Doctor’s > Rate and Economic Update: Mortgage Rates Settle at 2017 Lows, but for How Long?


Keeping you updated on the market!
For the week of

June 5, 2017


Mortgage Rates Settle at 2017 Lows, but for How Long?

We could say that mortgage rates are like the weather: We can talk about them, but we can’t do much about them, expect to talk about them to discern the outlook.

And talk about mortgage rates we do. On that front, mortgage rates drifted lower through most of May; it’s possible they could drift lower still.

Many market watchers focus on the 10-year U.S. Treasury note and its yield. The yield on this influential security (as it influences the yield on mortgage-backed securities, which, in turn, influence mortgage rates) has dropped to 2.21%. Market watchers who watch the yield charts, tell us that we could see lower mortgage-rate quotes if the yield on the 10-year note falls below 2.17% (which is seen as a technical support floor).

For now, though, quotes of 4% (and frequently below) on a prime 30-year fixed-rate mortgage are a regular occurrence. Quotes across the mortgage board are near 2017 lows. Rates have trended lower over the spring months. Concurrently, the federal funds rate — the rate everyone refers to when the Federal Reserve raises rate — has trended higher and is at a multi-year high. The Fed raised the range on the fed funds rate to 0.75% to 1% in March. The effective rate — at 1% — is at the upper boundary of that range.

The fed funds rate is a short-term rate — it’s the overnight lending rate for commercial banks. The fed funds rate serves as the base rate for most other lending rates. A change in the fed funds rate won’t necessarily move long-term rates (as we’ve seen), but you would it expect it to have some pull over time. So far, it hasn’t had much pull, even with the increasing likelihood we could end the year with the fed funds rate approaching 2% — a rate unseen in nine years.

We suspect that the lack of pull is attributable to lack of consumer-price inflation, which runs at 1.5% annually. Inflation expectations exert greater influence on long-term rates than short-term rates. Low inflation expectations are holding long-term rates in check.

The Fed is expected to raise the range on the fed funds rate to 1%-to-1.25% at its next meeting on June 14. In fact, traders in fed funds rate futures contracts are betting a 90% chance that a rate increase will occur. What’s more, most Fed watchers believe two more increases will occur after a June rate increase.

So, the Fed will likely raise the range on the fed funds rate this month. Contrary to popular perception, though, rising mortgage rates need not follow. Indeed, since the Fed began raising the fed funds rate in December 2015, the increase has generally been followed by a slow decline in mortgage rates. If past is prologue, a further decline in rates is within the realm of possibilities as long as inflation remains muted.




Date and Time
Consensus Analysis

Labor Market Conditions


Mon., June 5,

10:00 am, ET

0.2 Point (Increase)

Moderately Important. The latest Federal Reserve data on employment show the best conditions in two years. This gives the Fed more ammo to raise interest rates.

Mortgage Applications

Wed., June 7,

7:00 am, ET

0.5% (Decrease)

Important. Purchase applications declined a third-consecutive week. The trend points to lower May and June home sales.

Consumer Credit


Wed., June 7,

3:00 pm, ET

$15 Billion (Increase)

Moderately Important. Student-loan debt continues to pace the overall increase.  Student-loan debt has  been an obstacle to first-time homeownership.


Pending Home Sales Point to Fewer Immediate Sales

The NAR’s Pending Home Sales Index dropped 1.3% in April, which puts the index below April 2016 levels. The NAR blamed the usual suspects — low supply coupled with low affordability — for dwindling sales contracts. Because contract signings lead sales by 45 to 60 days, there’s a good chance that existing-home sales for May and June will disappoint.

We found it interesting that the NAR’s press release mentioned a supply factor that we’ve mentioned in the past: Institutional buying of single-family homes. Lack of supply has weighed predominately on the lower echelons of the existing-home market. One reason for the supply dearth in this niche is that many single-family homes have been purchased by large institutional investors. Less supply, of course, means higher prices and fewer affordable homes for first-time buyers.

NAR chief economist, Lawrence Yun, amplified an additional insight, one we’ve also mentioned, on institutional owners. These institutional owners will be as motivated to sell when rents and returns on investment fall as they were to buy when rents and returns on investment were rising. "The unloading of single-family homes purchased by real estate investors during the downturn for rental purposes would also go a long way in helping relieve these inventory shortages," Yun opines.

With more millennials and other first-time buyers turning away from renting and turning to buying, we could see institutional investors turn to sellers from buyers.  Such an event would help to relieve the supply shortage that constricts home-sales growth.
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