Are Rates ready to finally make their move? Financial markets are out of patience…

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Over the past few weeks, we've increasingly witnessed a consolidation in bond markets. (That's a fancy way of saying interest rates have been less and less volatile.)  When we look at this on a chart, and if we draw lines resting along the highest and lowest interest rates, the lines converge on a single point.  More often than not, rates will break forcefully higher or lower before reaching that point. If the analogy works for you, think of this like squeezing a spring between your thumb and forefinger.  The space occupied by the spring gets smaller and smaller until one side slips.  The spring could launch in either direction.

As of last week's Jackson Hole Symposium (where the Fed often shares some more candid thoughts about monetary policy), interest rates could scarcely have been compressed any further. When the Fed Chair's speech was made, rates moved lower at first, but shortly thereafter, the Vice Chair framed that speech in a different context.  Basically, "Hey everyone! Yellen (the Fed Chair) just said we're going to hike rates in 2016!" is what was stated, and rates moved quickly higher in response.

However, additional comments from Vice Chair Fischer helped everyone calm down. The end of any given month also tends to be more rate-friendly, because certain investors are required to hold a certain amount of bonds for their official month-end reporting (higher demand for bonds equates to lower interest rates).

So as September began, rates moved higher immediately only to be sent tumbling back to the previous floor by exceptionally weak economic data on Thursday (ISM Manufacturing).  Then on Friday, the big jobs report came in below its forecast; something that would normally help rates move lower, or at least hold their ground. Instead, rates began rising back toward recent highs, suggesting that markets may be have simply decided "it's time" to break out of the consolidation pattern, regardless of the quality of the evidence.

Does all this Fed-related interest rate drama matter for the housing market? Absolutely! At first glance, it might not seem like housing would respond too much to interest rate volatility, but in the bigger picture, the correlations are undeniable.  Not only are rates, themselves, a factor, but market psychology can also have a bearing on the strength of the housing market. Incidentally, a longer term chart of the Pending Home Sales data that came out this week helps illustrate the point.

Apart from the home buyer tax credit distortions in the immediate wake of the financial crisis, the most notable changes in the Pending Home Sales Index have followed the major Fed policy developments. In 2013, the Taper Tantrum clearly took a bite out of sales, and then the Fed's rate hike rhetoric in 2015 aligned with the next salient decrease in activity.

The reality is, we are still experiencing historic low rates. Click Here for free options about how rates can help your situation or call me direct at 801.599.5363.

Wow! Rates moved back to two-week lows!

cfc_16-06_headshot_matt01_webEven though last week we experienced a 7-year high in Existing Home Sales, concerns about rates and new construction remained. Theoretically, with two major central bank announcements and New Home Sales data, the current week could have added to this anxiety. In reality, just the opposite happened!

Let's begin with rates. At the beginning of the week, they stood at the highest levels since Brexit (the UK's withdrawal from the EU). Markets were waiting to see what the FED and Japan had to say in their respective policy announcements on Wednesday and Thursday. Expectations were that the FED would talk up the economy somewhat based on the last jobs report being strong and a so far less catastrophic fallout from Brexit. Some even feared a rate hike prediction at their September meeting.

Although the Fed Funds Rate doesn't affect mortgage rates directly, when a market consensus pushes the next hike further into the future, as was the effect of this week's announcement, most interest rates tend to fall, including mortgages. Also, major foreign banks have had a hand in creating the current reality for financial markets. Even so, the Bank of Japan's less than expected delivery Thursday night wasn't enough to deter bond buyers. Ultimately, rates moved back to 2-week lows by Friday afternoon.  In the bigger picture, not only does this keep the long term trend intact, but also calls into question doomsday scenarios in the financial news. For these to be worthy of our attention, rates would need to be much higher than they are now, somewhere in the ''danger zone" as seen in the following chart.

Danger Zone chart

Danger Zone chart

Based on current rates, it would be easier to argue an impending move to new all-time lows. Rates can always move higher, I'm merely saying that, based on the charts, the decades-long trend towards lower rates is alive and well.

 

Now for some housing-specific news. Rising home prices are also doing a great job of avoiding their demise. This week's data showed a slight deceleration in gains, but not enough to change the trend of 5-6% year-over-year appreciation, which has been uncannily steady over the past 2 years.

Rounding out our trio of good news, we had New Home Sales hit a post-crisis high this month, comin in at 592k homes versus a median forecast of 560k. This makes the past 5-6 years look stellar in terms of New Homes Sales growth, but in the bigger picture, we're just now getting back to the middle of the pre-boom range.

Housing data wasn't all sunshine though. Pending Home Sales were equivocal at best, only rising slightly from last month. Foreclosure starts were surprisingly higher, bucking a general trend of improvement in terms of mortgage performance. Finally, the Census Bureau reported home ownership fell to a new all-time low of 62.9 % in the 2nd quarter.

Next week brings a slew on important data, culminating in Friday's big jobs report. This could have an even bigger impact on the Fed rate hike outlook than it's policy announcement this week if the data is unified in its message. That means rates run the risk of bouncing in the event of strong data, and they stand a chance to move back to all-time lows if the data is weaker.

With that in mind, we're still experiencing some of the lowest mortgage rates in history. This is the point at which lenders have been less and less willing to improve rates very much or very quickly. It's also the territory that leaves us at more risk of bouncing back toward higher rates, even if that proves to be yet another bump in a road that ultimately leads to new all-time low rates. The reality is that rates are at a 2 week low. They have been over 4% at least once in the last 6 months and it is still possible for a reversal.

Click here for free options about how rates can help your situation or call us direct at 801.599.5363.