After a sharp, six-week jump from mid-January through late February, the rise in mortgage rates slowed to a near-standstill over the last three weeks. Perhaps it was inevitable that we’d come to a point where investors relaxed a bit and mortgage rates soften slightly. Concerns about inflation returning quickly amid above-trend growth haven’t exactly gone away, but enough new numbers suggest that more evidence of a near term emergency is needed, before we start worrying about 30 year mortgage rates going to 6 percent.
With the Federal Reserve meeting today, it is widely expected that another hike in the federal funds rate will come. Presently, the more important question to try to answer is whether the Fed has become more likely to try to lift rates four times this year, up one from the three moves that were telegraphed at the close of the December FOMC meeting.
Aside from projections, what the Fed has to say about future policy (in both official statements and in the press conference which will follow the meeting) will also certainly influence investor moves in the days and weeks ahead.
The Fed and Mortgage Rates This Spring
Lost in the noise, perhaps, but important to remember is that changes in the federal funds rate don’t have much direct relationship with long-term mortgage rates.
It also bears consideration that at least a part of the January rise in interest rates can also be attributed to the doubling of the draw down of the Fed’s holdings of Treasuries and MBS (Mortgage Backed Securities).
Turning the year, the run-off of Treasury holdings accelerated from $6 billion to $12 billion, while mortgage holdings were trimmed at an $8 billion rate.
In April, the amount of reduction for both of these is slated to expand by 50 percent to a run-off of $18 billion for Treasuries and $12 billion for MBS. Coming at a time when the Treasury is already issuing a lot more new debt, this means investors will need to absorb even more supply. More supply may or may not be met with demand, rates may be poised to go slightly higher before long, if investors choose not to step up and buy more of these investments.
Aside from the robust hiring report for February (which showed an easing of wage pressures that have help investors to relax a bit) there doesn’t seem to be all that much evidence to suggest that the Fed needs to consider a more aggressive course for interest rates, at least at the moment. For example, the Atlanta Federal Reserve Bank’s GDP Now model suggests the economy not only isn’t accelerating at the moment, but rather has actually slowed to a running rate of just 1.8 percent in the current quarter. Dr. Walton, an Economist with NCSU, stated last week that even though the White House might think GDP is going to end the year near 4% he believes we are still in the high 2% range.
The Federal Reserve raises the Fed Funds rate to curb inflation in the Economy. If the “normal” GDP for the Economy is 3.0% – then a GDP number of 1.8 from the Fed’s Atlanta office certainly doesn’t “sound” like inflation?
Key to GDP growth is what consumers do in terms of spending. Of late, retail sales have been rather lackluster, and that despite increases in take home pay for many as a result of the Tax Cut and Jobs Act. Retail sales declined by 0.1 percent in February, a third consecutive slide of 0.1 percent. A decline in sales at gasoline stations and auto dealers were the cause of the headline decline, and sales posted a 0.3 percent gain with these excluded from the tally.
If America’s spend the tax refund dollars the way they have in the past, they won’t be buying clothes, they will be paying down debts. For the moment, spending remains soft, and its hard for growth to get much traction without it.
As the U.S. is a nation of imports (on net), costs of goods coming onto these shores can of course influence inflation. Trade policy of course has been in the news of late and we may see the Inflationary effects on costs from these changes in tariffs in the coming months… but we also are seeing the effects of a weaker dollar, which makes our exports more competitive in global markets.
Housing Market and Mortgage Rates
Housing markets of course would not welcome higher mortgage rates, and potential home buyers are already dealing with the problems of high and rising home prices and a lack of available inventory to buy. This is especially true with existing homes in the under $400,000 range. Baby Boomers looking to down size are squeezing out first time home buyers who have been watching HGTV and are ready for their first “Fixxer Upper.”
This from the Triangle Business Journal on Home Prices:
Home prices are rising in Raleigh, but not nearly as much as other tech hubs around the country.
The five-year appreciation rate in home prices across the Raleigh metro area is 27 percent, according to a new report from data analytics company CoreLogic. While that’s above the state average of 25 percent, it’s lukewarm when weighed against many of the country’s leading tech cities, including some of those competing against the Triangle on Amazon’s top 20 list of potential locations for the online retail giant’s HQ2.
The National Association of Home Builders index of member sentiment for March came out this week, with the headline value easing one tick to 71, a robust level. Moods here have been running strong even as sales of new homes have lacked traction, but conditions continue to be solid. Measures of single-family sales remained elevated at a reading of 77, as did expectations for the coming six-month period (78, down from 80) and a measure of traffic at showrooms and model homes remained above the break even point of 50 for a fifth consecutive month.
Construction on new housing units dipped back in February after hitting a recovery high in January. A 7 percent fall in housing starts for the month put the annualized level back to 1.236 million, with single-family starts managing a 2.9 percent rise to 903,000 (annual) units begun. An update on new home sales comes next Friday, but with about 6 months of supply already built and ready to go, it’s hard to expect much by way of a ramp-up in construction or permits at the moment.
Despite somewhat softer economic growth and at least a leveling of inflation pressure, it would be wrong to expect that interest rates have any room to decline measurably. Today’s Fed meeting will have much to say in this regard; a soothing message and projections that aren’t much moved from present levels could perhaps allow for a minor decline or two in the weeks ahead… but any such move would be measured in a handful of basis points, at best.
For the most part, holding at about these levels is the best we can expect for now. If we really do see a slowing in first quarter GDP (no actual preliminary data on this for six more weeks), it would also need to be accompanied by at least a slight downtrend for inflation to see mortgage rates take meaningful bites out of the 2018 rise. With the Fed’s balance sheet run-off accelerating, major economies growing and more, just holding steady for a time would be an accomplishment of sorts, and that’s about what we expect for next week — little change in mortgage rates when Freddie Mac reports next Thursday morning.
Worried About Mortgage Rates?
Average monthly mortgage payments have increased by almost 13% compared to a year ago.
An analysis from realtor.com has found that rising home prices and the interest rate hikes have increased monthly payments for the national median home price up by $138.
The figure is based on a 10% rise in US home listing prices on realtor.com and an interest rate rise of 28 basis points on a 30-year fixed-rate mortgage.
The Spring forecast for mortgage rates is a slow march higher. If inflation, and GDP do not show signs of growing later this summer, we could see the Fed slow down the rate of moving more off the balance sheet. It’s a tight walk for them. If you have questions about Mortgage Rates, call Steve and Eleanor Thorne 919 649 5058.
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