This is such a strange credit market because it’s such an unusual market.
The Federal Reserve raised the range on the federal funds rate to 1%-to-1.25% from 0.75%-to-1% this past Wednesday. That’s not so strange. Everyone expected the Fed to raise the fed funds rate. (The fed funds rate is the overnight lending rate among banks. Banks borrow at this rate to adhere to minimum reserve requirements with the Fed.) The market’s reaction is what’s strange.
In days past, when the Fed raised the fed funds rate, interest rates would rise (either by anticipating the event or the actual event). But in days past, the Fed wouldn’t telegraph its punches as it does today. A rate increase (or decrease) would come with no (or little) warning.
These days, fed funds rate increases are telegraphed from a mile away. The market priced this latest fed funds rate increase back in early May. When everyone sees it coming, little more than shoulder shrug is needed to deflect the impact. After the Fed announced its latest fed funds rate increase, yields on government securities fell. Quotes on mortgage rates drifted lower. Mortgage rates across the board are at an eight-month low.
In addition to announcing a fed funds rate increase, the Fed announced it was considering shrinking its balance sheet. This would be a big deal if it were to happen.
The Fed’s balance sheet is straightforward. The asset side is larded with government securities, namely U.S. Treasury bonds, and with mortgage-backed securities (MBS), which it bought in droves after the market crash in 2008. The liability side is larded mostly with dollars. When the Fed buys a Treasury security or an MBS it pays with dollars, and these dollars are conjured from thin air.
“Shrinking the balance sheet” is a euphemism for selling bonds and MBS (or not reinvesting the proceeds when these securities mature). If the Fed sells a bond, it receives dollars. When the Fed sells a bond, both assets and liabilities shrink. Liabilities shrink because dollars are extinguished and removed from circulation. This means the money supply shrinks.
The strangeness quota rises because the Fed is doing all this during a time consumer-price inflation is falling. The latest reading on the Consumer Price Index showed a drop in inflation. Higher interest rates and reduced money supply are tools used to hold consumer-price inflation in check. According to the CPI, there isn’t much inflation that needs to be held in check.
When Trump took office in November, many market watchers expected the 40-year trend of lower interest rates to end. Eight months later, it’s still game on, but it’s impossible to know for how long.
Admittedly, we’ve cried wolf on rising rates in the past, but with the Fed committed to raising the fed funds rate (which it will likely do again this year), something lurks in the economic data to support the increases. These increases often (though not always) work their way to the long-end of the interest-rate curve. This suggests to us that anything below 4% on a prime conventional 30-year loan is still a bargain. We think that any improvement on that rate is an invitation to lock.
Date and Time
Thurs., June 21,
7:00 am, ET
Important. Mortgage rates holding at lower levels should stimulate more home sales.
Existing Home Sales
Wed., June 21,
5.6 Million (Annualized)
Important. Low supply and rising prices continue to weigh on sales growth, but lower lending rates could offset these impediments.
New Home Sales
Fri., June 23,
10:00 am, ET
Important. Sales remain volatile from month to month, but price cuts and supply increases should enable sales to hold the long-term up trend.
Refis Up, Purchases Down
A meaningful drop in mortgage rates impacts refinances first. It’s everyone in the pool, and refinance activity rises. That was the case last week. Refinances (seasonally adjusted) surged 9% from the previous week to hit an activity level unseen since last November, according to the latest Mortgage Bankers Association data.
But as what often occurs with refinances, it’s everyone out of the pool if the trend fails to hold. We don’t see rates moving meaningfully lower from here, so we expect activity to assume a lower level going forward.
As for purchase activity (seasonally adjusted), it was down last week. The MBA’s purchase index showed purchase activity down 3% week over week. The good news is that we remain ahead of the game compared with this time last year. Year over year, purchase activity is up 8%.
As for the present, rates are ideal as we head into the summer home-sales season. At these rates, we expect purchase activity and home sales trend to higher through the summer months.
Info@DoctorMortgageAlliance.com (800) 385-0766
This Newsletter is for informational purposes only. The information contained herein may not be applicable to every situation or jurisdiction and we urge you to consult your professional advisor prior to acting on information contained herein. The content, accuracy and opinions expressed herein are not verified or endorsed by the sponsor hereof. Mortgage Matters Powered by In Touch Today. 555 Alter Street, Unit 19-D, Broomfield, Colorado 80020. Phone – 303.460.1027
CONNECT WITH US
Doctor Mortgage Alliance Birmingham, Alabama 35005
Copyright C 2016 Doctor Mortgage Alliance. All Rights Reserved. | Dallas, Texas 75024, (800) 385-0766 Doctor Mortgage Alliance is not a lender or a mortgage broker and does not provide mortgages. Doctor Mortgage Alliance is a service that connects residents, physicians, doctors, and physicians with physician/doctor loan specialists at various national banks. We do not offer physician loans or mortgages directly or indirectly through any representatives or agents. We do not market directly to consumers via email, telephone or mail.