In North Carolina, we mark the end of Summer with the Home Builder’s Parade of Homes – which comes at the end of September. I know, September is normally considered a “Fall Month,” but if you’ve lived, or been to NC in September, you know we are still experiencing 90 degree days! With the Parade of Homes, and folks out looking at the newest ideas in kitchens and master bathroom designs, we always get the question of what will happen to Mortgage Rates.
The Federal Reserve says they are going to raise mortgage rates in the next few weeks, hinting that September would be the month. Then China decided to makes waves, and all bets were off. Even if the Fed DOES take the leap and raise their rates from ZERO, will it make a difference to mortgage-backed securities and our mortgage rates??
Mortgage Rates End of Summer 2015
So what are we afraid of with regard to higher short-term rates… or more importantly, what is the Fed afraid of?
To start, we’ll get it out-of-the-way: From our perspective, the Fed should lift rates a quarter-percentage point in September. Should they hold, we think the Fed risks a loss of credibility of sorts, as a continued lack of action on their part continues to signal a lack of confidence in the durability of the U.S. economic expansion.
If a 5.3 percent employment rate, an economy producing about 2 million jobs per year, a 2+ percent annual growth rate over the last few years and signs of considerably improved consumer spending aren’t the right set of conditions to lift rates off record-low bottoms, then what are the conditions that will make it so?
Will the consumer be affected by slightly higher rates? Barely so, given that much consumer debt (and especially that accumulated during the recovery) is fixed rate. Yes, some home equity line of credit and credit cards costs may rise a tad, as might business lines of credit and such, but those effects are minimal.
There are considerably far fewer adjustable-rate mortgage resets to worry about now than perhaps at any time in the last generation… and the few newer ARMs that have been originated mostly won’t see any change for years yet. The Fed isn’t directly manipulating long-term mortgage or other interest rates any longer, and short-term interest rates and long-term mortgage rates have little direct relationship with one another, regardless.
Will inflation be trimmed a bit by higher interest rates, which will tend to further strengthen the dollar? Yes, a little. However, below-zero “real” interest rates and out-sized stimulus may have prevented outright deflation over the last few years, but there isn’t any evidence that it has been successful in creating inflation, either.
The fact is, there’s nothing special about attaining the 2 percent inflation the Fed might like to see, and 1 percent would probably do just as well, provided it can be expected to remain reasonably constant over time.
We don’t think there’s much downside to a small change in rates, and there are likely to be positive signals. Asset markets (stocks, homes) have all been going higher at a fairly rapid pace over most especially the last couple of years, and a slowing of appreciation as we go is probably healthier in the long run.
Home Prices could even go DOWN a little in some of the “hotter” markets. We don’t see the opportunity for this much in North Carolina – because we haven’t seen 20 and 30% increases in home values in the past 12 months – like they have in Arizona and Florida and California… the places that really saw the worst of the worst.
Lower housing costs, could spell lower closing costs, especially for First Time Home Buyers in NC. We have seen a tremendous demand for housing from First Time Home Buyers, and those homes in their price range are sometimes having appraisal problems because of escalated Seller paid Closing Costs.
Is the Fed concerned about upsetting the stock market further, particularly given the recent China episode? Possibly. To be fair, though, markets have been volatile on more than a few occasions during the course of the recovery and expansion… and a slight change in Fed Policy is not likely to cause nearly the movement cause by UNEXPECTED news from abroad.
A small positive signal — especially if accompanied with repeated soothing messages about the future path of policy — should not disrupt the markets, or cause spikes in Mortgage Rates anywhere any more than we’ve already seen in recent years… and we have recovered and moved on from those events.
Although the whole of this forecast isn’t truly about the Fed, the September Fed meeting is the dominating event of the forecast period. We think the Fed should make the move, say soothing words about where we’re going and how fast change may come, see how their new tools and processes work, let the dust settle… and check back in long about next February to see if another move might be appropriate.
Does Fed Move Mean Rising Mortgage Rates?
China “blew up” and as a result the DOW and the NASDAQ had such rotten days, that they did “Special Reports”on CNBC. The common them was that if China wasn’t doing well, they would stop investing in the US, and our economy would thereby suffer.
Despite the fact that the average Retirement Account lost so much money, and even with all of the bouncing about in the Bond market, mortgage rates barely moved.
Determining the effect that the upheaval in global markets has had on the Fed’s thinking is hard to know. At least one Fed governor said that a September move felt “less compelling” now than it did weeks ago. An less-united or even undecided Fed would tend to inject volatility into rates, for better or worse.
If the Fed punts at the September meeting, we might see some downside for rates, but not much.
The economic momentum of the second quarter seems likely to have at least mostly spilled over into the third, and that’s been a key factor in keeping rates from backing down in recent months. This is likely to continue to be the case over the next nine weeks.
READ: We think we are going to remain in a pretty tight range in the next 8 to 9 weeks for Mortgage Rates
By the time we pass the September Fed Meeting (3rd week of the month), and then have a chance to read their notes from the meeting in October – we don’t expect much to happen. Regardless of whether you think the Fed should move or not (or is right or wrong in why they have or have not), why not check back to see if our crystal ball has worked with regard to mortgage rates?