market. Interestingly, mortgage rates across most product offerings eased since the latest job numbers were released last Friday. Usually such bullish economic news pressures rates to rise. That didn't occur. A subsequent speech by Federal Reserve Chair Janet Yellen was key to rates remaining subdued. Basically, Ms Yellen said the Fed will continue to maintain an “accommodating” monetary policy for the foreseeable future. Today, mortgage rates are not only subdued, they're positively languid, residing at levels we haven't seen in six months. These lower rates haven't exactly ignited a refinance flurry, but at least purchase activity is showing some real signs of life. Indeed, purchase applications surged 9% in the May 2 week, lifting the percentage of purchase activity to 51% of all activity. This marks the first time since 2009 that purchases have exceeded refinances. Lest our enthusiasm run too wild, we need to keep in mind that purchase applications are still 16% lower than they were a year ago. Then again, it's also worth keeping in mind that the Mortgage Bankers Association tends to understate purchase activity because small lenders are underrepresented in the MBA's purchase index. The bottom line is that we like the way things are trending, and we're looking forward to more home sales and rising purchase-mortgage activity in coming months.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Mortgage Applications	Wed., May 14, 7:00 am, ET	None	Important. A strong surge in purchase activity bodes will for the housing outlook.
Consumer Price Index (April)	Thurs., May 15, 8:30 am, ET	0.2% (Increase)	Moderately Important. Consumer-price inflation won't move interest rates.
Homebuilder Index (May)	Thurs., May 15, 10:00 am, ET	49 Index	Important. Optimism should continue to rise on improving activity.
Housing Starts (April)	Fri., May 16, 8:30 am, ET	985,000 (Annualized)	Important. The important single-family segment is expected to drive overall growth.

 

Why the Housing Market Is in Better Shape Than We Think We have to confess to being a little dour over the past couple months. Perhaps we were influenced by the surfeit of hand-wringing articles lamenting the problems with housing. Yes, existing home sales are down and inventory is tight, but a chief reason sales are down is the decline in distressed sales – and that's a good thing. Fewer short sales and fewer foreclosures will keep prices moving on an upward trajectory, which, in turn, will lift the number of owners with positive equity. At the same time, we've seen tight credit standards gradually become somewhat less tight. Competition, which is always a good thing, is forcing lenders to rethink underwriting policies. This is good for the market. Credit might still be tight, but it can only go in one direction – toward more accommodation, and that's where we are trending. Demographics also favor more housing and lending activity. The fact is the population continues to grow, so demand for housing will have to rise. At the same time, housing starts – below 1 million annually – continue to trail the historical average of 1.5 million. We mentioned last week that we remain unconvinced that we're destined to become a nation of home renters. In our travels and experiences, we continually find that people want pride of ownership, stable housing payments (rents continually rise), an appreciating asset, and eventual freedom from monthly payments. They also want mobility, which more of them will regain as the housing recovery moves along. In other words, yeah, we like where things are going, and we are eager to get there.

When Bad News is Good....

