Same Old, Same Old for Now

Same Old, Same Old for Now

Meet the mortgage rates for this week, which are like the mortgage rates from the previous week.

Meet the mortgage rates for this week, which are like the mortgage rates from the previous week.  Mortgage rates from the previous week were like mortgage rates the week before that.

Mortgage rates have held within a tight range through July. A quote on offer today differs little from a quote on offer three weeks ago. Upfront costs would be the differentiating factor.

Credit markets (as well as equity markets) have been held in suspended animation for the past month. The trade war has held center stage.

Credit-market participants, as well as equity investors, remain cautious. They’re unsure how best to proceed because they’re unsure what the escalating tit-for-tat tariffs imposed by the United States and its trading partners mean to the U.S. and global economies. 

More uncertainty is generally good for U.S. Treasury securities. Market participants seek haven investments when uncertainty runs high. U.S. Treasury securities are haven investments.

Heightened uncertainty is generally good for mortgage rates. We frequently note in our missives that mortgage rates take their cue from U.S. Treasury securities, particularly the 10-year U.S. Treasury note. The yield on the 10-year note has clung tightly to 2.85% through most of July. We shouldn’t be surprised that mortgage rates have remained subdued within the 4.625%-to-4.75% range established a couple months ago.

The Federal Reserve’s latest reading of the “Beige Book” – a report on the economy as the Fed sees it – did little to stoke animal spirits. The Fed sees expanding economic activity across the United States. The activity expands “modestly.” The Fed also described wage growth as “modest.” The Fed was notably unconcerned about interest rates, which have trended higher this year.

So modesty prevails for now. This suggests that we should see more of the same for mortgage rates. We expect rate movements to remain muted in the near-term.

That is, we expect movements to remain muted if ceteris paribus – conditions remain the same – prevails.

That’s a big “if.” Things frequently change with little warning. Things frequently change with enough magnitude to move markets. (The Trump administration repealing trade tariffs would offer enough magnitude to move markets. Interest rates would surely rise.) 

Modesty can quickly give way to “immodesty.” What’s more, the longer modesty has prevailed in the past, the less likely it will prevail in the future. (This is an incarnation of a “Minsky Moment,” where long periods of prosperity increase the likelihood of a sudden market correction.) 

The current economic conditions still favor higher interest rates over lower interest rates. We still see risk in floating in this modest market. We think the potential benefits of floating for a lower rate aren’t commensurate with the risk of getting stuck with a higher rate.

Time to Get Cautious on Homebuilders

Homebuilders have been on a tear since 2012. The SPDR S&P Homebuilders ETF – a fund of homebuilder stocks –  has doubled over the past six years. From 2012 through 2017, the ETF was up 150%. 

The jets have cooled in 2018. The SPDR S&P Homebuilders ETF is down 9% year to date. Home builders are doing less well this year compared to recent history.

June was an exceptionally disappointing month. Housing starts dropped 12.3% compared to a year ago. Starts posted at 1.173 million on an annualized rate. Single-family starts were especially disappointing. They were down 9.1% to 858,000 units on an annualized rate.

The good news is that homebuilders still optimistically anticipate the future. The National Association of Home Builders (NAHB) Housing Market Index posted was at 68 in July, unchanged from 68 in June. An index number above 50 indicates that optimism trumps pessimism.

The bad news is that homebuilders should be doing better than they are doing. The demand is there. What’s more, homebuilders have plenty of room to increase supply to meet the demand. Annual starts continue to run far below the 1.5 million annualized rate that is the historical norm. 

Rising costs weigh on growth. Rising interest rates contribute to rising costs, to be sure. Rising building materials are the greater concern, though. Tariffs applied to imported lumber have increased the average price of a home by $9,000, according to NAHB estimates. Recent tariffs applied to imported steel and aluminum point to an even higher average price.

Repeal of import tariffs on lumber and other commodities would likely push interest rates higher. That’s okay. The benefits of a tariff repeal would surely outweigh the costs.