Doctor’s > Rate & Economic Update for Dr Loan: It Looks Like a Done Deal




 

Keeping you updated on the market!
For the week of

March 13, 2017


MARKET RECAP

It Looks Like a Done Deal

This has been one of the quickest change of sentiments we’ve seen in some time.

Less than a month ago, no one gave meaningful odds that the Federal Reserve would raise the federal funds rate at its March 14-15 meeting. Traders in fed funds rate futures contracts were betting with less than 25% odds a rate increase would occur. As we write, the odds are 86%. Now, it’s everyone in the pool. A lot of people are already gaming the next increase.

The mortgage market has certainly taken the plunge. The trend in rates — across product and duration — is up significantly over the past week. A 4.25% quote on a prime conventional 30-year loan is a common quote these days with 4.375% gaining in popularity.

Surprising to some, the rising trend in lending rates has brought a rising trend in lending activity. The Mortgage Bankers Associations’ latest weekly reading on mortgage lending shows an increase in both purchase and refinance activity.  We’re not terribly surprised. Many potential borrows wait for a potential pullback in a flat market. They anchor to a past rate. But when rates begin to pull ahead and show no signs of a pullback, they switch to action from inertia.

Purchase activity has been a bright spot since the beginning of the year (and really since the election).  Rates have moved higher, but activity remains brisk. Year over year, purchase activity is up 4%. This confirms our sentiment for the past couple years: A mortgage rate is no longer the overarching arbiter in the decision to buy. 

Other economic variables have come into play. Job growth remains brisk and economic growth appears poised to finally ramp up. More people can afford to service a higher-rate loan. What’s more, a higher lending rate should lead to higher mortgage credit availability. Higher spreads will lead to more lending opportunities to more borrowers. (Though many in the media complain about tight lending standards, the fact is that the MBA’s Mortgage Credit Availability Index has risen 75% in the past four years.)

History supports optimism in the face of rising mortgage rates: In 2004-through-2006, the Fed raised the fed funds rate over four percentage points. Over that time, mortgage rates rose… and so did home sales and home prices. Of course, history doesn’t repeat exactly, but as Mark Twain pointed out, it does frequently rhyme. 

 

Economic

Event

Release
Date and Time
Consensus Analysis

Consumer Price Index

(February)

Wed., March 15,

8:30 am, ET

All Goods: 0.5% (Increase)

Core: 0.3% (Increase)

Important. Rising consumer-price inflation gives the Fed impetus to raise interest rates.

Home Builder Sentiment Index

(March)

 

Wed., March 15,

10:00 am, ET

65 Index

Important. Sentiment continues to point to rising starts in 2017. 

Federal Reserve FOMC Meeting

Wed., March 15,

2:00 pm, ET

Federal Funds Rate: 0.75% to 1%

Important. A rate increase this month will likely lead to multiple rate increases this year.

 

Curves We Can All Appreciate

A lot of ink and pixels have been spent on the subject of interest rates: will they or won’t they rise?

Much less ink and pixels have been spent on the subject to how they will rise. This is really the more important subject. How rates rise across the yield curve matters as much, if not more, than the fact that rates are rising.

The yield curve is a plot of bond yields — usually government bond yields — across bond maturities on a graph. As for plots for government bonds, the plots go from one month to 30 years. (There are 11 yield plots in total). How the yields plot is an important indicator to the outlook for the economy. The yield curve has predicted all U.S. recessions except one since 1950.

The yields on the curve can plot flat, inverted, or positive. A flat curve indicates that market participants are unsure about future economic growth and inflation. An inverted yield curve is frequently the harbinger of recession. When yields on short-term bonds are higher than those on long-term bonds, market participants expect interest rates to decline in the future, usually in conjunction with slowing economic growth.

A positive yield curve is what we want, and it’s what we’ve got. The yield curve trends progressively higher. Each maturity in the future brings a higher yield (e.i., 1-month bond yields 0.55%, 3-month bond yields 0.76%…. up to the 30-year bond and its 3.11% yield).

An upward sloping yield curve, which we now have, has often preceded an economic upturn. Investors demand more yield as maturities extend because they expect economic growth. They demand more yield because of the associated risks of higher inflation and higher interest rates, which can hurt bond returns.

Interest rates might rise, but as long as they rise in the right way, that’s what matters. Fortunately, they’re rising in the right way.

 

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