MARKET RECAP Who to Believe on This One? For the past year, if not more, we've been wishing, hoping, and even cheerleading for an upturn in economic growth. To this day, we have little to show for our emotional investment. Gross domestic product (GDP) grew at an imperceptible 0.1% rate on an annualized basis for the first-quarter of 2014. The advance fell far short of an already low-bar consensus estimate for 1.0% growth. Acceptable annual growth for a big country like ours is 3% or higher. Unless the economy picks up steam soon, we're unlikely to see 3% in 2014. Interestingly, the Federal Reserve's take on the economy doesn't quite jibe with the Bureau of Economic Analysis. (The BEA calculates GDP.) Fed officials see economic activity picking up, with employment improving and consumer spending gaining pace. The Fed is sufficiently convinced the economy is on the right track that it sees no reason to back off tapering. It will continue to reduce its monthly purchases of Treasury notes and bonds and mortgage-backed securities (MBS). Timing might account for the difference in opinion: The Fed is focused more on the latest economic data, while the BEA parses data all the way back to January. That said, the more contemporary data aren't terribly encouraging, particularly on housing investment. Many economists focus on consumer spending when estimating economic growth, but investment is just as important. Investment sets the stage for future consumption. Residential investment matters, because it has a rippling effect on the economy. It doesn't take much imagination to see the different materials and services required to build, sell, maintain, and furnish a home. Unfortunately, residential investment contracted during the first quarter, which marked a second-consecutive quarter of investment contraction. Because housing is such a large economic contributor, residential investment will need to turn positive for the economy to meaningfully grow. Mortgage activity, sluggish in recent months, also needs to pick up pace. We're not surprised that the surge of refinances that occurred in the past four years has been reduced to a trickle. Now that mortgage rates have stabilized within a tight range, there is less incentive to refinance. At this point, we'd like to see more purchase activity , which would obviously be of reflective higher sales volumes. On this front, activity continues to ebb and flow. Over the past two weeks, it has mostly ebbed. Nevertheless, we remain optimistic. The first signs of spring momentum have finally arrived. Pending home sales ended nine-straight months of declines with an encouraging 3.4% uptick in March. In another positive, February sales were revised upward by three-tenths to minus 0.5%. Home-price growth also appears to be moderating, which should help bring inventory and buyers into the market. Therefore, we expect pending home sales to rise over the next few months. If this occurs, we should expect to see a pick up in mortgage-purchase activity.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
International Trade (March)	Tues., May 6, 8:30 am, ET	$40.5 Billion (Deficit)	Moderately Important. International trade remains as subdued as domestic trade.
Mortgage Applications	Wed., May 7, 7:00 am, ET	None	Important. Purchase activity tumbled in the latest MBA report. This points to sluggish immediate sales activity.
Consumer Credit (March)	Wed., May 7, 3:00 pm, ET	$15 Billion (Increase)	Moderately Important. Revolving credit use has stagnated, which points to a moderating consumer-spending trend.
Job Openings (March)	Fri., May 9, 10:00 am, ET	4.2 Million	Important. Openings have trended higher in 2014, but the trend has been lead by lower-paying retail jobs.

 

Keeping you updated on the market for the week of May 5, 2014.

When Bad News is Good  Homeownership has hit a 19-year low, according to the Census Bureau. The share of Americans owning a home is down to 64.9%. Meanwhile, the median monthly asking rent has soared to a record high, hitting $766 as of the first quarter of 2014. Because our bread is buttered by homeownership, it would seem that ownership hitting a 19-year low is reason to lament, especially if we consider that many pundits believe the trend will be sustained. One prominent pundit, Sam Zell, chairman of apartment REIT Equity Residential, believes the homeownership rate will eventually fall to as low as 55%. We don't quite see it that way. For one, continually rising rents is good news for housing, especially if the rate of home-price appreciation continues to ease. This would mean that owning a home will make more sense economically to more people. The simple fact people prefer to own than to rent is also reason to be encouraged. People prefer to live in a neighborhood of owners, because these neighborhoods are usually more stable and better kept. The good news is that if you can satisfy your preference at a comparatively better price, you're more likely to act. We expect to see more people act as the advantages of ownership become more apparent. The U.S. homeownership rate peaked at 69.2% in June 2004. We don't see a return to that level in the near future, but something in the 65%-to-66% range is entirely reasonable and plausible.

Still Stuck in the Mud. Keeping you updated on the market for the week of April 28, 2014.

