Mortgage Rates are about to rise
While the 30-year Fixed Rate Mortgage rate increased this week from 3.49% to 3.56%, the yield on the 10-year Treasury (10T), which tends to drive the rate on the 30-year Fixed Rate Mortgage (FRM), jumped sharply later in the week and this will likely lead to a sharper increase in the FRM reported by Freddie Mac next Thursday.
The FRM rate is a premium – or spread – to the yield on the US Government’s 10- year Treasury Note. That in turn is influenced by two major factors: the outlook for the economy (expanding businesses invest creating demand for money) and geopolitical events – the US dollar and US Treasuries are seen as a safe haven during times of uncertainty.
In general terms, the yield on 10T moves more quickly than does the FRM rate, so that when interest rates move sharply lower- often driven by geopolitical events – it takes a while before the spread returns to its normal level. But it always does.
Two weeks ago, I wrote: “Currently, the spread is 2.08%, or some 0.35% above the average of 1.73% since 2005. History suggests that either the yield on the 10T is going to rise or the FRM rate fall.” At that time the 10T yielded 1.50% and the FRM was 3.58%. By this Thursday’s date, the yield on 10T had jumped to 1.79% while the FRM was just slightly lower at 3.56% compared with 3.58%. The spread has dropped from 2.08% to 1.77%.
Why have interest rates jumped?
In the words of HSH.com’s Market Trends, an excellent summary of the week’s economic and mortgage activity: “Reasonable economic date here in the U.S., rising optimism that some sort of trade deal between the U.S. and China will get at least worked on (if not necessarily worked out) and new or (or new and) expanded stimulus by central banks around the world are having predictable effect. While rates set by fiat (defined as a formal authorization, proposition or decree) are being cut by central banks (and the US Federal Funds rate will very probably be cut this week – AO) market interest rates are moving in the other direction.”
“Why would this be the case? Several reasons. First, perhaps the largest cause of the global economic slowdown has been the continued escalation of tariffs between the U.S. and China, which has disrupted supply chains and slowed economies that heavily depend on such trade for growth. If any sort of deal may get done, or even simply instituting delays and using softer rancor (as is the case at the moment) has seen investors shift some funds out of the safe haven of bonds and back into riskier (but potentially more profitable) equities. As such, these moves put upward pressure on yields.
Recently I wrote: “The best outcome for both the US and the rest of the world would be an end to the tariff war, which would lead to renewed confidence, increased capital spending and continued economic growth. This, in turn, would increase the demand for money and lead to higher interest rates and higher mortgage rates. Higher rates would, in fact, be a positive sign for both the economy and the housing market.”
Last week was a positive one and interest rates responded accordingly. As the 70th anniversary of the founding of the People’s Republic of China will be celebrated on October 1, it would be reasonable to expect only positive news between now and then. But the longer term issues remain to be resolved.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Mortgage rates drop to 3.5%
In last week’s Why aren’t mortgage rates even lower? I wrote: “History suggests that either the yield on the (US Treasury 10-year Note) 10T is going to rise or the (30-year Fixed rate Mortgage) FRM rate fall.”
Both occurred this week, with the yield on 10T increasing 7 basis points (0.07%) and the FRM rate dropped another 9 basis points (0.09%) to 3.49%.
In its weekly commentary Freddie Mac wrote: “Mortgage rates continued the summer swoon due to weaker economic data. While economic growth is clearly slowing due to rising manufacturing and trade headwinds, economic fundamentals are still solid for U.S. consumers. The unemployment rate is low, housing affordability is improving, homebuyer demand is rising, and home price growth is stable.”
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Why aren’t mortgage rates even lower?
That might sound like a strange question when the latest Freddie Mac 30-year Fixed Rate Mortgage (FRM) rate is 3.58%, down from 4.5% at the beginning of the year and nearly 5% last Thanksgiving. And at the end of last year most pundits were forecasting that the FRM would breach 5% in 2019. (more…)
Do you know why the Chinese like doing business with you?
