How Will the Housing Market Handle Rising Rates?

Ever since the November election, when the Trump victory sent bond yields flying and mortgage rates following closely behind, analysts have been preoccupied with that question. From overly cautious lending standards to extremely tight inventory, the housing market has plenty of challenges, and any additional constraint won’t help.

While mortgage rates have not made a significant move upward yet, most analysts project stronger economic growth in the U.S. for later this year which always causes fixed rates to rise.  But everything is relative as a stronger economy also means higher wages and more jobs….two key factors in housing demand.

With Inventory levels at 17 month lows and more consumers joining the work force and earning more, it actually more than offsets any uptick in mortgage rates.

The real key is going to be the regulatory path for changes in the Dodd-Frank Act.  The Trump Administration has already signed one executive order for departments to review and change their regulatory rules based upon looser interpretations, but they have made it clear that they will be proposing changes in Congress to lighten up the impact of Dodd-Frank which would make lending easier for financial institutions and potentially add more home buyers to the market place than their otherwise would be and that would add more demand to a housing market that is already very tight.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.50 MBS) gained +22 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.  We had another “choppy” week as we had a -83BPS move from our best pricing levels of the week (lowest rates) to our worst pricing levels of the week (highest rates).  Compare that to a -74BPS swing the prior week and -96BPS the week before that and you see that the bond market has been very volatile.

We had a very light week for economic data.  We did important 10 year and 30 year Treasury auctions but neither had any significant influence over MBS pricing.

Domestic Flavor:

Inflation?: Maybe.  Import Prices jumped 0.4% in December which was double the market expectations of 0.2%.  Year-over-year (YOY) Import Prices jumped 3.7% which was a huge uptick from November’s YOY reading of 1.8%.

Consumer Sentiment: The preliminary February reading came in at 95.7 which is a good reading but it was certainly lower than market expectations of 97.9 and a large drop from January’s uber-high 98.5.

Geo-Political: President Trump said that he can now support a “one China” policy which is causing long bond traders to ease up a bit on concerns over a major trade war.  The bond market also focused on his statement that we can expect a major announcement (finally) regarding tax reform/rates in “2 to 3 weeks” during a meeting with airline executives.

The Talking Fed: Federal Reserve Governor Daniel Tarullo resigned effective in April. This was unexpected and he was a leader in the regulatory side.  However, this is welcome news as he was one of the “enablers” on the Board of Governors and bond traders see it as a potential positive towards the administrations movement of lower regulations.
St. Louis Fed President James Bullard (not a voting member): Said that he thinks that the Fed can keep rates relatively low for some time.  He said they could leave the rates alone and instead focus on their asset reinvestment purchases as a tool to raise rates instead.
Chicago Fed President Charles Evans (voting member this year) said that he supports gradual interest rate hikes and expects an economic boost from U.S. President Donald Trump’s planned fiscal policies.

What to Watch Out For This Week:

The above are the major economic reports that will hit the market this week. They each have the ability to affect the pricing of Mortgage Backed Securities and therefore, interest rates for Government and Conventional mortgages. I will be watching these reports closely for you and let you know if there are any big surprises.

It is virtually impossible for you to keep track of what is going on with the economy and other events that can impact the housing and mortgage markets.  Just leave it to me, I monitor the live trading of Mortgage Backed Securities which are the only thing government and conventional mortgage rates are based upon.

Brought to you by:

Taff Weinstein


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Houston, TX 77009
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