MARKET RECAP Still Stuck in the Mud Existing home sales are like a Jeep with bald tires stuck in a mud bog: The wheels spin furiously, but the Jeep goes nowhere. Not only does the Jeep go nowhere, it backslides. So is the case with existing-home sales. For the seventh time in the past eight months, sales have backslid. Sales for March were 0.2% lower compared to February, posting at 4.59 million on an annualized rate. Year over year, sales are down 7.5%, which is the steepest rate of decline in nearly three years. Prices, on the other hand, continue to rise, with the median price moving up 5.4% to $198,000. Now, new-home sales are adding to the sense of discouragement. New-home sales had been trending mostly up over the past 12 months. That trend ground to a halt in March, with sales plunging 14.5% to a 384,000 annual rate , far below anyone's estimate. Prices are an obvious drag on sales. The median price of a new home surged 11.2% to a record high $290,000. Year over year, prices are up 12.6%. Prices in many markets are a baffling anomaly. They continue to rise, but they're not materially pulling in additional inventory. Admittedly, if you sell one home at a higher price, you'll likely have to buy another at a higher price, but rising prices tend to pull in more people willing to sell. In many markets this isn't occurring. Prices simply continue to rise, and continue to rise at a rate we thought would have abated by now. Tight lending standards and higher mortgage rates are frequently fingered as culprits in stagnating home sales. Yes, lending standards are tighter than they were in 2006, but someone with a work history and a decent FICO score can still readily secure financing. As for rates, 4.5% continues to act as a ceiling on the 30-year fixed-rate loan. To be sure, rates spiked higher last summer, but the market should have adjusted to the new reality by now. In the past, we've blamed a stagnating economy and weak job growth for sales failing to pick up pace. A dearth of new buyers entering the market is also to blame. One concern we have is ballooning student debt . A lot of young adults owe a lot on student-loan debt these days. That's making it tough for them to enter the housing market. We remain positive, nonetheless. All markets are local, and all markets are complicated. There is a myriad of variables that influence value and establish trends. We think economic growth will overcome higher mortgage rates, and even higher home prices. Frustratingly, growth has been slow in coming about, but we still expect it to come sooner than later.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Pending Home Sales Index (March)	Mon., April 28, 10:00 am, ET	0.5% (Decrease)	Important. Sales continue to stagnate on low inventory and rising prices. Both trends are unlikely to end soon.
S&P/Case-Shiller Home Price Index (February)	Tues., April 29, 9.00 am, ET	0.6% (Increase)	Important. Price growth will likely accelerate over the next couple months.
Mortgage Applications	Wed., April 30, 7:00 am, ET	None	Important. Purchase applications have reversed course and point to slow sales growth.
Gross Domestic Product (1st Quarter 2014)	Wed., April 30, 8:30 am, ET	1.0% (Annualized Growth)	Important. Sluggish economic growth explains sluggish job growth so far this year.
Employment Situation (April)	Fri., May 2, 8:30 am, ET	Unemployment Rate: 6.6% Payrolls: 210,000 (Increase)	Very Important. Monthly job growth must exceed 200,000 to sustain the economy.

 

How the Washington Post Got It All Wrong on Home Ownership A recent article in the Washington Post was hardly favorable to housing. Basically, the article dispels the belief that a home is the best investment for most people. Other investments, such as stocks, are better investments over the long run. The article misses the point. The home you own isn't an investment. Properly speaking, a home is an asset. It's an asset that satisfies a very basic need – it provides a place to live. That's not the proper role of an investment, which most people buy for immediate cash flow and to eventually sell at a higher price for a profit. A home frequently satisfies the latter requirement: Over time, a home usually appreciate in value. We aver that a decade from now most homes across the nation could be sold for more than the purchase price today. In this regard, a home is an appreciating asset, but still not an investment. A home is only an investment when it is rented to generate monthly cash flow or to be renovated and flipped for a profit. But in this case, a house is not a home. It's only a home to the family occupying it. We might be parsing semantics here, but words matter, and the Washington Post got the words wrong.

When Will We Pull Out of the Doldrums?

