The GDP grew at a rate of 3.7 percent in the second Q2 estimate, way above forecasts, and most housing metrics have been positive as of late. . .how are housing and the economy going to work together for the remainder of 2015 and 2016 to buoy each other up?
Housing and the economy are finally in a supportive, virtuous cycle again. The economic growth we’ve seen over the last two years has provided the context for the healthy growth in home sales and the recovery of prices we have experienced this year. Higher prices are a result of surging demand with tight supply, which is finally resulting in more growth in single-family construction. Historically, new construction and housing services contribute 18 percent of the US economy. That contribution has been lower while new construction was depressed and while the housing sector worked through the distress brought on by the foreclosure crisis. Housing’s contribution is on the rise again, just in time to offset the drag from lower oil production and lower exports caused by the strong dollar.
More job creation, higher consumer confidence, and an increasing pace of household formation all lead to more demand for housing, keeping that virtuous cycle going.
Before Greece and then China rattled global stock markets, mortgage rates were already on the move. The 30-year fixed conforming rate has seen more than 50 basis points of movement in 2015, touching 4.2 percent briefly in June. The upward moves followed clear data that the US economy was strong and growing in the second quarter. But China’s weakness, and the easing of monetary policies in China and by other Asian countries strengthened the dollar and drove demand for US treasuries, driving yields down and mortgage rates with them. The selloff in stocks had the same effect—producing more demand for treasuries and lowering yields and mortgage rates.
At the beginning of this year, forecasters expected mortgage rates to be higher than they are now, so rates now in September remaining at such low levels is truly a gift for every buyer. The number one issue holding back would-be buyers this year has been tight supply. Now that school has started, frustrated buyers who haven’t been able to purchase have the most choices they’ve had all year and they haven’t missed the opportunity to lock in rates near their lows. I expect that will produce a much stronger fall as a result.
"The various mortgage metrics today suggest that today’s investor is looking for every reason not to make a loan."
As economic data continue to confirm that the U.S. economy is seeing solid and consistent growth, rates should resume their ascension. I wouldn’t be surprised in we challenge the June peak before the year is over.
The stock market doesn’t always move in reflection of the underlying strength of the U.S. economy, and the recent selloff is one of those corrections historically that are mostly about bringing down stock valuations. When the market is on consistent positive footing again, mortgage rates will likely move up.
What will be the short and long term effects on the mortgage industry if the Fed chooses not to raise interest rates in September?
Mortgage rates have already been ignoring the Fed. Despite the official target remaining at zero, we’ve already seen mortgage rates move up. I don’t really think the September decision—either way—will have much of an effect. The August employment data will likely cause more movement in mortgage rates than the official September policy announcement.
The Fed tried to increase mortgage rates in 2005 and 2006 to cool off the housing market. Over those two years, the target Federal Funds Rate was increased 300 basis points, from 2.25 to 5.25. Those moves only produced about 100 basis points of movement in mortgage rates, and that’s looking at the highest average monthly rate compared to the lowest average monthly rate. Overall the average 30 year conforming mortgage rates was under 6.2 percent in December 2006 even though the Federal Funds Target range was 5.25-5.25. The 30-year fixed rate in January 2005 averaged 5.7 percent.
Mortgage rates reflect global demand for U.S. bonds, and market volatility and global economic concerns make those bonds all the more attractive to a wider audience than just our Fed.
That said, I do think moderately higher rates are inevitable due to continued economic expansion and a tightening U.S. labor market. In housing, we’ve witnessed firsthand what happens when excess supply turns into limited supply—prices appreciate well above normal historical experience. The Fed seems intent on making sure inflation won’t flare up, and managing short term rates is their primary tool for controlling inflation.
I believe that modestly higher interest rates will help rather than hurt housing and the mortgage industry. Higher rates will provide banks and investors with more profit incentive to grow purchase mortgages, leading to more competition and wider credit access than we have today.
The various mortgage metrics today suggest that today’s investor is looking for every reason not to make a loan. When the potential rewards finally outweigh the potential risks, we’ll have more purchase originations even though the costs to consumers will be marginally higher. Today’s historically low rates don’t matter much to the households who can’t—or perceive they can’t—qualify.