Can interest rates go even lower? A long-term view suggests they can…..

A long-term view of rates

If you took out a mortgage in the 1300s then it’s probably time to refinance.  A new working paper from the Bank of England looks at a trend in global interest rates over the past eight centuries.  

The findings show that interest rates have been trending lower over the past ~800 years.

Should the trend continue then our grandchildren receive interest (negative interest rates) when they borrow money.

Home Loan Rates

Looking at a much shorter-term…. Mortgage rates here in the US remain at very attractive levels despite an easing of geopolitical tensions between the US and Iran over the weekend.

Stocks and home loan rates

Corporate earnings season is upon us.  For the next couple weeks publicly traded companies will release their 4th quarter earnings reports.  

In aggregate, when earnings are stronger than expected it generally causes stocks to rise and hurts mortgage rates and vice versa.  

Jobs Week

Last week’s all-important jobs report came in slightly softer than expectations.  It showed 145,000 new jobs were created in December and the national unemployment rate of 3.5%.  All in all, the report signals continued strength in the economy.

However, looking back over the past few decades every recession has started while the unemployment rate is at cyclical lows.  

The week ahead

This week’s economic calendar is relatively light.  On Thursday we get retails sales and on Friday it will be housing starts and consumer sentiment.  

From a technical perspective mortgage rates are trading in a wide range.  I will be watching the stock market for direction.  If stocks rally then consumers should lock. If stocks trade sideways or decline then consumers can afford to float.

Current Outlook: neutral

Mortgage Rates Improve on Heightened Geopolitical Tension

Home Loan Rates

Mortgage rates are at the best levels in six weeks in response to a rise in geopolitical tensions between the US and Iran.

Geopolitical tension

Last week a top Iranian official was assassinated by a US airstrike.  Iran has characterized the attack as an act of terrorism and has vowed a retaliation.  I hope and pray that diplomatic efforts can ease the tension between the two countries.

However, the fear over a heightened conflict is causing uncertainty in the financial markets and encouraging investors to shift capital out of the stock market into safer havens such as US treasuries and mortgage-backed bonds.

A Flight to Safety

Should tensions continue to escalate then we may see US mortgage rates continue to decline as investors park their money in safer places.

Jobs Week

This week’s economic calendar is fairly light until we get to Friday when the all-important jobs report will be released.  Analysts are expecting 160,000 new jobs created for the month of December.  The previous month saw 266,000 new jobs.

Generally, when the employment report is stronger than expected it is bad for mortgage rates and vice versa.

Closer to home

Here in Oregon job growth in 2019 was slower than the previous six years.  The Bureau of Economic Analysis is predicting slow and steady growth for the next two years.

Outlook

From a technical perspective mortgage rates look like they have more to lose than to gain.  Therefore, I will recommend a locking bias.  However, should tensions between the US and Iran continue to escalate (and I hope they do not) then we should float.

Current Outlook: Locking bias

Home loan rates slightly worse on “phase one” trade deal

Home Loan Rates

Mortgage rates are mostly unchanged to slightly worse compared to last week.  The catalyst which pushed rates higher last week was an announcement pertaining to US-China trade relations.

Phase One

On Thursday, it was announced that the US and China had agreed to a “phase one” trade agreement.  On the announcement the US stock market rallied and mortgage rates increased.  However, after analysts had a chance to read the details of the agreement stocks and rates recovered slightly because the initial plan is less substantial than the markets had thought.

The Fed

Last week the Federal Reserve Open Market Committee met and elected to make no changes to short-term interest rates.  Although the Fed does not directly control mortgage rates their comments can, at times, impact their direction.

The markets currently are not expecting any cuts or hikes to the Federal Funds rate in 2020.

Home Construction

Data released earlier today shows strength for home building in 2020.  According to the Commerce Department housing starts were up 8.5% in October compared to a year earlier.  Furthermore, building permits hit the highest level in over 12 years.

More housing supply should help soften home price appreciation in the near-term.

The week ahead

This week’s economic calendar is relatively light.  I will be watching for existing home sales (Thursday), leading economic indicators (Thursday), and the Personal Consumption Expenditure Price Index (Friday).

From a technical perspective there is more room for mortgage rates to worsen than there is for them to improve.  I will maintain a locking bias this week.

Current Outlook: Locking bias

Mortgage rates worsen slightly following a strong jobs report

Home Loan Rates

Mortgage rates have worsened modestly from last week’s ‘rate update’.

Jobs Report

Last Friday’s all-important jobs report showed that the US economy added 266,000 new jobs in November.  The national unemployment rate ticked down to 3.50%.  The results were stronger than analysts had anticipated, which is bad news for interest rates.

Here in Oregon job growth has slowed but fortunately layoffs remain low.  The main reasons for the slowdown in job growth is lower migration into the state and the aging of our population.

Trade Outlook

As I have written repeatedly over the past few weeks trade seems to be the main driver of interest rates as of late.  When it looks more likely that trade agreements will be reached it causes stocks to rise and pressures interest rates higher.

Earlier today it was announced that Democrats had reached a deal with the Trump administration to approve a new trade agreement with the US and Canada.  Should this get pushed through Congress it may cause mortgage rates to worsen.

