Is a recession on the horizon? Fear drives mortgage rates to multi-month lows

I hope you took time to celebrate National Roof Over Your Head Day on December 3rd!  I showed up to work and helped people get a new roof over their heads so I’m feeling good about my contribution.  

Mortgage Rates

Mortgage rates continued to improve last week.  They are currently at multi-month lows.

Yield curve

As long-term rates improve the short-end of the yield curve is basically unchanged.  The difference in yield between the US 2-year & 10-year treasury notes is only .015%!  It appears that the yield curve may invert in the coming months.

Going back many decades every time the US yield curve has inverted the economy has gone into recession shortly thereafter.

Housing Prices

Corelogic released its monthly Home Price Index today.  It showed that homes appreciated by +5.4% nationwide in the past year.  Oregon homes appreciated by +6.0% according to the report.  

Home prices are still increasing but at a slower pace.   

The Week Ahead

The financial markets will be closed on Wednesday this week in honor of President George Bush who passed away over the weekend.  On Friday we get the all-important jobs report which can definitely influence the markets.

Current Outlook: floating

What goes up……might come down?

If you are a believer in the proverb “what goes up must come down” then last week doesn’t hurt so bad.

Home Loan Rates

Mortgage rates suffered the biggest increase in one week since the presidential election in November 2016.  Interest rates rose by +.25% last week.

Affordability

It seems obvious that as the cost of borrowing increases affordability of homes worsens.  But how much? For every 1% increase to interest rates purchasing power decreases by 12% for homebuyers.  

Therefore, homes got 3% more expensive in five short days.

Wages

The good news and bad news is that average hourly wages are increasing in the US.  Over the past year American workers have seen their pay increase by 2.9%.  That is good news because it allows households to afford higher mortgage payments but bad news because it helps contribute to higher interest rates via wage-based inflation.

Why are rates rising?

One of the primary reasons why we’re seeing mortgage rates rise is because the Fed is no longer supporting them.  I explained this concept back in February (HERE).  For years the Fed had been purchasing mortgage-backed securities via quantitative easing.  Instead of stopping the support immediately they gradually tapered their activity.

As recently as September they had been reinvesting some of their capital into the mortgage-backed securities market.  Starting on October 1st that activity has ceased and as a result interest rates have risen in order to attract capital from other places.

The week ahead

The economic calendar is relatively light this week.  There are three Fed officials speaking today.  Tomorrow we’ll see the producer price index and on Thursday we’ll get the consumer price index.  Since mortgage rates increased so sharply last week I am going to recommend floating this week in the hopes that what goes up must come down.  

Current Outlook: floating bias

Holiday shortened week could cause volatility

If we celebrated the day that the Continental Congress voted on the Declaration of Independence from Great Britain then we wouldn’t be in the office today. It was actually on July 2, 1776 that the colonies voted to approve the Declaration of Independence. However, following the nearly unanimous vote Thomas Jefferson took the document, made a few edits, and it was adopted on July 4, 1776. Happy 4th!

Mortgage rates adopted modest improvements last week.

The Week Ahead
It is a holiday week and the financial markets will close early on Tuesday and remain closed until Thursday. During holiday weeks trading desks tend to be lightly staffed. With fewer buyers and sellers in the marketplace we have to be on guard for volatility.

Jobs
The economic calendar this week is compressed with the highlights coming Thursday and Friday. On Thursday we’ll get minutes from the last Fed meeting at which they hiked short-term rates.

On Friday we get the all-important jobs report. Analysts are expecting ~190,000 new jobs created. A number north of that estimate would likely pressure rates higher and vice versa.

US Stocks
US stocks continue to slide on fears of trade tensions. Since the middle of July the S&P 500 is off about 3% and mortgage rates have improved by ~.125%.

Technical Trading Patterns
The yield on the US 10-year treasury note continues to trade below 2.90%. As long as we remain at or below 2.90% I will continue to recommend a floating position.

Current Outlook: floating

Higher oil prices pressure home loan rates higher

They say that weddings are getting more and more expensive.  In fact, the average cost of one surpassed $30,000 in 2017.  That is enough to put 5% down and pay closing costs for a median priced home in Portland, OR..   

As I type there are four days, six hours, and 27 minutes until the royal wedding for Prince Harry and Meghan Markle.  That ceremony is estimated to cost $2.8 million which could be used to put 5% down on THIS HOME.

Mortgage Rates  

Unfortunately mortgage rates worsened modestly last week as US stocks rallied.  The US stock market registered its best week in over two months which put upward pressure on home loan rates.

Oil prices

Geopolitical tension in the middle east coupled with uncertainty around Iran economic sanctions further supported oil prices last week which are now at three and a half year highs.

Higher oil prices are problematic for interest rates because they tend to be inflationary and inflation is the primary driver of mortgage rates.  

The Week Ahead

This week’s economic calendar is relatively light.  It features a slew Fed officials speaking around the country.  The Fed does not directly control mortgage rates but their comments can certainly influence them.  

According to CME Group there is currently a 95% probability that the Fed will hike short-term interest rates at the next meeting on June 13th.  There is a 50% probability that the Fed will hike short-term rates three more times in 2018.

Outlook

Due to momentum and the longer-term trend for interest rates I favor a locking position this week.

Current Outlook: locking