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The Calm Could Soon End Bookmark and Share

 Construction

It has been nice over the past couple weeks. 

Mortgage rates have drifted lower, even if they remain range-bound. The 4.5%-to-4.625% range on the prime 30-year fixed-rate loan still holds, as it has held for the past couple months. The good news is that quotes have held mostly at the low-end of the range. 

The pressure builds, though. The pressure builds for rates to move to the high-end of the range, and possibly beyond. The news has been good lately, which is bad for interest rates.

News comes from Washington that an impending trade war with China could be aborted (a good thing). President Trump has talked tough on imposing import tariffs on Chinese goods. He has talked as if the tariffs were a done-deal. It now appears that they’re not. 

White House economic adviser Larry Kudlow, testifying before Congress, stressed that U.S. tariffs announced on Chinese goods have yet to be applied. What’s more, they may never be applied.

The tariffs may never be applied because recent stock-market volatility has spooked the White House. The prospect of a U.S. trade war with China has been the cause of recent stock-market volatility. Some in the administration are worried. The continual rise in stock prices has been a source of pride for the administration. No one wants to see a price reversal.   

With trade-war fears tamped down, stock prices have begun to move up. Yields have begun to rise. 

The yield on the 10-year U.S. Treasury note has risen to above 2.8% after spending the past week hovering around 2.75%. As the yield on the 10-year note goes, so go quotes on long-term mortgage rates. Rate quotes have drifted higher over the past couple days.

If JPMorgan CEO Jamie Dimon has his druthers, we should see more upward drift. The yield on the 10-year note should be considerably higher, according to Dimon.

Speaking on Yahoo Finance, Dimon posited that the yield on the 10-year note should be around 4%, which is closer to historical norms. If this were to occur, rate quotes on prime 30-year fixed-rate mortgages would be closer to 6% than to 4.5%. 

If U.S. corporations continue to grow earnings at double-digit year-over-year rates, the pressure will rise further still for interest rates to rise.

On that front, it appears that U.S. corporations will continue to produce double-digit year-over-year earnings increases. FactSet data shows that of the 19 companies in the S&P 500 reporting first-quarter 2018 earnings, 16 have reported positive earnings surprises (beating analysts’ estimates). 

Mortgage rates are sedated today. That said, it’s not beyond the realm of possibilities for a new higher range to emerge in the coming weeks. A little more good news is all that’s needed. 

Supply, Now More Than Ever
Home prices continue to rise, and then rise some more. 

CoreLogic’s latest home price index shows home prices at the national level rose 6.7% year over year in February. Prices were up a full percentage point month over month. Given strong demand (USA Today recently ran an article titled “Home Buying Market So Brutal, Some Home Buyers Make Offer Sight Unseen”), we’re unlikely to see a reprieve soon.

We also get word that lumber prices are up 23% year over year. Given relentless housing demand and rising production costs, lumber prices are unlikely to fall anytime soon. New home prices are unlikely to fall anytime soon. Such is the downside to import tariffs. (This time on imported Canadian lumber.) 

It’s hard to believe that it was only a decade ago when an epic construction binge ended and a hangover-induced constriction emerged. The hangover should be long over by now. Unfortunately, fewer homes are being built per household than at any time in U.S. history. New homes are still being built at an annual rate roughly 300,000 shy of the historical annual average. 

There isn’t much we can do, but rant. So, rant we will. Until, we see a surge in housing supply, whether existing or new, relentless price increases and tepid sales growth are the future. That’s something worth considering for anyone willing to take on a pro-housing lobbying agenda.   

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