That was the question put to me by a Chinese businessman in Malaysia many years ago.
“No,” I said, “I haven’t got a clue.” (more…)
Mortgage rates drop again
Mortgage rates dropped again this week, as bond markets continued to reflect the slowing global economy and growing fear of a recession.
It seems scarcely believable that 9 months ago the 30 year Fixed Rate Mortgage (FRM) was almost 5% with widespread forecasts that it would rise further in 2019.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Are mortgage rates headed to 3%?
At mid-year, as the Freddie Mac weekly survey produced a figure of 3.73% for the 30 year Fixed Rate Mortgage(FRM), it is timely to note both that the rate has come down sharply since late 2018 and also that there are some forecasts that it could go even lower.
The first chart shows the FRM weekly since the beginning of 2018.
In late 2018 there were several forecasts that the rate would top 5% in 2019. The Mortgage Bankers Association, for example, in its December 2018 publication, forecast that the rate would reach 5.0% in Q4 2019. And they were not alone.
So what happened?
The most important aspect of mortgage rates to understand is that the FRM is based upon a premium – or spread – demanded by investors over what they can earn from investing in US Government Treasuries. The Federal Reserve sets the Fed Funds Rate – which is the basis for Prime Rate, which determines interest rates on credit cards, auto loans and adjustable rate mortgages – but the market sets the rate for the yield on the 10 year Treasury (10T), which is the main reference for FRM.
The FRM has been at a premium of about 1.7% over the 10T in recent years.
This week’s Freddie Mac FRM was 3.73% and the yield on 10T 2.01% – a difference, or spread, of 1.72%, in line with what one would expect. And that spread has been consistent even while the yield on 10T has varied from a low of under 1.5% to a high over 3.2% as shown in the next chart.
Why have interest rates dropped this year?
I addressed this in a recent post Why are mortgage rates plummeting? and there is a page on the website devoted to Mortgage Rates. Basically, the yield on 10T reflects three things: the outlook for the US economy (a rapidly expanding economy produces a greater demand for borrowing and interest rates tend to rise); geopolitical tensions (the “flight to quality” which sees interest rates drop as a result of the buying of US Treasuries as a “safe haven”); and relative yields compared with other developed countries.
I have been writing consistently since late 2018 that the outlook for the US economy is for a slowing, but still growing economy. At mid-year that still looks a good bet, tariffs notwithstanding.
There is no doubt that the world economy is slowing or that inflation has failed to appear as expected, while the world is awash in cash. Against that background the yield offered by US Treasuries is extremely attractive. The chart below shows the yields on 10 year Government Securities in 10 major countries.
Startlingly, roughly 50% of all European Government debt carries negative yields, meaning that investors are paying for the privilege of owning the securities.
Will mortgage rates reach 3%?
At a time when the economic outlook can change in the time it takes one man to type 280 characters, it is really hard to make forecasts. Most economists and businessmen would say that uncertainty slows investment and there is plenty of uncertainty at the moment. To get to a 3% FRM, the yield on 10T would have to drop to around 1.25%. In July 2016 it reached 1.37%, so it is not impossible. Is it likely? Hand me my crystal ball – oh it’s gone all cloudy.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Two things you learn from this blog
Regular readers of this blog know two things:
the cost of a 30 year Fixed Rate Mortgage (FRM) is based upon the yield on the US Treasury 10 year Note, not the Federal Reserve’s rate announced with great fanfare each month
the list of Sunday’s Open Houses published on Saturday is incomplete: you need to check back at 8 a.m. on Sunday for an updated list.
In tomorrow’s blog I shall publish an article entitled: “Are mortgage rates headed for 3%” – and an updated list of Open Houses.
Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Why are mortgage rates plummeting?
