Will the Federal Reserve show chutzpah today?
In my How far Behind the Curve is the Federal Reserve? report last weekend I suggested that the Fed needed to increase its Fed Funds rate by a full 1.0% today to regain control of the inflation narrative and asked if it has the chutzpah to do this.
The following table shows clearly that it has been the market fighting inflation by driving up interest rate – while the fed has continued with its easy money policy.
We’ll find out in a few hours how serious this Fed is about getting inflation under control.
And read these recent articles:
How far Behind the Curve is the Federal Reserve?
How quickly are houses selling?
Have Home Sales slowed?
June Housing Inventory: still way below 2020 levels.
Swampscott House on over 1 acre with HUGE potential
Marblehead Neck Oceanfront New Listing
Why are Mortgage Rates so high?
Time to Consider an Adjustable Rate Mortgage
The Federal Reserve and Mortgage Rates
Federal Reserve: “Make me responsible…. but not yet”
How Marblehead’s 2022 Property Tax Rate is calculated
Essex County 2022 Property Tax Rates: Town by Town guide
Guide to Buying and Selling in Southwest Florida
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, please contact me on 617.834.8205 or [email protected].
Andrew Oliver, M.B.E.,M.B.A.
Market Analyst | Team Harborside | teamharborside.com
REALTOR®
m 617.834.8205
www.OliverReportsMA.com
“If you’re interested in Marblehead, you have to visit the blog of Mr. Andrew Oliver, author and curator of OliverReportsMA.com. He’s assembled the most comprehensive analysis of Essex County we know of with market data and trends going back decades. It’s a great starting point for those looking in the towns of Marblehead, Salem, Beverly, Lynn and Swampscott.”
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Federal Reserve: “Make me responsible…. but not yet”
With apologies to St. Augustine the gist from the release this week of the minutes of the last meeting of the Federal Reserve Open Market Committee (FOMC) was that, yes, inflation is worse than we expected, and yes, we need to raise interest rates and, yes, we need to sell some of our huge portfolio of Treasuries and Mortgage-Backed Securities, and we will …soon…I promise.
“Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate,” the meeting summary stated.
The minutes show concern about inflation and financial stability though members urged “a measured approach” to tightening monetary policy. FOMC members noted that “inflation was beginning to spread beyond pandemic-affected sectors and into the broader economy.”
No kidding. (more…)
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?
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Mortgage rates still heading lower
I last wrote on mortgage rates in February in a report titled What happened to 4% mortgages? That article started with these words: On the way to the “inevitable” increase in mortgage rates this year, a funny thing has happened – they have gone down again, raising the question: what happened to 4% mortgage rates?
Where are rates now?
Here are this week’s rates, with the 30 year fixed rate mortgage (FRM) at a new 3 year low:
Source: Freddie Mac Weekly Survey
What are the “experts” forecasting?
The Mortgage Bankers Association (MBA) has been forecasting for the last 2-3 years that mortgage rates would soon increase to 5% or more.
In November 2013 the MBA forecast mortgage rates “to rise to 5.1% in 2014”. Actually, the 30-year Fixed Rate Mortgage (FRM) was 4.0% at the end of 2014.
Undaunted, in December 2014 the MBA again forecast a rise to 5.1% by the end of 2015, and once again the actual FRM was 4.0% at the end of 2015.
By January 2016 the MBA had become a little more cautious and forecast an increase to just 4.6% by the end of 2016, but to 5.2% by the end of 2017.
And now in May, those forecasts have dropped to 4.1% by the end of 2015 and 4.8% by 2017.
Why are the “experts” so wrong?
The FRM is based, not on short-term interest rates over which the Federal Reserve has influence, but on the yield on the 10 year US Treasury (10T), whose price is influenced by a number of factors, notably the anticipated strength of the economy, yields compared with other countries, and geopolitical developments around the world.
When the Fed increased short-term rates last December, the yield on the 10T was 2.25%. On Friday it closed at 1.71%, a change of more than half a per cent. In the same period,the FRM has dropped 0.4%.
The reason the MBA keeps getting the forecast for the FRM so wrong is that it keeps forecasting that the yield on the 10T is going to increase. Its latest FRM forecast assumes a 10T yield of 2.2% by the end of 2016 and 2.9% by the end of 2017. These forecast rates have dropped from 2.7% and 3.3% just since January.
But it is not just the MBA that gets interest rates wrong. The Fed was so concerned about being “transparent” and explaining, ad nauseam, its thinking on interest rates in order not to “surprise” the market, that it missed the opportunity to raise rates when the US economy was strong and did so just as it became apparent that the continued weakness in the rest of the world was leading to lower interest rates elsewhere, not higher.
Interest rates have long been higher in the US than in most of the rest of the world, leading to demand for US Treasuries from overseas and causing the dollar to strengthen dramatically.
In my comment on the Fed’s increase in December I wrote: “If commodity prices remain weak, there will be a significant deflationary impact felt in several countries; China’s slowdown could continue to be a drag; and of course there is always the risk of a major war or confrontation.The US economy is doing quite well, but will not be immune to what is happening elsewhere in the world.”
Where are mortgage rates headed?
As I have pointed out, the “experts” have been consistently wrong, so their “forecasts” have really become guesses.
The chart below shows the spread – the difference between the rates – on the FRM and 10T. For the last three years this has averaged 1.67% and been pretty consistent: 2013 and 2014, 1.66%, 2015 1.70%. Today the spread is 1.82%, a little higher than the last few years.
Source: US Treasury, Freddie Mac
Summary
While the US economy is stronger than those of most of other countries, it is growing at only a moderate 2 – 2.5% per annum. Elsewhere there are many headwinds, which make it hard – at least for this observer – to see the basis for interest rate increases in the near future.
Trying to guess the bottom in mortgage rates is like trying to time investment in the stock market – great fun, but rarely successful.
What we can say is that mortgage rates today are extremely low by historic standards and to some extent are offsetting home price increases in the last few years.
If you are considering selling your home please contact me on 617.834.8205 or [email protected] for a free market analysis and explanation of the outstanding marketing program I offer.
Read Which broker should I choose to sell my house?
If you are looking to buy, I will contact you immediately when a house that meets your needs is available. In this market you need to have somebody looking after your interests.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated
@OliverReports
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