There have not been any significant developments between the US & China.

The Technical Outlook

The US 10-year treasury note is currently yielding 1.83% which is slightly above multiple layers of support.  Furthermore, mortgage backed-bonds have drifted below several layers of resistance.  Combined, the technical outlook is not favorable for mortgage rates at the current moment.  There is more room for rates to move higher than there is for them to go lower.

The week ahead

This week’s economic calendar is busy.  Tomorrow the Fed will conclude a normally scheduled monetary policy meeting.  No changes to short-term rates are expected but the comments following their meeting can influence interest rates.

We’ll also get the latest reading on inflation (Consumer Price Index & Producer Price Index) and Retails Sales numbers.  Given the aforementioned technical outlook I recommend locking.

Current Outlook: Locking

Mortgage rates improve on an escalation of trade tensions

Home Loan Rates

Mortgage rates are at the best levels in over a month today thanks to weakness in the US stock market.

Trade Tensions Escalate

Speaking at a NATO summit President Trump commented earlier today that a trade deal with China may not come until after the 2020 election.  Furthermore, he said he may use trade sanctions to punish countries who do not fund a fair share of NATO’s budget.

On the news US stocks declined.  The S&P 500, Nasdaq Composite, and Dow industrials were all down over 2% in midday trading.  Bad news for the stock market is good news for interest rates.

Jobs Report

This Friday we’ll get the latest monthly jobs report.  Analysts are currently expecting +189,000 new jobs to be reported.  A number south of that figure could help push rates back down to 2019 lows.

Locally, job growth in Oregon is slowing but as economist Josh Lehner points out this is mainly due to fewer job hirings, possibly because of tight labor market, rather than layoffs (which is a good thing).

The week ahead

Aside from the employment report the weekly economic calendar is relatively light.  Therefore, I expect mortgage rates to react to sentiment surrounding US-China trade talks and technical trading patterns.

From a technical perspective the yield on the US 10-year treasury note is currently trading at 1.711% which is below several layers of importance.  If yields can close below this level and follow through tomorrow then I expect rates to drift lower.

Current Outlook: floating

Mortgage rates improve as builders pick up pace

Home Loan Rates

I recommended “floating” in last week’s ‘rate update’ and that paid off.  Mortgage rates are about .125% lower today than they were a week ago.

Trade Talks

Interest rates have improved because optimism surrounding US-China trade talks have subsided.  There have not been any new details regarding trade negotiations in the past week and therefore sentiment is turning more pessimistic which is helping US interest rates move modestly lower.

Home Construction

Earlier today the Commerce Department released the latest figures for housing starts and building permits.  The figures were stronger than expected and demonstrate that builders are continuing to break ground on new homes.

Ironically, here in the Pacific Northwest the level of residential construction remains historically low relative to in-migration numbers.  The result is that home prices and rents continue to rise.

The week ahead

Tomorrow we’ll get minutes from the last Fed meeting.  It is expected to show that Fed officials will be on hold from any further short-term interest rate adjustments (CLICK HERE to see why the Fed’s rate cuts don’t matter that much anyways).

On Thursday we’ll get existing home sales from the National Association of Realtors and on Friday we’ll get the latest reading on Consumer Sentiment.

From a technical perspective interest rates appear vulnerable to reverse course and move higher.  However, longer-term the stock market also appears over-bought.  If we see the US stock market pull back that would be very favorable for mortgage rates.

Current Outlook: locking bias

The Fed cuts and mortgage rates don’t budge. Explain that one….

It’s counter-intuitive that when a person blushes, presumably because they are embarrassed, we tend to like them more.

Do you know what else is counter-intuitive?

Home Loan Rates & The Fed

It can be confusing for consumers when the Fed cuts interest rates and mortgage rates go up.

Since July the Fed has made three rate cuts totaling -.75%.  However, consumers should know that the Federal Funds Rate, which is what the Fed controls, has a very obscure purpose (see HERE).

Mortgage rates today are effectively the same as they were when the Fed started this campaign.

Mortgage rate forecast

Nobody has a crystal ball but it’s worth noting that Fannie Mae released its latest forecast for housing and interest rates.  They are predicting that mortgage rates will average 3.5%-3.6% in 2020.  Their forecast includes interest rates with discount points but nevertheless they believe rates will be the same and moderately lower next year.

Trade Talks

Sentiment over US-China trade talks have played a significant role in the direction of the stock market and interest rates recently.  Over the past two weeks the financial markets have been optimistic that the US and China will iron out a new trade deal which has hurt mortgage rates and pushed stocks to all-time highs.

However, last week President Trump disputed progress so it’s tough to know what is going on behind the scenes.  The President is scheduled to speak in New York City today to a group of economists so any news could drive sentiment and influence the direction of mortgage rates.

The week ahead

This week’s economic calendar features the Consumer Price Index on Wednesday, the Producer Price Index on Thursday, and Retail Sales on Friday.  In addition there are Fed officials scheduled to speak through the week.

I recommended locking last week but am going to switch to floating.

