Here we are halfway through 2017 and mortgage rates are where most people expected them NOT to be.
We find quotes across most mortgage products are lower today than before the 2016 election. It wasn’t supposed to be this way. Post-election everyone was sure rates would rise on President Trump’s pro-growth initiatives. These initiatives would co-op a pro-active Federal Reserve continually raising the federal feds rate to quell any inflationary embers.
At least one aspect of the narrative has materialized. The Fed has continually raised the fed feds rate. The fed funds rate has been increased three times over the past seven months.
Most everything else, though, has failed to follow the script. The Consumer Price Index runs below the Fed’s desired 2% average annual rate. This is no surprise when you consider that oil, a key input factor, has seen its price drop through most of 2017. Oil trades at the lowest level in 2017. In addition, the yield on the 10-year U.S. Treasury note is at a 2017 low. Economic growth remains muted.
Unfortunately, the yield curve suggests a pickup in economic growth won’t occur until the more-distant future.
We’ve seen a gradual flattening of the yield curve in recent weeks. The spread between the five-year and 30-year Treasury yields has dropped below one percentage point. This is the lowest spread since December 2007. The yield on the five-year Treasury note has risen (on falling prices), while the yield on the 30-year Treasury security has fallen (on rising prices).
Slow-growth and low-inflation expectations and depressed risk appetites are associated with rising long-term bond prices (which cause yields to fall). Instead of the hyped-up economic growth many were expecting to start the second of half of 2017, we’re more likely to see something on par with the sluggish growth that paced the economy for the second half of 2016.
Money-supply growth is another indicator that points to sluggish growth and low inflation. Last month, money supply grew 5.9% year over year. This is the lowest year-over-year increase since July 2008.
Drops in money supply measures have historically accompanied a worsening economy. This was the case in the lead up to the 2008 financial crisis and to the dot-com bust before that. Money supply, in turn, is reflective of lending activity. Lower lending activity leads to lower money supply growth. Both are reflective of overall economic activity.
The good news is that lending activity in our neck of the woods continues to hold its own.
More refinances have been the upshot of falling mortgage rates. The Mortgage Bankers Association Refinance Index was up again last week, with a 2% weekly increase. Purchase applications failed to maintain pace; they were down 1% for the week. But year over year, purchase activity is up 9%.
Four percent is the prevalent quote nationally on a prime conventional 30-year fixed-rate mortgage. If the yield curve continues to flatten, don’t be surprised if 4% gives way to 3.875% in the near future.