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Mortgage Rates Drop Below the 2017 Range Bookmark and Share

Fed Reserve

We’re all but assured that the Federal Reserve will raise the federal funds rate (the rate everyone refers to when everyone refers to the Fed raising interest rates) next week. It appears a done deal, and as such, it is priced in market interest rates.

Because the Fed is in rate-raising mood, an uplift in yields on the short end of the yield curve -- the plot of Treasury yields on 1-month to 30-year securities -- has occurred. The slope of the curve remains normal, with each successive yield higher than the next. This is a good shape because it foretells an expanding economy.

The Fed raising rates should influence the short-end of the yield curve first. We’ve seen some uplift in interest paid on certificates of deposits and passbook savings accounts. But the Fed’s actions have had little influence on lending rates.  Quotes on a 5/1 ARM have generally moved lower with quotes on longer-term loans. If you look at the rate charts of the 30-year loan, 15-year loan, and 5/1 ARM, you’ll find that the rates have moved like synchronized swimmers.

The market today is like no other. Banks hold $2 trillion of excess reserves with the Federal Reserve. Before 2008 they held none, because before 2008 the Fed had not paid interest on these reserves.  The Fed raising and lowering the fed funds rate had a discernible influence throughout the yield curve before then. Today, not so much.

Five years ago, we thought quotes of 5%-or-higher on a prime 30-year loan would be the norm. A year ago, we thought 4% would be an opportunity if rates would drift so low. So much for expectations, such is the difficulty in predicting the path of mortgage rates. (Better luck is had predicting the flight path of a butterfly. This applies not only to us, it applies to everybody.)

That said, let’s take advantage of what we’ve got. Refinance applications were up last week, and so, too, were purchase applications. Indeed, purchase apps were up 10% week over week. Perhaps we’ll see an upward surprise in May and June home sales.

Is an Echo Bubble in the Making?

We stumbled across an article titled “Housing’s Echo Bubble Now Exceeds the 2006-07 Bubble Peak” at the financial website Seeking Alpha. The author claims that a housing bubble has reformed after the initial bubble burst because home prices presented by the S&P/Case-Shiller Index now exceed pre-bubble highs.

First, bubble is a loaded word. Nobody knows when an extended market (bubble) has occurred until after the fact. Second, is there evidence of the same bubble re-inflating? The author claims it’s so, but the evidence is suspect.

The Internet-stock bubble popped in 2000. The NASDAQ Composite Index, which houses many Internet and technology stocks, took 15 years to trade above 2000 highs. It trades 10% above those highs today. The gold bubble, which popped in 1980, took 28 years to recover. Gold trades above the 1980 highs. As for housing prices, they’re at new highs 10 years after the housing bubble burst.

But so what? Asset and investments move higher over time. If you look at the long-term trend in stock and gold prices, they’re always higher. Why should housing be different? It shouldn’t be because it isn’t. The long-term trend is up.

As for an echo bubble, we’ve seen no instance when the bubble that produced the previous financial market crash produced the next crash. Whatever sends markets into a tailspin in the next crash, we feel assured that it won’t be housing or mortgage lending.

Mortgage Rates Settle at 2017 Lows, but for How Long?

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