Freddie Mac’s national average 30 year Fixed Rate Mortgage dropped to 3.99% this week, but with interest rate falling sharply later in the week that number is likely to drop further this week, perhaps to 3 7/8%.
Why are rates falling?
Let us look at two charts:FRM and the US Treasury 10 year (10T) yield.
Mortgages are bundled together and sold to investors. Because mortgage are riskier than US Treasuries investors demand a premium to the yield on 10T. This premium is known as the spread. In recent years that spread has averaged around 1.7%. Add that to the 10T yield and you get a pretty good idea of where FRM will be.
This is the what, but now the why. Why are interest rates plummeting?
In broad terms, the yield on 10T reflects two main factors: the outlook for the US economy and the demand by investors for a “safe haven” in a time of uncertainty.
I have written several times in recent months that the outlook for the US is a slowing, but still growing economy, and for a stable housing market. It is clear that the world economy is slowing and also that increased tariffs are contributing to that slowing – and to growing uncertainty.
This blog tries to stick to real estate and economic commentary so I will just quote from an Editorial in yesterday’s Wall Street Journal headed Tariff Man Unchained: “The biggest economic risk of a Donald Trump Presidency has always been that his trade obsessions would swamp the benefits of tax reform and deregulation. For two years he has kept his worst protectionist impulses mostly in check, but as he seeks a second term we are now seeing Tariff Man unchained. Where he stops nobody knows, which is bad for the economy and perhaps his own re-election.”
On the verge of a trade deal with China, the President announced new tariffs. On the day that the new Mexico/Canada/US trade agreement was sent to Congress the President announced new tariffs against Mexico. All these actions, to say the least, create uncertainty. And as the number of countries against whom the President has announced tariffs mounts, so does the possibility that the rest of the world will decide that the US is an unreliable partner and seek alliances amongst themselves.
It may be that the President feels that traditional diplomacy has been to the advantage of other countries (although the US is still the richest country in the world) and that he can use the bully pulpit to change the balance of trade. The danger of using the bully pulpit is that those who are bullied tend not to like being bullied and have long memories. And the Chinese in particular have not only long memories but long time perspectives.
The WSJ article ends: “But then Tariff Man is impulsive and often his own worst enemy. Equities have fallen for six straight weeks and corporate profits are down. The job market is strong, but that isn’t guaranteed if investment starts to lag. Senate Republicans need to get off their sedan chairs and send this President a message on trade, or they may be in the minority in 2021.” And that prospect may well influence the way the rest of the world responds to the latests threats.
The natural tendency and hope is that all these issues will blow over quickly and not have a damaging effect on the economy. But the bond market is sending out warning signals.
Mortgage rates rise as yield curve reverts to normal shape
The spread between the 3 month (3M) and 10 Year (10T) Treasury yields, which gained so much attention two weeks ago when it inverted (meaning the yield on the 3 month Treasury was greater than on the 10 Year; read Treasury yield curve inverts: what it means for the housing market ), actually lasted just 5 days before reversing, as the yield on 10T increased to 2.5%, largely on evidence that the US economy continued on the path of steady, albeit slow, growth. Meanwhile, inflation remains subdued.
The result is that the cost of a 30 year Fixed rate Mortgage (FRM) edged up a little last week to 4.08%. One might have expected the rate to be higher; remember the rule of thumb is the yield on 10T plus 1.7%, which would imply a FRM of 4.2%.
It appears that mortgage lenders may have held rates down to encourage borrowing. If so, they were successful as Freddie Mac reported: “Purchase mortgage application demand saw the second highest weekly increase over the last year and thanks to a spike in refinancing activity, overall mortgage demand rose to the highest level since the fall of 2016.”
At a time when the rest of the world is suffering from a significant slow down in economic activity, the US economy continues to grow steadily. Chains has already started to stimulate its economy and others may need to. The big potential positive is a trade deal with China. Depending upon what was accomplished, such a deal could remove the self-inflicted damage that tariffs have imposed on the US economy.
