Mar 202018

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By G. Steven Bray

The big financial news this week is the Federal Reserve meeting. The Fed is expected to announce a quarter-point increase in short terms interest rates. That shouldn’t cause even a ripple in mortgage rates as markets long have expected it. What could make waves is the press release and post-meeting press conference.

At this meeting, the Fed will update is economic projections by way of what’s called the “dot plot.” It shows what Fed governors predict short term rates will be over the next few years. The Fed has suggested it will raise rates three times this year, but markets are hedging for a fourth increase. If the plot confirms the hedge, we may see some upward pressure on rates.

After the meeting, Fed head Powell will hold his first press conference as Chairman. Markets will be keenly interested in what he has to say. Expectations are he’ll steer the same course charted by Janet Yellen. However, analysts will dissect his answers looking for change. They also will listen for his thoughts on the economy. Even an innocuous comment, as we discovered with his Congressional testimony, could create a market wave. I think the upside risk here is greater than the downside potential.

If the Fed doesn’t cause any waves, the rest of the week looks to be quiet. The Consumer Price Index last week confirmed that inflation remains tame. The headline rate printed at 2.2% while the core rate was 1.8%. The Feb jobs report showed wage inflation also pulled back. Both may give the Fed some breathing room to dismiss the fourth rate hike rumor, which took hold after the previous month’s heightened readings, and that could take some pressure off rates.

Mar 072018

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By G. Steven Bray

Youtube descrip:

The good thing I can say about interest rates is they’ve stayed in a pretty narrow range for the last couple weeks. Unfortunately, that range is about 3/4 of a point higher than it was a few months ago, and market forces seem aligned to keep it from falling.

We took a run at lower rates last week with the President’s announcement of tariffs. However, the lower rates lasted less than 24 hours and really didn’t break below their recent range. At this point, markets seem to have completely discounted the possible negative effects of the tariffs and have returned to the upper end of the range.

So, what are the forces? One that pundits continue to cite is expectations for higher inflation. On that, it’s instructive to look at the most recent data. Last week, we got the Federal Reserve’s favored inflation index, the PCE Deflator. It was flat and matched expectations with the headline number showing 1.7% inflation. The core index, which strips out food and energy costs, was 1.5%. The Fed’s target is 2%, so one could argue that inflation remains stubbornly subdued. Markets barely noticed.

This week, we get the Feb jobs report and with it a look at wage inflation. The Jan report showed wages increasing at the fastest pace in years, albeit matching economists’ expectations. I’d wager markets are going to be far more interested in this report than they were the PCE report.

Mar 062018

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By G. Steven Bray

With mortgage rates up about 3/4 of a point since last fall, industry waggers are starting to wonder how higher rates are going to affect the housing market. The conclusions of a recent survey by Redfin say not much.

Redfin asked prospective homebuyers what they would do if rates rise above 5%. Only 6% said they would stop looking for a home. An additional 27% said it would slow their plans. However, that was almost balanced by the 21% who said it would speed up their search, and another 21% said they would keep looking, but would look at cheaper homes.

This result indicating higher rates will have a limited effect is consistent with historical evidence. Freddie Mac reviewed the six instances since 1990 that mortgage rates have risen at least 1%. On average, existing home sales fell only 5% and housing starts fell 11%. During one period, sales and starts actually rose.

The conclusion is that rising mortgage rates by themselves have a limited effect on the demand for homeownership. Home seekers at the margins, especially first-time homeowners, may no longer be able to qualify, but most potential homebuyers just adjust their plans and keep looking for their dream homes.

One note: the Freddie review didn’t consider instances of rising mortgage rates coupled with rapidly rising home prices, the situation that exists in a number of metro areas today.