We have a new Federal Reserve Chairman. Jerome Powell leads the troops these days. As Fed Chairman, Powell will recurrently be run through the Congressional wringer. His first run through occurred last week.
From what we gleaned from Powell’s testimony, the new Fed boss holds similar views to the old Fed boss, Janet Yellen. Powell, like Yellen, holds a positive outlook on the economy and inflation. Like Yellen, Powell plans to raise the federal funds rate this year. Powell’s optimism, which exceeds Yellen’s, has led some market participants to believe that four rate increases could occur before the end of the year.
You would think the prospect of four rate increases would have interest rates trending higher. They did initially, but they then drifted lower. The yield on the 10-year U.S. Treasury note is down roughly 10 basis points compared with the yield last week.
Mortgage rates followed suit. Yes, they remain near a four-year high, but there was some back-sliding, at least at the national level. Quotes on a prime 30-year fixed-rate conventional mortgage remain range-bound between 4.5% and 4.625%. Closing costs, though, have become more accommodating to prospective buyers.
Ascribing an accurate cause for lower yields and interest rates is more art than science. Perhaps more market participants expect inflation to remain subdued longer into the future. Stock-market volatility could be a contributing cause. Stocks have been bobbing and weaving more than usual of late. Higher stock-market volatility increases demand for haven investments like U.S. Treasury securities.
We can only guess the cause; we know the effect.
When market participants expect interest rates to fall, they will fall immediately, and when market participants expect them to rise, they will rise immediately. Expectations set the current rate.
Future interest rates follow a random walk. The path can be deciphered if you can accurately anticipate what will coalesce with other market participants. Many of us can accurately decipher the path a few times. Rare is the individual who can do it consistently. But we’ll keep trying.
Mortgage credit availability has been one positive that’s accompanied rising mortgage rates. The MBA’s Mortgage Credit Availability Index trended higher in January. Availability increased across the board. The good news is that more borrowers have availed themselves of a purchase mortgage. Purchase applications rose 6.0% in the February 23 week.
As for the choice between lock and float, our opinion remains unchanged. Rate pullbacks, as minor as they may be, offer the opportunity to look. A meaningful pullback -- such as a pullback to mortgage rates that prevailed to start the year -- is a long-shot bet at best. Our experience suggests that it’s best to avoid long-shot bets.
No End to the Frustration
A comment from a Kelli M. at Mortgage News Daily accurately captures the housing zeitgeist in which we live.
Kelli M. says, “I’m a frustrated buyer. The supply is very low and the houses still on the market are flawed or too high [too highly priced].” Ms. M. was referring to the lower end of the market. She went on to observe that homes at the higher end -- $600,000 and above -- just sit. Kelli M. didn’t tell us anything we didn’t know: Many home markets are bifurcated markets. That said, it’s telling when a layperson makes the observation.
Prices are the overarching issue. Prices across the 20 cities covered by the S&P CoreLogic Case Shiller Home Price Index show prices up 6.3% year over year in December. None of the regions the index covers showed real, inflation-adjusted price declines in 2017.
We see no end to this continuous march to higher ground. Home prices will climb. The lower-end of the market will likely remain on the steepest incline.
Costs are a driving factor behind rising home prices. Due in part to tariffs applied to imported Canadian lumber, the cost of two-by-four lumber, is at a record high. Other input costs could follow lumber’s lead. The New York Times reports that Secretary of Commerce Wilbur Ross is recommending a 24% tariff on all steel imports. Lumber is a key input to new construction and home upgrades, steel is another.
As for the human element, don’t expect a reprieve on that end. CNBC reports that skilled construction labor is not only expensive, it is difficult to find. Wages will likely trend higher.
So, expect more of the same on housing: rising home prices and rising frustration among potential buyers like Kelli M.
The 5% Rate Quote: Sooner or Later?