Doctor’s > Rate and Economic Update: An Impossible Proposition




Keeping you updated on the market!
For the week of

July 17, 2017


An Impossible Proposition

Mortgage rates have held steady for the past week. That said, they’ve held steady near a three-month high.

Much of the recent inertia is attributed to the moment. Federal Reserve Chair Janet Yellen gave testimony before Congress this past week. Market watchers parsed every word. Because Yellen knew they would parse every word, she was careful to say as much as she could without saying much of anything (such are the tendencies of central bankers).

Yellen did confirm that additional federal fund rate increases are likely in order, but this is common knowledge. The goal with the fed funds rates is to maintain a neutral rate of interest. This means that the Fed attempts to set the fed funds rate to where it’s neither expansive nor recessive.

In Yellen’s opinion, the neutral rate, guided by the fed funds rate, will need to rise gradually over the next few years. She also opines that because the neutral rate is low by historical standards, the fed funds rate won’t need to rise much to maintain a neutral rate.

It sounds neat, tidy, and doable. The fact is, though, that the Fed is really groping in the dark. You can’t know what a change in the federal funds rate will do to the neutral interest (an unobserved rate at the present) until it has been done. It’s no easier to divine a neutral interest rate by committee than it is to divine the neutral corn price in Iowa by committee. But this is what the Fed is charged to do. Fed officials understand the difficulty in delivering on their charge.

So what’s all this mean to us?

Market participants believe the Fed is moving in a more dovish direction. This is evinced by Yellen’s testimony. As she talked, her talking was more cautious than expected. The yield on the 10-year U.S. Treasury note drifted lower. Mortgage rates remained in a narrow band, though they have drifted lower (albeit slightly).

The key for us is Yellen’s stance on the “neutral” interest rate. The Fed continues to anticipate that the longer-run neutral-inducing level of the federal funds rate is likely to remain below levels that prevailed in previous decades. This suggests to us that mortgage rates will remain below levels that prevailed in previous decades.

But it doesn’t mean mortgage rates will remain below levels that prevailed in previous years. Yes, we’ve seen quotes on the prime 30-year fixed rate mortgage dip to 4%, but they’ve subsequently moved higher. The dips were lock-in opportunities.

We think that dynamic will continue.  But we think it will continue to with dips occurring on a rising (albeit slightly rising) rate trend. With the Fed and other central banks cautiously exploring higher levels of interest rates, we think that locking on the dips remains a sound strategy. But don’t be surprised if the dips occur on a rising plane.




Date and Time
Consensus Analysis
Housing Market Sentiment Index


Tues, July 18,

10:00 am, ET

68 Index Important. Expectations for future sales remain strong, which points to elevated construction spending through the rest of the year.
Mortgage Applications Wed., July 19,

7:00 am, ET

None Important. The trend in purchase applications points to sluggish near-term sales growth.
Housing Starts


Wed., July 19,

8:30 am, ET

1.1 Million


Important. After a poor showing in May, starts should pick up in June. This would be welcomed news, given the powerful ripple effect housing construction has on the economy.

Housing: The One Sector That Continues to Perform

Many sectors of the economy have moved in fits and spurts since the last recession, but not housing. Most data — from prices, to construction, to sales — point to one direction for housing, and that’s up.

That said, Black Knight’s latest Mortgage Monitor report shows one segment of the housing market is down (which actually supports upward momentum). Delinquencies, at 4.62% of outstanding mortgages, are as low as they’ve been in years.

Black Knight goes on to tell us that underwater mortgages are also down 35% over the past year. The number of underwater borrowers has dropped to 1.8 million. This is the first time this population has fallen below two million since 2006.

Black Knights reveals more good news that rides on something that is up — rising home prices. Only 750,000 borrowers owed more than their homes were worth. Negative equity remains well below 2005 levels. Today, only 750,000 borrowers owed more than their homes were worth.

When you look at the data over the past five years, you’d be hard-pressed to find a sector of the economy that has outperformed housing. (We argue none has.) What’s more, we don’t see a sector challenging housing this year, and likely beyond. The trend will remain our friend, and the occasional flare-up in lending rates is unlikely to change that.

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