Keeping you Updated on the Market for the week of April 21, 2014

MARKET RECAP When Will We Pull Out of the Doldrums? Last week, we referenced the movie Groundhog Day, because things continually feel the same. We're not moving backward, but we're not moving noticeably forward either. Much of the recent economic data support our contention. The Federal Reserve's “beige book,” a compendium of data and Fed officials' interpretation of the data, points to tepid economic growth. Words like “modest” and “moderate” show up frequently in the text released this past week. Home builders also continue to feel rather “moderate.” The NAHB/Wells Fargo Home Builder Sentiment Index posted at 47 for April. Fifty is considered breakeven, the point where sentiment tilts either positively or negatively. Right now it's tilting negatively. At least housing starts picked up in March. Starts rose 2.8% to a 946,000 annual rate, lead by single-family starts, which jumped 6%. Unfortunately, the increase failed to live up to expectations. The consensus estimate was for starts to increase to 970,000 on an annualized rate. The positive takeaway is that single-family starts are gaining momentum. We expect to see starts ramp up going forward. Weather in the first three months of 2014 had been atypically lousy. Indeed, the Federal Reserve referred to weather no fewer than 103 times in the beige book. With weather a less influential factor, perhaps we'll see a pick up in housing activity. As for interest rates, they continue to be priced for sluggish economic activity. On the mortgage front, rates were down again this past week. Bankrate.com's survey has the 30-year fixed-rate loan priced at 4.43%; Freddie Mac has it priced at 4.27%, which is a six-week low. The upside is that lower rates have reignited activity: The Mortgage Bankers Association reports refinances were up 7% for its most recent reported week. Just as important, purchase applications were up 1%. Purchase activity has been up every week for the past month. Gains in purchase activity have been incremental, to be sure, but it appears a budding trend is taking hold. Ellie Mae's Origination Insight Report states that 40% of mortgage loans closed in March were originated for refinancing, while 60% were for home purchases. In February, the split was 43% for refinances and 57% for purchases. FICO scores were another telling data point. Ellie Mae's numbers point to easing credit standards, a trend we've seen, and one that goes under-reported and under-appreciated. We've mentioned a few times over the past couple months that the perception of getting a mortgage loan differs from the reality. The perception is that it's difficult; the reality is that's not really so. With any luck, the trends we see in the credit market will portend a step-up in economic growth. Credit generally becomes easier to come by when the economy is improving. Let's hope that's the case.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
FHFA Home Price Index (February)	Tues., April 22, 9:00 am, ET	0.5% (Increase)	Moderately Important. Prices will likely show slowing appreciation.
Existing Home Sales (March)	Tues., April 22, 10:00 am, ET	4.5 Million (Annualized)	Important. Sales continue to languish on low inventory and sluggish job growth.
Mortgage Applications	Wed., April 23, 7:00 am, ET	None	Important. Rising purchase activity points to rising home sales.
New Home Sales (March)	Wed., April 23, 10:00 am, ET	460,000 (Annualized)	Important. Sales are expected to climb through spring and early summer.

 

How to Become a World-Class Decision Maker To make good decisions, one must be grounded in reality. Unfortunately, most people aren't grounded in reality. The problem centers on the past. People anchor to sunk costs, which are past costs. We've seen this with home prices and mortgage rates. People will automatically assume that past prices and past rates have to reappear in the future. That's not necessarily true. Just because a home sold for $400,000 in 2006 and sells for $350,000 today doesn't mean $400,000 will reappear. The same goes for the 3.5% 30-year fixed-rate loan. It was here once, but that doesn't mean it will be here again. The focus should be on where things are going from here forward. Making good decisions requires thinking on the margin. For example, if you had a $50 ticket to a football game and lost that ticket, would you still attend the game? Many people wouldn't attend because they view the ticket as now costing $100 instead of $50 – the cost of the lost ticket and the cost of the ticket that would need to be purchased. But that's the irrational way of looking at it. The rational way is to ask, “Am I willing to spend $50 to attend the game?” The first ticket is a gone, so it shouldn't factor in the decision. For most people, it does. Similarly, we see people anchor to home prices or mortgage rates that no longer exist. It's always important to let our clients know that the prices that prevailed in the past shouldn't influence today's decision. What matters is what today's data lead us to believe for the future. This sounds like a simple concept, but it's one few people grasp.

Still Not Gaining Traction After All These Years

Keeping you updated on the market for the week of April 14, 2014.

