Doctor’s: Rate & Economic Update > Most Everything Moves Higher


Keeping you updated on the market!
For the week of

April 3, 2017


Most Everything Moves Higher

Home prices continue to emulate the Energizer bunny: They keep going and going, and the going is mostly up.

The latest reading of the Case-Shiller Home Price Index shows home prices up yet again.  Specifically, prices rose 5.7% year-over-year in January. This is the fastest rate of home-price appreciation since July 2014. Thirteen of the 20 metropolitan regions the index comprises reported increases before seasonal adjustments; after seasonal adjustments, 19 metropolitan regions reported price increases.

The Case-Shiller index shows prices approaching the all-time highs set in 2006. But keep in mind that the index reports in nominal dollars. When the index is adjusted for consumer-price inflation, it remains nearly 20% below the 2006 peak. To be sure, home prices have gotten pricey, but they’re less pricey when priced in constant dollars.

Home prices are up, and so is new-home construction. Housing starts grew to 1.288 million on an annualized rate in February. Single-family starts led the charge, rising 6.5% to 832,000 on an annualized rate.  Single-family starts look set to maintain their upward trajectory: permits were up 3.1% for the month.  We can’t say that we were surprised to see such strong numbers on starts. Home builders have grown increasingly optimistic since the start of the year. 

And what’s being built by home builders will likely be sold.  The Pending Home Sales Index, a forward-looking indicator based on contract signings, spiked 5.5% higher in February. NAR economists Lawrence Yun attributed the surge to higher stock prices, warm weather, and fears of rising interest rates. All three are factors, to be sure, and they likely pulled sales forward that would have occurred down the road. Nevertheless, the latest index reading bodes well for sales activity through the spring months. 

The latest reading on purchase-mortgage activity also points to sales holding elevated levels. The MBA’s seasonally adjusted Purchase Index increased 1% from the previous week. The unadjusted Purchase Index increased 2% and was 4% higher than the same week a year ago.

Taking a holistic view, we see economic growth is on the rise. Fourth-quarter 2016 gross domestic product (GDP) was revised up to 2.1% from the second estimate of 1.9%. Stronger-than-expected consumer spending was a leading contributor to the upward revision. Residential investment was another leading contributor. Residential investment is up 9.6% year-over-year.

So far, most everything is so good through the first quarter of 2017.




Date and Time
Consensus Analysis

Construction Spending


Mon., Apr. 3,

10:00 am, ET

Unchanged Moderately Important. Overall spending is flat to down, but residential-construction spending continues to trend higher.

Mortgage Applications

Wed., Apr. 5,

7:00 am, ET


Important. Lower mortgage rates offer borrowers a window of opportunity to lock in at a month-low rate.

Employment Situation



Fri., Apr. 7,

8:30 am, ET

Unemployment Rate: 4.7%

Payrolls: 185,000

Important. Payroll growth should slow after a strong showing in February, but growth remains strong enough to allow the Fed to follow through on expected rate increases.


Mixed Blessings

The NAR’s Lawrence Yun mentioned fears of rising interest rates as a factor in the strong showing for pending home sales.  But is the fear rational?

The consensus estimate among credit-market watchers is that we’ll end 2017 with the Federal Reserve having increased the federal funds rate three times.  The fed funds rate is the overnight lending rate among commercial banks. In theory, the fed funds rate serves as the base rate for all other rates.

That said, just because the fed funds rate serves as the base, it isn’t preordained that other rates have to follow the fed funds rate lead. While the Fed can exercise control over short-term interest rates via the fed funds rate, it has lesser control over long-term rates. In this sense, long-term rates can be seen as reflecting, to a greater degree, the underlying expectations of market participants.

With three fed funds rate increase baked into the market, market participants appear to have broadened their perspective. Yes, short-term rates might be on the rise, but given expectations for low consumer-price inflation and steady, though unspectacular, economic growth, investors aren’t pricing much risk premia into the long-end of the yield curve. The yield 10-year U.S. Treasury note has settled around 2.4%. Rates on the 30-year prime conventional mortgage, in turn, have settled in a 4.125%-to-4.25% range (for the national average).

Uncertainty surrounding health-care reform and income-tax-rate cuts has increased demand in haven investments (like Treasury securities) over the past month. Many investors are in a wait-and-see mode. Demand for haven investments, in turn, has helped cap interest rates. With uncertainty on health-care reform and income-tax-rate cuts unlikely to abate in the near future, we see rates on the prime 30-year mortgage holding the 4.125%-to-4.25% range for the near future.
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