Current Outlook: floating

Mortgage rates float higher despite Fed cut

Despite last week’s Fed rate cut mortgage rates have actually increased modestly this week.  Remember, the Fed does not directly control long-term interest rates (including for home loans).

Stocks/ US-China Trade Talks

Optimism surrounding US-China trade relations is fueling the stock market and hurting mortgage rates.  It was reported late yesterday that US & Chinese officials are close to an agreement which will roll back tariffs on $111 billion in Chinese goods.

Analysts are viewing this development as a positive sign that the two sides may be able to create a mutually agreeable trade package.  This is good news for the economy and the stock market but bad news for mortgage rates.

Jobs Report

Last week’s all-important jobs report showed that only 128,000 new jobs were created during the month of October.  Normally, such a soft number would help mortgage rates improve.  However, digging deeper into the report the BLS also revised previously released figures by +95,000 jobs.

Good news for the labor market also equates to bad news for home loan rates.

Housing Prices/ Millennials

CoreLogic released its monthly Home Price Index report earlier today.  The release showed that nationwide homes increased by 3.5% over the past 12 months.  They also forecasted that home price appreciation would pick up steam over the next 12 months and increase by +5.6%.

One reason why home prices are expected to accelerate is the demographics of our population.  Over the next five years over 30 million people will reach the age of 33 which happens to be the median age of a first time homebuyer in the United States.  Even if the economy slows down the trend in population should lend support for home demand.

The week ahead

The remainder of this week’s economic calendar is relatively light.  I expect mortgage rates to continue to react to the stock market and sentiment surrounding US-China trade talks.  Unfortunately momentum is working against us so I recommend locking.

Current Outlook: locking.

 

US-China trade talks continue to influence mortgage rates

Happy Birthday to Ken Galbraith who would have turned 111 today.  The Canadian economist famously predicted in his 1958 book The Affluent Society that as society becomes more affluent private business would create additional consumer demand through marketing and consequently public goods (i.e. schools & parks) would be neglected.

Seems to me like he was on to something.

US-China Trade Talks

Trade negotiators from China and the US may be onto something too.

There are literally thousands of factors which can influence the direction of mortgage rates.  However, over the past few weeks one story line in particular has dominated.

Trade tensions between the US and China began flaring up in March of 2018.  Since then both sides have taken a tit for tat approach to trade policy.

Over the past few months trade negotiators from both countries have engaged in talks to try and resolve differences.   The financial markets have monitored the talks closely and sentiment has see-sawed accordingly.

When optimism rises that a trade deal will be reached mortgage rates worsen and when pessimism over a trade deal grows home loan rates tend to improve.

Following last weeks meeting between President Trump and China’s vice premier the financial markets are relatively optimistic that a trade agreement can be reached and therefore interest rates are currently cycling higher.

Will they continue to move higher?  Or will optimism wane and help rates cycle back lower?  Time will tell.

Brexit

Similarly, news out of Brussels is that UK and European leaders are close to reaching a draft Brexit deal which may allow the UK to separate from the EU in an orderly fashion.

Interest rates in Europe are increasing on optimism over an orderly exit.

The week ahead

Although I expect mortgage rates to react to sentiment over US-China trade talks there are a few other story lines I’ll be following.  Third quarter earnings reports have started.  As the stockmarket reacts to the reports I expect interest rates to react accordingly (click HERE to learn how the stock market can influence mortgage rates).

Furthermore, we’ll get the latest reads on retail sales (Wednesday), housing starts & building permits (Thursday), and industrial production (Thursday).

I think rates may worsen in the coming days but I do think they will reverse course at some point.  For those who can wait I would recommend floating.

Current Outlook: neutral

Mortgage rates are better than fluffernutter!

What do you get when you add peanut butter to marshmallow?  Well if you add them to two pieces of bread you have yourself a fluffernutter sandwich and today is National Fluffernutter Day!  Never tried one but if I did I would probably add bacon.  Doesn’t that sound good?

Mortgage Rates

Home loan rates are good this week and are benefiting from a deterioration in US-China trade talks.  The two countries are scheduled to meet this week but on Monday the US Commerce Department added 28 Chinese companies to an export blacklist which will make an agreement all that much harder to achieve.

Economy

Last week’s all-important jobs report showed weaker than expected hiring.  Furthermore, a reading of service sector activity also showed weaker than anticipated results. Earlier today, the head of the International Monetary Fund warned that, “the global economy is now in a synchronized slowdown.

Bad news for the economy tends to be good news for mortgage rates.

Federal Reserve

We may learn more about the Fed’s economic outlook on Wednesday when the minutes from their last monetary policy meeting are released.  The financial markets currently think there is an 80% probability that the Fed will cut again at the next meeting scheduled for October 30th.

Outlook

The economic calendar is relatively light this week which means mortgage rates will likely respond to technical trading patterns and sentiment surrounding US-China trade relations.

Mortgage-backed bonds are currently trading at an important technical layer.  If bond prices can rally and close above this level then it would be a positive signal for rates.  However, if bonds sell-off then it’s likely rates will trend higher the remainder of the week.

Current Outlook: cautiously floating