Doctor’s: Rate and Economic update for the Doctor – Physician Loan > Falling Stock Prices Halt (Briefly) the Mortgage-Rate Rise!


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February 12, 2018


Falling Stock Prices Halt (Briefly) the Mortgage-Rate Rise

To say stock prices have been volatile over the past week is to say Eagles QB Nick Foles played a decent game in the Super Bowl. It’s to understate the obvious. 

The Dow Jones Industrial Average dropped 1,175 points last Monday. The point drop, in absolute terms, was the largest on record.

When things get a little testy in the stock market, investors seek havens elsewhere. U.S. Treasury securities are frequently the haven of choice. The price of the 10-year U.S. Treasury note was bid higher to see its yield lowered by nearly 12 basis points. 

Stock prices rallied over the subsequent days. Prices of U.S. Treasury securities, in turn, fell. Yields rose.

Mortgage-backed securities (MBS) take their cue from long-term U.S. Treasury yields. Mortgage rates take their cue from MBS. Long story short, mortgage rates fell and then trended higher. They trended high enough to touch recent highs set the week before.

We thought we would see a little more down drift in mortgage rates.The bond-market response to the stock-market route was more tepid than expected. The prospect of rising consumer-price inflation and three increases in the federal funds rate tempered investor enthusiasm for bond havens. 

Enthusiasm was tempered further by the employment numbers for January. Another 200,000 payrolls were added for the month. The number was strong, but wage growth was the real story.

Hourly wages grew 0.3% in January, while wage growth in December was revised higher to 0.4%. The year-over-year rate of wage growth stands at 2.9%. This is the highest annual increase since the economic recovery began in 2009. 

Wage growth due to productivity growth is never an issue. If employees are more productive, and if employers can sell more product profitably, employers will logically offer higher wages to lure employees. (But keep in mind, wages are relative. A potential employee will move to another job only if the wage is higher than the one he or she currently receives, ceteris paribus.)   

Wage growth across the board, on the other hand, is a monetary phenomenon. New money the Federal Reserve injects into the economy can slither into asset prices, consumer prices, and wage prices. We’ve seen asset prices rise. We see that consumer prices are rising. We could see wage rates rise at an accelerating rate.

We could see a rise in inflation pervade the entire economy.

If this occurs, the Fed is sure to continue raising the fed funds rate. More important from our perspective, investor interest in long-dated bonds would continue to wane. Interest rates, including mortgage rates, would continue to rise.

A lot of theorizing, to be sure, but rising interest rates are what market participants anticipate these days. Any deviation from the script — such as a dip in mortgage rates — should be viewed as an opportunity to lock. 




Date and Time
Consensus Analysis

Consumer Price Index


Wed., Feb. 14,

8:30 am, ET

All Goods: 0.2% (Increase)

Core: 0.1% (Increase)

Important. Consumer-price inflation shows signs of accelerating, which will pressure long-term lending rates to rise.

Home Builder Sentiment Index


Thurs., Feb. 15,

10:00 am, ET

72 (Index)

Important. Optimism holding at higher levels with interest rates rising is positive for the housing outlook.  

Housing Starts


Fri., Feb. 16,

8:30 am, ET

1.25 Million (Annualized) Important. Single-family starts were down in December, but permits were up. Starts should rise to start the new year.


Is Rising Market Volatility in Our Best Interest?

We refer to stock-market volatility, which is really a euphemism for falling stock prices.

Falling stock prices occurred on the previous Monday: stock prices fell, and so did interest rates. Mortgage rates are a version of interest rates. They, too, fell. 

Good for us, at least for the short term. But to answer the question, no, stock-market volatility isn’t in our best interest.

For one, cosmic justice frowns upon engaging in schadenfreude — pleasure derived from another person’s misery. In addition, falling stock prices, though good for interest rates, would be a net negative, principally for their impact on the wealth effect. 

Rising stocks raise the wealth effect —  emotions associated with changes in investment and asset values. A  positive wealth effect —  rising investment value —  imbues people with a sense of comfort and security, which prompts spending. Spending on big-ticket items, like homes, are keen beneficiaries of a positive wealth effect.   

Mortgage rates were a hot-button issue five years ago. Today, the issue has cooled. Job security, productivity-driven wage growth, the wealth effect are more influential considerations. The good news is that all three trend positively.

So, if higher mortgage rates are the price to pay for a positive wealth effect, so be it. We don’t see rising mortgage rates derailing housing and mortgage lending. Purchase-mortgage activity supports our assertion. It’s mostly up this year, even though mortgage rates are up too.
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