A popular pithy quote, attributed to Mark Twain, goes, “History doesn’t repeat itself, but it often rhymes.” Whether Twain actually uttered this observation is debatable; the truth behind it isn’t. We frequently see current patterns that resemble patterns in history.
The year 2016 is now history, but what we see today resembles what we saw a year ago: We refer specifically to patterns in interest rates.
Fifteen months ago, we saw the yield on the 10-year U.S. Treasury note and most mortgage rates rise into the December 2015 meeting of Federal Reserve officials. At that meeting, Fed officials raised the target range on the federal funds rate 25 basis points. Soon after the fed funds rate was raised, the yield on the 10-year Treasury note drifted lower, and so did most mortgage rates.
We see a similar pattern occurring today. Interest rates and mortgage rates rose into the December 2016 Fed meeting. Fed officials again raised the range on the fed funds rate 25 basis points. Since the Fed raised the fed funds rate on Dec. 14, the yield on the 10-year Treasury note has drifted, and so have most mortgage rates.
The 10-year Treasury note holds considerable sway over mortgage rates. As the yield on the 10-year note goes, so go quotes on 30-year fixed-rate loans. Not surprisingly, quotes on the 30-year mortgage loan have drifted lower.
A couple weeks, we surmised that mortgage rates would develop a lower range and stick with that range at least until the Jan. 20 presidential inauguration. So far, we’ve been fairly accurate. We expected quotes on a top-tier 30-year conventional loan to range between 4.125% and 4.25%. That’s been a popular range for the past two weeks. (Of course, there are a number of variables embedded in a mortgage quote, but the national average range has held.)
Last year, quotes continued to drift lower after the Fed raised the fed funds rate. By July, a quote below 3.5% on a 30-year conventional loan was as prevalent as 90-degree daytime temperatures in South Florida.
We also surmised that it would be a while before we saw a sub-4% quote on a 30-year loan. We might have to retract our supposition. Fed officials appear to be getting cold feet on rate increases.
The recently released minutes from the December 2016 Federal Reserve meeting suggest that even one increase this year might be pushing it. CNBC reports the minutes show that a gradual “three-step” increase is in doubt. Many Fed officials raised a number of risks that, if realized, could cause the Fed to change direction.
Could we see a 3.5% quote on a 30-year loan by July? We can no longer discount the possibility. If we do see it, history will not only have rhymed, it will have repeated.
Date and Time
Consumer Price Index
Wed., Jan. 18,
8:30 am, ET
Moderately Important. Consumer prices are rising at a rate to please Fed officials, but that might not be enough to raise interest rates.
Home Builders Sentiment Index
Wed., Jan. 18,
10:00 am, ET
Important. Home builders continue to see rising demand and construction activity for 2017.
Thurs., Jan. 19,
8:30 am, ET
1.1 Million (Annualized)
Moderately Important. Though the report is volatile month to month, single-family starts continue to show persistent strength.
Black Knight Financial Services released its November Mortgage Monitor report this past week. There were a number of positive takeaways, particularly on the negative-equity front.
BKFS reports that the number of U.S. mortgage borrowers in negative equity has decreased to 2.2 million. This is the lowest number since early 2007. More impressive, the number of borrowers in negative equity has decreased by a million over the past year. As it now stands, only 4.4% of homeowners with a mortgage are underwater.
On the other side of the coin, tappable home equity has increased to $4.6 trillion. This is equity that can be monetized and used for investment or consumption. Both drive economic growth.
In a separate report, ATTOM Data Solutions’ data show that only 0.7% of all homes had at least one foreclosure filing in 2016. This is the lowest percentage since 2006.
The data in these reports portend better days ahead for home sales and purchase lending. Few sellers like coming to the table owing cash. With so many homes in positive equity, we expect to see an uptick in housing inventory (a dearth of which has plagued home sales). At the same time, we expect to see more purchases financed with a mortgage loan.
Things are as good as they’ve been in over a decade, but we expect them to get even better. We expect 2017 to produce more home sales and more purchase loans than 2016.
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