Doctor’s > Rate & Economic Update for the Doctor Loan Offering! – The Dip Continues to Hold


Keeping you updated on the market!
For the week of

September 11, 2017


The Dip Continues to Hold 

We suppose we could call it the gift that keeps giving, though it’s a gift we would rather return.

Mortgage rates continue to hold near 2017 lows. The noxious fellow on the other side of the Pacific is largely responsible.

North Korea’s leader Kim Jong Un continues to hold court on the world stage. He does so by means he holds court within his country — intimidation. Jong Un intimidates his neighbors with militaristic threats. Bomb detonating tops the list.

The latest detonation occurred last week. South Korea reported that North Korea denoted a bomb that was the largest recorded. Political experts near and far publicly worry that the threat of a nuclear attack is on the rise. The worries have spilled into financial markets. When investors — international and domestic — get worried, they seek havens in the Unites States.

The U.S. 10-year Treasury note is a favorite haven. We’ve noted time and time again (because it’s true) that as the yield on the 10-year Treasury note goes so goes long-term mortgage rates. The yield on the 10-year note falls when investors seek a haven. In turn, rates on long-term mortgages, most notably the 30-year fixed-rate mortgage, fall as well.

The influence isn’t quite as direct as we depict. The yield on the 10-year note influences yields on mortgage-backed securities (MBS) first, but the end result is the same. The dip that has taken the prime 30-year fixed-rate loan to 4% and below continues to hold its level.

Kim Jong Un had some help influencing interest rates. The latest jobs numbers were weak, and that tends to have a deflationary influence. Payrolls missed most estimates by a wide margin in August. The miss allowed the unemployment rate to creep up to 4.4% from 4.3%.

Consumer-price inflation also points to the current dip in mortgage rates holding for a while longer.  Inflation is described as no better than modest, as increases in input costs are showing limited pass through to selling prices.

Non-inflation, and even deflation, is more persistent than the Fed would like. This means that consumer-price inflation continues to run lower than the Fed would like. Consumer-price inflation is most impacting on long-term rates. Though the Fed may continually raise the federal funds rate, a short-term rate, it’s possible for long-term rates to hold steady.

Mortgage rates might hold steady, but they’ve shown little inclination to dip lower. This suggests that locking a loan wouldn’t be the most unreasonable act a borrower could make at this point.  




Date and Time
Consensus Analysis

Mortgage Applications

Wed., Sept. 13,

7:00 am, ET


Important. Recent purchase activity has dropped the year-over-year growth rate to 5%. Activity points to little near-term home-sale growth.  

Consumer Price Inflation


Thurs., Sept 14,

8:30 am, ET


Important. Muted inflation points to little upward movement in long-term interest rates.

Consumer Sentiment Index


Fri., Sept. 15,

10:00 am, ET

97 Index

Moderately Important. Positive prospects for income growth suggest that consumer spending will continue to be a key contributor to economic growth.


Inflation Is Key, but What’s Inflation?

Inflation is a key metric for the Federal Reserve. But not all inflation is alike.

The Fed focuses on inflation at the consumer level, which can be difficult to accurately measure. The Consumer Price Index (CPI) is calculated by collecting the prices of a sample of representative items over a specific period. It’s a tough index to accurately calculate. Accuracy is impeded by a substitution bias (consumers substituting goods for others) and quality improvements of new goods and services.

Because inflation doesn’t show in consumer prices, at least as the Fed measures inflation, doesn’t mean it can’t show elsewhere. We noted last week that housing prices have experienced price inflation. (This, after experiencing a shock of price deflation nearly 10 years ago.) Many other assets have experienced similar price inflation, most notably stocks. 

Perhaps focusing on money supply growth would be a better inflation indicator.

Money supply continually grows, so technically it’s inflationary, but that doesn’t mean that the growth will always immediately materialize in rising consumer prices. The reasons mentioned are a factor and so is the fact that some sectors of the economy are naturally deflationary (consumer technology, for instance). The CPI can be held below the Fed’s target rate for an extended time. 

The problem is that we don’t know where the ever-rising stream of money (persistent monetary inflation) will flow. It’s not flowing excessively to the basket of items that account for the CPI, but that doesn’t mean it can’t. The flow can change course in a New York second, and when it does, interest rates can change course just as quickly.
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