Last December, policymakers forecast that the Fed would raise rates four times in 2016. With three more meetings to go (including today’s) and having hiked exactly zero times so far, there is no possibility at all that they are not going to hit four. Last month, the Chair and Vice-Chair hinted that the central bank could plausibly effect two rate hikes this year. Even still, only two out of the 23 Fed preferred bond traders think that a rate hike will be announced at the conclusion of tomorrow’s meeting. Futures traders are pricing in a 20% chance that the Board of Governors hike the discount rate tomorrow. I on the other hand think that tomorrow could be the day that they do kick the rate up .25% to a whopping .5%. This accomplishes two things: The first is conveying the sentiment that the economy is in fact getting better, instilling confidence in a financial system that has been in the sickbed for the better part of a decade. The other agenda accomplished by a rate hike tomorrow is giving the Fed additional ammunition to drop interest rates again in the future when there is a slowdown (see, I am not entirely optimistic).
I place the probability of a rate increase tomorrow by the Fed at 50%. And if they do, I see mortgage rates dropping again.
I know I know, I have used this image before. I am an old hack who is unoriginal in his thoughts, but it’s Friday and this actual photograph of the Federal Reserve Board Chair Janet Yellen is an uncanny metaphor of her “hawkish” 23 page speech at the University of Massachusetts last night. Ms. Yellen said that the Fed will likely raise interest rates later this year (read: December) as a result of improvements in the labor market, and expects that inflation will tick up shortly afterward. (BTW: in economic speak, a hawk is generally someone who favors higher interest rates to keep inflation in check. Chair Yellen is insinuating that by raising interest rates, the chance of inflation spiking out of control will be mitigated.)
If you didn’t understand any of that besides “raise interest rates”, you got the point. Watch for interest rates to start coming up.
Home prices across the nation rose 5.5% November to November according to CoreLogic, who also forecasts a 4.6% appreciation rate in the year ahead. Including distressed sales, home prices in Utah are still 11.0% under their peak 2007 value (9.1% excluding distressed sales).
The DOW is down another 100 points this morning after yesterday’s 300 point slide. It would seem that this new year is bringing with it concern over just how robust our economy actually is. Low oil prices and a new congress are just not as inspiring as they used to be.
Mortgage Bond pricing is bumping up against resistance not seen since March of 2013. If we can get through this threshold, interest rates could drop another 1/2%…
I chose this picture of Grizzly Adams as a representation of current market conditions for three reasons: 1. It was my favorite show (besides Dukes of Hazzard) when I was a kid. 2. My 12 year old son just did a report on the real James “Grizzly” Adams for 7th his Grade U.S. History class. 3. It seemed more workplace appropriate than a photo of a doped-up crack head. The metaphor of the crack head could have been used because A: the markets also make decisions based on irrational fears and B: the markets currently “need” low interest rates to get through the day. As a continuation and clarification of my commentary yesterday, I want to reiterate that we are not in a “normal” market. In a normal market, good news (whether economic or political in nature) leads to higher stock prices and higher interest rates, while bad news leads to lower stock prices and lower interest rates. Mortgage Bonds have seen reduced yields this last week as stock prices have plummeted over the anticipation of rising rates cutting into profitability. Thirty year rates for FHA are at 3.25% and conforming conventional loans are at 3.875% today, while 15 year rates are down at 3.0%. (APR will be higher, depending on the amortization term, and the loan and down payment amounts–as closing costs and the presence of mortgage insurance affect each loan differently).
New Home Sales come in at 504,000 annualized units, way above the 435,000 expected by Wall Street. New Sales jumped 18% in August (the largest increase in over 22 years), and have increased 33% from a year ago! The median price of said new home is now at $276,600, and increase of 8% over this time in 2013. So far this morning the markets don’t know which way to react; stocks and bonds have whip-sawed back and forth in early trading. Thirty year FHA loans are at 3.5% and Conventional loans are at 4.125%. Fifteen year rates are way lower at 3.0% (APR will be higher, depending on the loan and down payment amounts, and amortization term–as closing costs and the presence of mortgage insurance affect each loan differently.)
Easing off the throttle by another $10B, the Fed will purchase a total of $15,000,000,000 in mortgage backed securities and Treasuries (10 billion in Treasuries and five billion in mortgages) next month. This is down from the original 85 billion per month when Quantitative Easing began almost six years ago…. The DOW took the news well, closing at another all-time record high of 17,156, up 24 points, while Mortgage Bonds lost 25 basis points to fuel the surge in Stocks. The DOW is up almost 100 already this morning as Mortgage Backed Securities settle in at the lowest price of the last five month, putting upward pressure on interest rates.
Although they are phasing out their purchase of long term debt, the Federal Open Market Committee yesterday reaffirmed their commitment to keep the Fed Funds Rate (which directly affects short term interest rates like credit cards) at the current level for a “considerable time”.
Among this morning’s data released, Building Permits decline 6% to just under 1MM (annualized), and Housing Starts are also just under 1MM, a drop of over 14% from the month prior. Jobless Claims fall 36K to just 280,000 new filings for Unemployment Compensation last week.
Bad news for a guy who feeds his family by helping other families borrow money: All-cash sales increased to 37.9% of purchase transactions funded in 2Q 2014. This is an increase from 35.7% the same time last year.
The fed minutes from the latest FOMC meeting will be released here in couple of hours. I anticipate that they will indicate that the Federal Reserve currently plans to keep short term interest rates low through mid-2015.
After a summer of laisser aller scheduling, it’s nice to get settled back into a routine with the kids heading back to school today. My first lesson is that the carpool lane at the junior high is substantially more complex than that of the elementary school. You know who didn’t take the summer off is home builders; Housing Starts rose almost 16% in July alone to raise the annual units to just back over 1M. Building Permits are also higher than expected, at 1.052M. Inflation at the retail level was moderated with the Consumer Price Index registering a 0.1% modest gain, dropping the year-over-year increase to a nice round 2.0%. Thirty year FHA loans are at 3.5% and Conventional loans are at 4.125%. Fifteen year rates are way lower at 3.0% (APR will be higher, depending on the loan and down payment amounts, and amortization term–as closing costs and the presence of mortgage insurance affect each loan differently.)
Every report out today is positive and cause for a bright outlook. The Case Shiller Index shows that home prices rose 12.4% from March 2103 through March 2014. Consumer Confidence rose from 82.3 in April to 83.0 in May. And lastly, Durable Goods Orders rose 0.8%; better than the -1.3% that was anticipated. All of this sunny news only substantiates the S&P 500 closing over 1,900 last Friday for the first time ever. Meanwhile, Mortgage Bonds continue to command 12 -month-high prices, keeping interest rates nice and low. Thirty year FHA loans are still at 3.75% and Conventional loans are a bit higher at 4.125%. Fifteen year rates are down at 3.25% (APR will be higher, depending on the loan and down payment amounts, and amortization term–as closing costs and the presence of mortgage insurance affect each loan differently.) Be careful; the rosy picture cannot last forever.
Zillow reports that negative equity declined 18.8% during the first quarter of this year. That’s more people that can now sell the home they have had since 2007 to purchase something that they really want.
There is a record number of Americans on disability right now at 10,996,447.
Thirty year FHA loans are still at 3.75% and Conventional loans are a bit higher at 4.125%. Fifteen year rates are down at 3.25% (APR will be higher, depending on the loan and down payment amounts, and amortization term–as closing costs and the presence of mortgage insurance affect each loan differently.)