Doctors: Rate & Economic Update as it relates to the Doctor Loan > Keep Humming Along


Keeping you updated on the market!
For the week of

November 13, 2017


Keep Humming Along

Businesses keep doing what they’ve been doing for the past five years — hiring employees and making money.

On the former, business hiring helped lift payrolls by 261,000 in October. The surge in hiring dropped the unemployment rate to 4.1%. This is the lowest the unemployment rate has been since the year 2000.

The latest round of monthly hiring lowered the pool of available workers to 11.7 million, which is shallow by historical standards. Businesses have been able to hire workers without breaking the bank. Wage growth remains anemic, with average hourly wages up only 0.5% in October. Year over year, hourly wages are up a moderate 2.4%. (That said, total compensation is likely growing at a faster rate when benefits are factored in.) 

On the latter, corporate earnings continue to flow unabated. Eighty-one percent of S&P 500 companies have reported third-quarter earnings. The blended earnings growth rate for these companies is 5.9% year over year. The flow should rise a few notches in the fourth quarter. Factset, a financial data provider, surveyed analysts and the analysts it surveyed expect S&P 500 fourth-quarter earnings to grow 10.4% year over year. 

Businesses are hiring, and they’re efficient about it. What modest wage growth we have has led to even greater earnings growth. (This is rational from an economic perspective: A business expects to receive a positive return on its factors of production.) 

So, wage-rate inflation remains a nonstarter for credit markets. There has been little of it to pressure interest rates to rise. Factor in low consumer-price inflation, another nonstarter, and it’s easy enough to understand why long-term interest rates continue to hover near multi-decade lows. 

As for long-term mortgage rates, 4% on the conventional 30-year fixed-rate loan serves as the fulcrum, as it has for most of 2017. Quotes on the national scene see-saw between 3.875% and 4.125%. 

We’re in a tight range, and we don’t expect to break that range in the foreseeable future. The range could easily hold for the remainder of the year.

It’s still a range worth gaming. After all, the difference in monthly P&I payments on a $300,000 30-year fixed-rate loan financed at 3.875% or 4.12% is $43. That will buy at least a couple of entrees and a round of drinks at the Olive Garden each month. 

For the immediate future, keep an eye on tax reform. If it becomes likely something might pass into law, mortgage rates will likely favor the 4.125% side of the fulcrum.



Date and Time
Consensus Analysis

Consumer Price Index

Wed., Nov. 15,
8:30 am, ET

All Goods: 0.4% (Increase)
Core: 0.1% (Increase)

Moderately Important. Consumer-price inflation remains benign, which helps keep long-term interest rates low.

Home Builders Sentiment Index

Thurs., Nov. 16,
10:00 am, ET

69 Index

Important. Rising sentiment points to rising new-home activity.

Housing Starts

Fri., Nov. 17,
8:30 am, ET

1.15 Million (Annualized)

Important. Starts overall are expected to be flat, but the important single-family segment should show gains.


Are We in an Interest Rate Bubble?

Interest rates and yields have trended in one direction since 1981 — down.  Back in the days when frizzy perms (for women) and blowzy fuchsia shirts (for men) were fashionable, yields on 10-year U.S. Treasury notes exceeded 15%. Quotes on 30-year fixed-rate mortgages exceeded 18%.  Both have trended 80% lower over the past 36 years.

Rising bond prices are the corollary to falling interest rates and yields. Bond prices have trended higher over the past 36 years. (Bond prices trend higher on previously issued higher-rate bonds to reflect current market rates.)

Many market commentators believe the music has to stop and something has to burst. The longer the bull market in bonds persists, the more likely a correction will occur. With Federal Reserve officials chatting up their desire to raise interest rates, the bull market in bonds is likely to end sooner than later, so says conventional wisdom.

But conventional wisdom can be wrong. The Federal Reserve incrementally increased the federal funds rate from 1% in 2004 to 5% in 2007. Long-term rates failed to play along. The 30-year fixed-rate mortgage held a 6.25%-to-6.5% range most of the time. The range has trended lower since.

History shows that rates can hang high or hand low for a long time. In their book A History of Interest Rates, authors Sidney Homer and Richard Sylla give evidence to show interest rates can hold a range or a level for decades or even centuries. 

Given history, given the surge in technology and productivity over the past 25 years, and given that consumer-price inflation shows no sign of igniting, we wouldn’t be surprised to see mortgage rates on offer five years in the future to resemble mortgage rates on offer today.
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