Forgive me if this gets boring, but for the third time in recent months (after the stock market’s sharp sell off in December and following the rally in the first quarter this year) I repeat that: “the likelihood for 2019 is a slowing, but still growing, economy and a stable housing market.”
And it is still possible to get a mortgage for around 4% (call me for an introduction to a lender offering a 30 year mortgage with no points for 3.99% up to $2 million).
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 617.834.8205
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Opportunity to refinance your mortgage
If you bought a house in 2018 the chances are that your mortgage rate is in the range of 4.5 – 5%. For most of 2018 it looked as though rates were headed on an upwards path and buyers had no alternative but to pay the higher rate.
And then rates collapsed, as per the chart below:
Thus, it is possible to refinance now to a rate of around 4%.
Why have rates dropped?
The background to the link between expectations for the economy and mortgage rates is explained in these recent articles:
Is a recession coming soon?
Why have Mortgage Rates dropped?
Treasury Yield Curve Inverts: what it means for the housing market
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 617.834.8205
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Treasury Yield Curve Inverts: what it means for the housing market
You may have heard on the news that the yield curve has inverted. Say what? you might be thinking. Here’s the what, why and wherefore – and the impact it may have on the housing market
The What
In normal times (whatever they may be) a lender expects to be paid more the longer the length of time she is lending money. Thus, the yield offered on a very short-term security, the US Treasury 3 month Bill (3M), would normally be less than that on the 10 year note (10T).
The chart below shows the yields on the two since the beginning of 2018. In January, the spread – the difference between the two yields – was 1.25% (2.66-1.41). Over the course of the last 14 months that spread has steadily narrowed until, on Friday this week, the yield on the 3M at 2.44% was greater than the 2.42% offered on the 10T. That situation is called a yield inversion.
What It Means
As Investopedia explains: “Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle.” But recessions have generally occurred 1-2 years after the inversion.
Why?
According to Barron’s: “If bond investors are bullish on the economy and believe interest rates will go up, they are more willing to hold short-term bonds and hope to harvest the higher yields later on. On the flip side, if bond buyers believe the economy is heading downward and interest rates are likely drifting lower, they’d prefer to hold the longer-term bonds in order to lock in the current higher yields.”
Bear in mind, the actions of the Federal Reserve impact only short-term rates. Long-term rates are market driven.
Impact on Mortgage rates
Regular readers of this blog are aware that the 30 year Fixed Rate Mortgage (FRM) is influenced by the yield on 10T. The chart below shows the FRM together with the yield on 3M and 10T.
At the beginning of 2018 the spread between 3M and FRM was 2.74%, but that has dropped to 1.82% currently. The spread between FRM and 10T, however, has been remarkably constant, averaging 1.7% over that period, as it has for several years.
Thus, a simple way to estimate the FRM is to follow the yield on 10T and add 1.7%. This spread will, of course, fluctuate, but for several years it has been in the range 1.6-1.8%.
Where are mortgage rates headed?
Since 2014 the Mortgage Bankers Association (MBA) has been forecasting that the FRM would reach 5% by the end of the next year. And last November, when the FRM reached 4.94%, it looked as though its forecast might finally be correct. But then came the stock market sell off, the flight to the safety of US Treasuries, and by year end the FRM had dropped back to 4.55%. This week it was 4.28%, but that reflected rates earlier in the week. Next Thursday, when the Freddie Mac FRM is announced, I expect it will drop back towards 4.1%.
And a lender I work with is already offering a 30 year mortgage, with no points, at 4% (and 15 year at 3.5%) for loans up to $2 million. (Contact me for an introduction).
Housing Market Outlook
In late December I published Is a recession coming soon? I concluded that article by saying:”Confidence is a fickle thing. At the moment it is intact. As long as that remains so the likelihood for 2019 is a slowing, but still growing, economy and a stable housing market.”