 

MARKET RECAP Still Not Gaining Traction After All These Years The employment numbers for March were reported this past Friday, and they were “okay” at best. The Bureau of Labor Statistics reports that total payrolls rose 192,000 for the month, which was inline with the consensus estimate. The good news is that gains were realized in the private sector, which created 167,000 new jobs compared to 148,000 in February. The pace of job creation wasn't able to move the unemployment rate, though, which remains stuck at 6.7%. To be sure, payroll growth has improved in recent months, but it needs to improve at a more robust pace. In January 2009, the number of unemployed plus the number of Americans not participating in the labor force was around 96.2 million. Today, that number has risen to over 104 million. As a standalone number, 192,000 new jobs might seem a lot, but it really isn't when placed in context of the bigger picture. Five years into the post-recession recovery, new jobs should be continually added at a 200,000-or-more rate each month. That hasn't been the case. Federal Reserve officials are also of the mind that things remain a little soft. The minutes from the latest Fed meeting points to continued loose monetary policy for years to come. This means the Fed is committed to holding rates low, even if it still plans to back off quantitative easing (buying Treasury notes and bonds and mortgage-backed securities). In short, the economy is at best creeping forward, the taper is still on as scheduled, and easy-money policies will persist longer than many economists had expected. Of course, there is a hedge (there always is), and that is if extraordinary market data appear, the Fed's direction will change. This all feels a bit like the movie Groundhog Day. At least the Fed is making us appear like a prophet on mortgage rates. At the beginning of the year, we thought the rate on the 30-year fixed-rate loan might bob about between 4.25% and 4.5% for a while. Bankrate.com's latest survey has the 30-year fixed-rate loan pegged at 4.47%; Freddie Mac's survey has it pegged at 4.34%. At this point, though, we'd have thought the 30-year loan would have ceased bobbing about and started trending higher. That hasn't been the case, as the economy in general and the labor market in particular continue to spin their wheels. Our primary concern is that if the economy doesn't gain traction soon housing – particularly new home activity – will start loosing traction. Existing home sales at the national level have gone nowhere over the past six months. New-home construction is an even bigger concern, because of its signification contribution to overall economic activity. The last thing we'd want to see is new-home construction backslide. For the past two years, we've anticipated some kitty litter being thrown down so that the economy could gain traction and drive itself out of this rut. So far, that's yet to occur.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Retail Sales (March)	Mon., April 14, 8:30 am, ET	0.7% (Increase)	Moderately Important. Sales will trend higher after weather-induced sluggishness.
Home Builder Sentiment Index (April)	Tues., April 15, 10:00 am, ET	50 Index	Important. Optimism is expected to return with the warmer weather.
Mortgage Applications	Wed., April 16, 7:00 am, ET	None	Important. Increased purchase activity points to rising home sales.
Housing Starts (March)	Wed., April 16, 8:30 am, ET	970,000 (Annualized)	Important. Starts are expected to surge after being impeded by bad weather in recent months.

 

Is Everyone Wrong About This Important Variable? Nearly every economist, every pundit, every commentator has predicted 5% on the 30-year loan by the end of the year. We have to slot ourselves in with the crowd. Though we still have almost eight months to go, rates continue to languish. Lower interest rates are certainly more popular than higher interest rates. But low interest rates alone can't drive the housing market. We simply need more economic growth, and not just to grow the market, but to sustain it. RealtyTrac reports that March marked the 42 nd consecutive month of falling foreclosure activity. But fissures are starting to show: RealtyTrac also reports that foreclosure activity was up in 29 states. We hope that our prediction of 5% on the 30-year loan comes to pass, because a 5% rate will only occur if accompanied by stronger economic growth. We can see no other way that Federal Reserve officials will let it rise.

