Just like that, school is back in session.  It was a great summer vacation!  Our family did a lot of fun things and I enjoyed sleeping in on a regular basis, staying up late, and relaxing a lot more.  But now it’s time to get back on a schedule.  It’s also time to pay the credit card bill for all the back-to-school shopping that was required to get four boys outfitted for learning.  As a nation, our back-to-school spending will hit $83.6 billion this year, a marked increase from last year’s $75.8 billion in clothes, shoes, pencils, and paper.

Mortgage bonds are trading sideways, keeping interest rates steady.  

I know that you know that this is the former Chair of the Board of Governors, Ben Bernanke, and not the current Chair, Janet Yellen.  Ben Bernanke navigated the U.S. through the most difficult financial crisis in 80 years, and it is he who said “Monetary policy is 98% talk and 2% action”.  That idea is a good way to introduce the Fed meeting yesterday.

The Fed raised the overnight lending rate to 1.25%, an increase of 1/4%.  That will instantaneously raise the Prime Rate to 4.25%, affecting credit cards and other short-term debt instruments like car loans.  It should also raise the yield on your savings account and certificates of deposit.  The financial markets all expected this move and so the hike was already priced into long-term debt like mortgages, student loans, and the next iPhone.

Chair Yellen yesterday laid out a plan to begin to sell off the Fed’s $4.5 trillion dollars in long-term debt holdings.  For the last eight years, they have been the world’s largest buyer of Treasury Notes and Mortgage Bonds, accumulating and then reinvesting the proceeds of sold Notes (from people cashing in Treasury Bonds or refinancing their mortgages) by purchasing new Notes/Bonds at the rate of $20-30 billion per month.  That will begin to unwind once the Fed Funds Rate reaches 2.0% (presumably the first of next year).  The plan is to allow $4 billion in mortgages and $6 billion in Treasuries to roll off the books every month, and to gradually increase the amount to a combined $50B/month “if the economy evolves inline with expectations”.  Assuming that the hopes of the economy fulfilling the well-crafted statement come to fruition, it will take at least a decade to unravel the balance sheet in an orderly fashion.

After digesting the Fed Show yesterday, mortgage bonds took a slight breather and opened down by about 0.15 bps.  Overall, interest rates are still better than they have been since last fall’s presidential election.  Nationwide, the average conventional 30 year loan is at 3.91%.  My rates are better than that and my service and turn times are also hard to beat!

Yesterday the Fed left interest rates in place.  Ironically, this puts upward pressure on mortgage bonds.  The 10 Year has risen to 2.36% this morning, the highest in a month.  The Fed commented that although GDP for the first quarter was only 0.7%, they have reason to believe that the second quarter will produce a 4.3% expansion rate.  That would net the growth for the year above the 2.0% target rate, and poise the economy for the two further rate hikes promised.

Tomorrow is the Jobs Report.  Like the expectation on GDP, last month’s measly 98,000 is anticipated to flourish to 180,000 new jobs created this month.  The Unemployment Rate is also expected to drop to 4.6%.  See you tomorrow!     

Twenty years ago yesterday, I graduated from college.  Like this guy, I wondered what in the world I was supposed to do with the rest of my life.  Though some days I still feel the same anxieties, it is nowhere near the state of mind boggling perplexity that I felt on that momentous occasion.  Nowadays. the greatest flummox I feel is in deciding what in the world to write about that you might find mildly entertaining, marginally interesting, or worth passing along to your clients.

After a month long march downward, mortgage interest rates turned a corner and are heading back up.  Here are a few of the factors impacting that trend today:

New Home Sales rose 5.8%, to an annualized 621,000 units–above the 590,000 predicted.

Trump’s tax reform is expected to happen for real.  The rate on U.S. companies is expected to drop from 35% to 15%; no word yet on individual rates.

Consumer Confidence, though lower than expected, is still at record highs.

Large-cap company stocks are thriving, driving the DOW up 1.08% this morning.

The markets close early today, and will be closed tomorrow in honor of Good Friday.  Traders tend to hedge going into three day weekends, so there could be a little selloff today.  On top of that, you can see from the above graph that the pricing for mortgage funds is again at YTD highs and ripe for a correction.  To the contrary, and keeping us pegged at the current ceiling, are a couple of things:

1. Talking monetary policy last night, President Trump said that he favors low interest rates, thinks that the dollar is too strong, and is undecided on whether or not he will swap out the current Fed Chair when her term renews next year.