Evidence grows almost on a daily basis that the world economy is slowing down. The US may be the strongest major economy, but it is not immune from the slowdown that is taking place. It seems more likely that economic activity in 2019 and 2020 will come in below expectations than above. But that does not mean that a recession is imminent, and my conclusion in December still seems a reasonable expectation.
And a mortgage rate of 4% for the first time since January 2018 should provide an incentive to buyers.
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 617.834.8205
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Conforming mortgage limit jumps 14% for Essex County
Late last year, in the midst of the annual turkey celebration, the Federal Housing and Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, announced the new conforming loan mortgage limits for 2019. The conforming loan limit is the maximum mortgage size that Fannie and Freddie are allowed to purchase. Freddie and Fannie are the two government-sponsored enterprises (GSEs) that purchase mortgages, bundle and securitize them, and then sell them to investors through Wall Street and other channels.
Loans above the conforming limit are jumbo mortgages.
For 2019 the conforming limit for most of the country increases 6.9% (the amount the FHFA index of home prices increased from Q3 2017 to Q3 2018), raising the new ceiling to $484,350.
But in Essex County, one of the “higher-cost areas”, the limit jumped a whopping 14% to $688,850.
While most articles about mortgage affordability focus on how little one can put down – e.g. 3% – I would like to suggest a different approach. With the new limit of $688,850 a buyer could buy a $1 million house with 31% down and still have a conventional mortgage.
Andrew Oliver
Realtor, Sagan Harborside
Sotheby’s International Realty
www.andrewJoliver.com
www.OliverReports.com
Tel: 617.834.8205
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated
Is a recession coming soon?
In 1936, British statesman Sir Austen Chamberlain (half-brother of Neville Chamberlain), made a speech in which he said: “It is not so long ago that a member of the Diplomatic Body in London, who had spent some years of his service in China, told me that there was a Chinese curse which took the form of saying, ‘May you live in interesting times.’ There is no doubt that the curse has fallen on us.” “We move from one crisis to another. We suffer one disturbance and shock after another.”
The last comments seem aptly to reflect the last few days and weeks of 2018.
Let me address one important question: is the stock market, which has now declined almost 20% from its high earlier in the year, telling us that a recession is coming soon, or is it just correcting from a sugar high after the huge stimulus from tax cuts and Government spending increases?
And if a recession is coming, what does that mean for the housing market?
In the interests of brevity I shall offer comments in note form:
1. According to many estimates, computer trading accounts for anywhere from 50-60% of equity trading in normal times to 90% on volatile days.Computer trading tends to exacerbate movements, both up and down.
2. The corporate tax cut produced a significant growth in after-tax earnings as companies reported results earlier in the year, leading some analysts to project valuations based on those one-time gains. As it has become clear that corporate earnings growth will return to more normal levels in 2019 so the stock market has corrected to a more sustainable valuation.
3. The Federal Reserve’s mandate from Congress is to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. Nowhere does it say that the Federal Reserve should seek to boost stock market prices.The late Fed Chairman William McChesney Martin famously said the Fed’s job was “to take away the punch bowl just as the party gets going.”
4. Following the Great Recession the Federal Reserve embarked on a policy known as Quantitative Easing in which it bought Government and other securities in great volumes to inject liquidity into the economy and drive down interest rates to stimulate growth. Those who argue now that the Fed kept the spigot open too long – which it probably did – may be forgetting that for a long time, as Congress failed to enact fiscal policy to stimulate economic growth, monetary policy carried out by the Fed was the only game in town.
5. In February I published What will happen to Home Prices in the Experimental Economy?. The Experimental Economy was the name I gave to the concept of providing a massive fiscal stimulus to an economy nearing full employment. In the article I wrote:”Those who are predicting that strong growth will follow from the major stimulus to the economy may be proved right. If not, the risk is that stimulating the economy at a time of full employment will cause the Fed to raise interest rates aggressively and choke off the hoped for economic growth.”
6. While the increase in the Fed Funds rate has been getting a lot of publicity very recently, the Fed has actually been raising rates – and indicating that it planned to continue to do so – for 3 years, with the first increase coming in December 2015.It could be argued that the more rapid increase in rates this year has been in response to the major stimulus from the tax cuts earlier in the year. It could further be argued that, on the evidence so far, the Fed has been successful in helping to slow growth to a sustainable level, thereby curbing inflationary pressures which would necessitate even higher interest rates.
7. Another part of the reason that economic growth is slowing from 4.2% in Q2 this year to 3.5% in Q3 and an estimated 2.7% in Q4 is the higher costs – and uncertainty – caused by the imposition of tariffs and the “tariff war” embarked on with China. Uncertainty acts to inhibit investment decisions.
8. The economy is still strong as evidenced by the 3.7% unemployment rate and widespread reports of the lack of applicants for job vacancies.
9. Perhaps the strongest sector of the economy has been consumer spending, which by many estimates accounts for 70% of the economy.
Comment
There is a saying in real estate that buyers buy with emotion and justify with logic. The key – both to real estate prices and to the path for the economy – is the level of consumer confidence. While all recorded reports show that level currently to be high, consumer confidence can also be very fragile.
It is too early to project the impact of the daily bombardment of announcements of policies which do not appear to have been given careful thought and analysis, but a period of silence would do a great deal to help restore confidence. That may be wishful thinking, but confidence is a fickle thing.
At the moment it is intact. As long as that remains so the likelihood for 2019 is a slowing, but still growing, economy and a stable housing market.
Andrew Oliver
www.OliverReports.com
Realtor
Sagan Harborside Sotheby’s International Realty
Tel: 617.834.8205
Why have Mortgage Rates dropped?
The Freddie Mac weekly index of the 30 year Fixed Rate Mortgage (FRM) has dropped from 4.94% to 4.63%, a fall of 0.31%, over the last month. Regular readers of this blog are aware that the FRM closely tracks the yield on the Government 10 year Treasury Note (10T) and so will not be surprised to learn that in the same period the yield on 10T has dropped from 3.24% to 2.91%, a fall of 0.33%. And note that the Fed Funds rate, which is controlled by the Federal Reserve, has been unchanged during this period. While it is widely expected that the Fed Funds rate will be increased by another 1/4% this coming Wednesday, this increase will have no direct impact on the FRM, although it may well have on Adjustable Rate Mortgages.
For an explanation of the link between the FRM and 10T read Mortgage rates head for 5% .
The question of why mortgage rates have dropped becomes, therefore, why the yield on 10T has dropped.
What drives the yield on the 10 year Treasury?
In general terms, the yield on the 10T is seen as a reflection of the outlook for the US economy and inflation, but it is also influenced by the demand for Treasuries from domestic and international investors seeking a “safe haven” in times of uncertainty.
Outlook for the US economy
The argument for the huge tax cuts earlier this year was that they would encourage investment which would lead to much higher economic growth than we have seen in recent years. The Administration talked of 4% growth, a figure it was claimed would lead to a reduction in the budget deficit, rather than the increase which would materialize if growth remained at the 2- 2.5% level. For my views last February and how this would influence real estate prices read What will happen to Home Prices in the Experimental Economy?
As 2018 draws to a close, it is clear that growth is slowing in many parts of the world. The US economy is performing strongly, although there are concerns about the impact a protracted tariff war with China could have on growth.
The chairman of the Federal Reserve has made two statements about interest rates in recent weeks. The market interpreted the first as suggesting that there could be several more rate increases in 2019, and the second as suggesting there may be only one more. Mr. Powell’s remarks this coming Wednesday will be analyzed very carefully, especially to see if the Fed makes reference to a slowing in the economy.
Inflation
This is perhaps where there is the greatest divide amongst pundits. Despite all the reasons that inflation should be rising faster than it is, it isn’t. In recent months, the oil price has dropped sharply and that has been a restraining factor on the overall price level. Those who see no signs of inflation picking up steam argue that interest rates do not need to be increased further. The arguments for continuing to increase interest rates include concerns that the full employment level in the US must lead to wage pressures, while unless interest rates are allowed to return to the sorts of levels we have seen over the last 30 years or so, the Federal Reserve will not be in a position to lower rates to stimulate the economy if we are to enter the recession some economists are forecasting for as early as 2020.
Treasuries as a safe haven
Here is an article from The Balance explaining Who owns the National Debt. It makes interesting reading.
Regardless of all the theories about, for example, whether China will stop buying Treasuries as part of its tariff war with the US, the fact remains that yields on US Government securities are far higher than those offering in other developed and stable counties.
Note that the yield on the US 10T has increased this year, as the Treasury has had to sell more Notes and Bonds to finance the growing budget deficit.
The only other country showing a significant increase in yields is Italy which is embroiled in a dispute with the EU over its budget.
The biggest factor in safe haven buying is concern about geopolitical developments. In times of uncertainty, investors buy Treasuries. Assuming that the reader of this blog is not immune to the daily bombardment of developments domestically and internationally, I shall not list them here. Suffice it to say, we are going through a period of great uncertainty.
Summary
There are many uncertainties facing all markets at a time when the supply of homes for sale has been increasing for several months. While the economy remains strong and employment high, there is no obvious reason to expect home prices to fall significantly. It is likely that some buyers were over- optimistic (or desperate) earlier in the year and that we are now seeing greater equilibrium emerging in many markets between buyers and sellers.
Andrew Oliver
www.OliverReports.com
Sagan Harborside Sotheby’s International Realty
Mortgage rates head for 5%
The yield on the US 10 year Treasury Note (10T) jumped sharply in the later part of the past week, a move which will cause the 30 year Fixed Rate Mortgage to move up again in the coming week, approaching 5%.
What drives mortgage rates?
The Federal Reserve (Fed) raised the Fed Funds (FF) rate again recently, the 8th increase since December, 2015
While changes in the FF rate (the rate at which banks lend overnight money to each other) claim the headlines, the 30 year Fixed Rate Mortgage (FRM) rate is set by the market and is a based on the yield investors in mortgage- backed securities demand over what they can earn from the US 10 year Treasury Note (10T).
Let’s look at some numbers. In the chart below, the first column shows the FF rate on the date of the increases. The second and third columns show the yield at that time on the 10T and FRM.
The second chart shows the spread (difference in yield) between FRM and FF on the left, and between FRM and 10T on the right. The consistency of the second column illustrates the link between the 30 year mortgage rate and the yield on the US 10 year Treasury Note.
What rates are influenced by the FF rate?
Banks respond to increases in the FF rate by raising their Prime Rates. This in turn influences the rates on such things as credit cards and auto loans, as well as home equity lines of credit. Adjustable rate mortgages (ARM) also move up with increases in short-term rates, especially the 1 year Treasury bill.
Where are rates heading?
Part of the reason for the increase in bond yields last week was the statement from the Chairman of the Federal Reserve that the current FF rate was “a long way from neutral”, a statement interpreted by the bond market as confirming that the FF rate may increase by another 1% over the next year. With the economy currently growing strongly and very low levels of unemployment, the bond market fears that inflation will pick up. With higher inflation levels, investors will demand higher yields from Treasuries. And this comes at a time when the Budget Deficit is jumping, a deficit that needs to be funded by selling more Treasuries.
Background Reading
Here are two articles I have written. The first is from October 2018:
Why mortgage rates may be headed upwards – finally
And this one from February 2018:
What will happen to Home Prices in the Experimental Economy?
Sagan Harborside Sotheby’s International Realty
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