A Federal Reserve World, And We're All Living in It

Keeping you Updated on the Market
For the week of April 6, 2014

MARKET RECAP A Federal Reserve World, And We're All Living in It When the conversation turns to monetary policy and the Federal Reserve, the natural reaction is for eyes to glaze over. This is understandable. In the past, monetary policy and the Fed were supporting players who impinged little on the day-to-day activity in the housing and mortgage markets. That's hardly the case today. Over the past few years, since the 2009 recession, the Fed has morphed into a leading player. Therefore, we have no choice but to follow the Fed. “You might not be interested in war, but war is interested in you,” is a quote attributed to Russian revolutionary Leon Trosky. We can modify Trosky's quote to say, “We might not be interested in the Federal Reserve, but the Federal Reserve is interested in us.” For this reason, we need to be interested in the Fed, which is why we spend considerable space on Fed commentary. Its policies directly influence home prices and mortgage rates. Now, it appears the Fed is backing off raising interest rates sooner than later. A couple weeks ago, we mentioned that new Fed Chair Janet Yellen had overtly hinted that interest rates would begin rising sometime in 2015. We speculated by mid-July. We were even more confident that 5% on the 30-year fixed rate loan was likely by end of this year. Indeed, mortgage rates rose – in fits and spurts – through most of March. The latest survey from Bankrate.com shows the national average on the 30-year loan at 4.54%. Freddie Mac's survey has the 30-year loan at 4.41%. Both are the highest they've been since late January. That said, we're rethinking our position. This past week, the Fed had what you could call a “wait-a-minute” moment. Fed Chair Yellen hedged her previous commentary, adding we will need stimulus for “some time.” This suggests that the economy has yet to gain sufficient traction, and appears unlikely to do so in the near future. In other words, 5% on the 30-year loan isn't quite the done deal that it seemed a couple weeks back. Since the recession ended, economic growth and job growth have remained stubbornly sluggish. A recent commentary from the Cleveland Branch of the Federal Reserve offers some insight into why this is: insufficient investment. Many economists focus on consumption as the main driver of the economy. Unfortunately, they under-weigh the importance of production. The fact is that we all have to produce in order to consume. We work first (produce), get paid, and then consume (credit not withstanding). Production is predicated on investment: We need tools (or capital) to produce. With the Fed pushing back raising interest rates, lower mortgage rates could prevail longer than we initially expected at the beginning of the year. Of course, the one caveat is that if job growth, investment, and consumption unexpectedly pick up, the Fed could signal a new direction, which would again alter interest-rate expectations.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Consumer Credit (February)	Mon., April 7 3:00 pm, ET	$12 Billion (Increase)	Important. Rising student loans outstanding could be a negative for the entry-level home market.
Mortgage Applications	Wed., April 9, 7:00 am, ET	None	Important. Purchase applications continue to inch higher, but no meaningful trend has been established.
Federal Reserve FOMC Meeting Minutes	Wed., April 9, 2:00 pm, ET	None	Moderately Important. The Fed is expected to reiterate its commitment to wrap up tapering by the end of the year.
Producer Price Index (March)	Fri., April 11 8:30 am, ET	All Goods: 0.1% (Increase) Core: 0.1% (Increase)	Moderately Important. Inflation at the producer level remains sedate and won't move interest rates.

 

A More Accommodating Market Than We Think One of the more prevalent complaints since the housing-market bubble burst in 2009 is how difficult it has become to get a mortgage loan. Compared to the early-to-mid-2000s, you could say that's true. The reality is – from a historical perspective – that the mortgage markets is more accommodating than many people think. This point was driven home in a recent Wall Street Journal article, which basically stated that getting a loan really isn't so tough. This is a point worth driving home to our clients. To be sure, the additional paperwork and verification required today compared to the recent past isn't something anyone particularly enjoys, but it's not unreasonable either. Last week, we explicated the upside of a housing market lead by mortgage-financed purchases. The good news is that the reality of obtaining a mortgage is easier than the wide-spread perception, which is why it's important to change the wide-spread perception. We're likely preaching to the choir on these points, but sometimes its worthwhile to do a little preaching to drive home an obvious point that isn't obvious to everyone.