2. The Producer Price Index released this morning showed that the cost of making new stuff declined -0.1% last month.

3. Initial Jobless Claims are at low levels not seen in 40 years, when the population was not as numerous

The Case Shiller 20-City Index rose 5.7% over the last 12 months, which is up from the 5.5% year-over-year gains posted the previous month.  In my little experience, I am seeing that rising home prices and rising interest rates are making it increasingly difficult for low income families to purchase a house.  Though the value of goods in most sectors is increasing, there is a buyer for just about everything out there for sale.  Consequently, Consumer Confidence swelled well past the 113.3 expected index reading to an astonishingly high 125.6.  Consumer spending accounts for 2/3 of the economy, so a positive outlook is a big deal , because it typically leads to big spending later on.  The danger to the mortgage market is that with increased spending and higher prices comes inflation, which always pushes interest rates upward.  

The appetite for mortgages, as evidenced by the pricing on Wall Street, is at a three year low this morning.  Mortgages are sought after by investors as a safe place to put money when the economic future is uncertain.  When more traders, including the federal government, throw excessive amounts of money at the mortgage market, the price goes up and the rate of return goes down.  Now that it appears that our economy has turned the corner (after like eight years), boring ol’ mortgages are getting the back seat to the high-flying thrill of the high-flying stock market.

The Jobs Report this morning is yet another evidence that the great recession–and super low interest rates–are no longer the talk of the town.  The Unemployment Rate dropped to 4.7%, the Labor Participation Rate rose to 63%,  Average Hourly Earnings rose 2.8%, and 227,000 new jobs were created.  Should optimism continue across other sectors, I see mortgage rates breaking through the three-year high and hustling up another 1/2%.  The excitement of a great running machine doesn’t come cheap, and neither does a vibrant economy. 

Carpe Diem

I am heading to Lake Powell this afternoon.  I heard that it’s going to be windy and rainy all over the state for the next few days and I thought “why not make an adventure out of the inclement weather by experiencing it on a houseboat on a body of water where the waves have nowhere to go but back at you?”.

But since I still have four hours to kill here at the office, let’s talk about interest rates and housing for a minute.  The Bank of Japan committed to do whatever necessary to keep their 10 year bond at 0%.  Our own central bankers of course meet today and there is a 12% chance that they will raise interest rates today, and a 60% chance that they will hike by December. I am of the opinion that they should raise them today for the same reason that I am going to Lake Powell in a fall storm: carpe diem.  There is no such thing as perfect timing in this life; you just do the best you can with what you have.  Plus remember that when they hiked last December, our mortgage rates actually decreased by 0.25% :).

Here is some interesting info that you might even find useful to pass along.  According to Reuters today, the supply of homes under $250,000 has fallen by 12% from this time last year.  The alarming statistic is that Salt Lake leads the country in dwindling starter home inventory, where the supply has decreased by 83% over the last four years.



50% Chance

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.

The Party Could Be Over

The party could be over.  Not the party that everyone is saying is finished; that one is purely a spectacle at this point–and if I may say so, a disgrace to the principles of truth and virtue upon which this great country was founded.  As Forrest Gump would say, “that’s all I have to say about that”.  I am talking about the low interest rate party that we have been celebrating since Great Britain seceded from the Union a few months ago.  If you will remember when that happened, interest rates dropped about 1/4% over the next few trading sessions, causing a mini refinance boom and handily paying for my family’s summer vacation to New York City.

But now that the weather is turning colder and traders are covering up the swimming pools and getting out their cashmere turtle necks, it’s become time to sell stuff.  Oil, Stocks, and Bonds are all getting the boot to free up some Wall Street cash.  All that selling has pushed mortgage prices down under a level that had held its ground all summer long.  My concern is that we aren’t going to break above that line anytime soon.  That means higher rates ahead, irrespective of the outcome of the FOMC meeting next week.

The party may be over, but here’s a practical purchase idea that will envelope you in warm memories through Thanksgiving (or at least through the election).  Take all that Brexit cash and check out the J. Peterman fall collection (it’s a real store, I just looked it up).  This British Motorcycle Jacket will have you grinning from ear to ear each time you throw a leg over your vintage Triumph to race to the Hamptons this autumn: