Mortgage Rates React To The Expected

Mortgage Rates React To The Expected

Federal Reserve officials came and left on Wednesday...

They came with an interest rate increase. They increased the range on the federal funds rate 25 basis points. The new range is now 1.5%-to-1.75%. (Bloomberg shows a quote of 1.67%.)

No one was surprised. Fed officials have foreshadowed the increase for the past month. Nevertheless, a small tremor occurred when the Fed announced the increase. The yield on the 10-year U.S. Treasury note spiked five basis points on the announcement. The yield has subsequently drifted lower.

Mortgage rates anticipated the Fed’s interest-rate announcement. Lenders were on the defensive and quotes were on the high-end early in the day. Once the expected was delivered, the quotes became slightly more accommodating, but only slightly.

Before he left, Jerome Powell, Fed chairman, projected two more interest-rate increases this year.

The Fed chairman also projected stronger economic growth.

The Fed now forecasts 2.7% gross domestic product (GDP) growth in 2018 versus the 2.5% forecast in December. The December forecast could prove right. Then again, so could the new March forecast. Perhaps both will prove wrong. History shows us that the Fed’s crystal ball has proven to be no more clairvoyant than that of other public prognosticators.

As for consumer-price inflation, which is most impacting on the long-end of the yield curve (and long-term mortgage rates), the Fed doesn’t see much. The Fed sees core inflation – calculated sans food and energy – running at 2.1% annually for 2019 and 2020. This is on the high side, but not egregiously so. It’s likely wrong anyway.

Powell also offered his insights on Fed policy and asset prices before he left. He conceded that equity markets and commercial real estate could be vulnerable to rising interest rates. (Interest rates are a discount factor. Rising interest rates lower the present value of future cash flows, thus leading to lower asset values.)  

As for housing, Powell sees no such vulnerability. Housing is warm, but not overheated, according to Powell.

Permit us to editorialize. Housing in the aggregate may not be overheated, but we don’t deal in an aggregated housing market. We deal in local markets. A few local markets, though not overheated, are getting toasty. (We can feel the heat radiate from Seattle and San Francisco.)  

The toastier the market, the more abrupt the cooling, so dictate the laws of financial physics. We refer to a recent update from Grant’s Interest Rate Observer that featured the Toronto housing market (which regular viewers of HGTV’s Love It or List It are likely familiar). Grant’s tells us that Toronto home prices – once white-lava hot – have dropped 12.4% year over year; active listings have nearly tripled.

We’re not saying similar toasty burgs in the States are in imminent danger of an abrupt cooling. We are saying to at least be alert to the possibility. 

Demography Is On Our Side

We confess that we frequently lose track to which ages get slotted into which category. One age group, labeled Generation Z, caught our attention. These are people born between the mid-1990s and the early-2000s. The generation appears to have taken a shine to owning a home, unlike its immediate preceding generations.

A recent MarketWatch article, titled “Nearly 100,00 Members of Generation Z Own a Home,” drove home the point. The article tells us that, according to TransUnion data, more than 99,000 members of Generation Z have a mortgage. The average balance is $140,000. Keep in mind that we’re talking about people aged 23-and-under.

MarketWatch speculated why this young generation (Generation Z) is more willing to buy a home than its immediate predecessors. One plausible speculation is that they’re further removed from the housing crisis, so they’re less inhibited by memory.

Regardless of the reason, the MarketWatch article offers two important takeaways: One, when there is a will, there is a way. The person who wants a home will get it. Two, people prefer to own than to rent their home. Contrary to the flood of articles to the contrary a few years ago, people want ownership. It was true 100 years ago. It’s true today. It will be true tomorrow.

This is good news for us. As memories continue to recede, we should expect more Millennials and Gen Xers to join their junior cohorts.