A Detour to 5%

A Detour to 5%

Mortgage rates dropped, and they dropped meaningfully this past week.

Mortgage rates dropped, and they dropped meaningfully this past week. 

The rate range on the prime 30-year fixed-rate conventional mortgage dropped to 4.5%-to-4.625%. It had been ensconced in a range 13-basis-points higher for the past month. Borrowers got a reprieve. 

We noted last week that Italy was holding interest rates in check because of the prospect it could leave the European Union. The prospect has become more palpable in recent days. Here’s the skinny on Italy:

The anti-establishment 5-Star Movement, Italy's largest party, and the far-right League party picked EU critic Paolo Savona as their economy minister. The two parties share a common platform – both are critical of Europe's single currency, the euro. The parties had won more than half the votes in parliamentary elections this past March. The Savona pick was subsequently vetoed. A new vote is expected in late July.

So why would an Italian election influence U.S. interest rates?

U.S. investors are nervous because the prospect of Italy (Europe’s third-largest economy) leaving the EU opens uncharted territory. Could Italy be the first domino to fall? Does it instigate the disintegration of the euro and the EU?  Uncertainty has been jacked higher. 

When investors are nervous and uncertain, they seek a haven. U.S. Treasury securities are favored havens. Investors bid up the price of these securities. By doing so, they bid down the yield. The 10-year U.S. Treasury note influences long-term mortgage rates. As the yield on the 10-year note goes, so go mortgage rates. 

The yield on the 10-year note dropped 25 basis points. That’s a big move. It’s no surprise, then, that we saw mortgage rates drop. 

Investor sentiment is fickle, though: scared today, emboldened tomorrow.

The yield on the 10-year note spiked eight basis points higher (because of investor selling) on Wednesday. This suggests investors are less worried. More investors view (rightly, in our opinion) that Italy is less likely to leave the EU than initially imagined. Not surprisingly, mortgage rates moved higher. 

This, too, shall pass, as all the teeth-gnashing passed after the Brexit vote (remember Brexit?). If we focus on the long game, we still find a rising-interest-rate environment. Indeed, market watchers expect the Federal Reserve to raise the federal funds rate 25 basis points at its June 13 meeting. 

Therefore, we don’t expect to see much more improvement in mortgage rates. Then again, we don’t expect them to surge immediately higher, either. It’s worth noting that the second estimate on gross domestic product (GDP) growth for the first quarter came in a little light. GDP growth was only 2.2% when annualized. It was 2.9% in the fourth-quarter of 2017.

The new lower range on mortgage rates could hold for a while longer. But why chance it? For anyone within 30 days of closing, locking would hardly be imprudent.  


Home Sales Come in Cool; Home Prices Come in Hot

The latest news on home sales was nothing to write home about. Sales of both new- and existing-homes failed to meet consensus estimates in April. The reasons differ somewhat.  

New-home sales failed to meet expectations because of lower builder activity. Builders are challenged by rising land, labor, and material costs. Somewhat paradoxically, supply is up. There are 300,000 new homes on the market, the highest in nine years. 

Existing-home sales remain subdued for the usual reason – low inventory (particularly in the lower-priced niches). Inventory decreased 6.3% year over year in April compared to a year ago. Existing home sales are down 1.4% year over year. 

Relentless price appreciation hurts both new- and existing-home sales. The Case-Shiller Home Price Index actually showed price appreciation accelerating in March. (That said, the data are skewed by a few hot markets in Northern California and the Northwest.) 

We don’t expect sales growth to gain traction in the near future. Purchase mortgage activity has eased. The MBA reports that applications were down 2% week over week for the latest reported week. The latest decrease drops the year-over-year gain to 2%. 

But let’s keep things in perspective: Housing and purchase mortgage activity remain elevated year over year. They’re a lot more elevated than five years ago. Still, we don’t expect to see notable gains over the next couple months.