Rising Rates, Higher Prices, and Record Low Inventories

Although the first three weeks of the year weren't inconsequential, investors were understandably eager to react to Trump's first week in office. One of the most notable developments was a break higher for stock prices after weeks of stagnation. This had the unfortunate effect of pushing bond yields (aka "rates") even higher.

2017-1-27 Stocks

Although this brought mortgage rates to 2017 highs, the broader range remains intact.  In the context of that range, late-December through mid-January provided an opportunity for rates to undergo a correction from an incredibly abrupt post-election spike.  The first 3 weeks of January were like a holiday break, and now it's back to business.

Further increases in rates raise legitimate questions for mortgage and housing markets.  Certainly, we've already seen the effects on refinancing activity, but that's to be expected any time rates rise this quickly.  In fact, refi applications tend to have a fairly predictable lower boundary.  

As I mentioned in previous newsletters (both in Nov and Dec), because of that lower boundary, refi activity didn't have as far to fall this time around compared to 2013.  Recent lows in the MBA's weekly Mortgage Market Index confirm that refi applications have bounced at expected levels.

2017-1-27 Applications

True to form, purchases have been much less affected by the rate spike, but that's partly due to the timing of housing reports.  In the chart above, the numbers cover the previous week's applications.  In the world of housing data, that's timely!  Most reports cover the previous month's data.  That means we're just getting December's New and Existing Home Sales numbers this week.  

Existing Home Sales fell moderately to an annual pace of 5.49 mln from last month's estimate of 5.65 mln.  Despite the decline, 2016 was unsurprisingly stronger than 2015.  The most interesting facet of the report was a plunge in inventories to the lowest level since 1994.

2017-1-27 Existing Sales

What's preventing homeowners from listing their homes?  It's not a one-dimensional issue.  Some sales simply aren't counted because they're not occurring in traditional channels (pocket listings and certain distressed sales).  We also know mobility needs have decreased which lowers the organic level of demand for home-buying.  

More tangible factors include rising prices of new homes coupled and rising rates.  That's a combination that prevents some would-be new home buyers from moving up (thus NOT adding to existing home inventory, as seen in the chart above).  This week's New Home Sales data doesn't disagree.  Sales fell sharply while prices remained pressed up against all-time highs.

2017-1-27 New Homes

This is part of the catch-22 of new fiscal policies and a potentially growing economy.  If the economy can grow at a faster pace and if fiscal policies are adding to inflation pressure, rates will continue to rise.  In turn, higher rates hinder further economic activity--especially in the housing and mortgage markets.  Decreased economic activity and inflation pressure would allow rates to fall again, but most experts agree that's a ways off.

Separate economic data this week suggested that near-term concerns about economic growth could remain on hold for a while longer.  The first reading on Q4 GDP came in at +1.9 percent versus a median forecast of +2.2 percent.  

Next week brings several of the most significant economic reports, including the all-important jobs report on Friday.  In addition, we'll get an updated statement from the Fed on Wednesday.  While investors will try to glean clues from any changes in the Fed's verbiage, there's effectively no chance of a rate hike this time around.

Recently Released Economic Data

Time Event Actual Forecast Prior
Tuesday, Jan 24
10:00 Dec Existing home sales (ml) 5.49 5.52 5.61
10:00 Dec Exist. home sales % chg (%) -2.8 -1.1 0.7
Wednesday, Jan 25
7:00 w/e Mortgage Market Index 397.4 382.2
7:00 w/e MBA Purchase Index 243.2 229.4
7:00 w/e Mortgage Refinance Index 1265.6 1263.2
Thursday, Jan 26
8:30 w/e Initial Jobless Claims (k) 259 250 234
8:30 w/e Continued jobless claims (ml) 2.1 2.040 2.046
10:00 Dec New home sales-units mm (ml) 0.536 0.588 0.592
10:00 Dec New home sales chg mm (%) -10.4 -1.0 5.2
Friday, Jan 27
8:30 Q4 GDP Advance (%) +1.9 2.2 3.5
8:30 Dec Durable goods (%) -0.4 2.6 -4.5
10:00 Jan U Mich Sentiment Final (ip) 98.5 98.1 98.1
Monday, Jan 30
8:30 Dec Consumption, adjusted mm (%) +0.5 0.5 0.2
8:30 Dec Personal income mm (%) +0.3 0.4 0.0
8:30 Dec Core PCE price index yy (%) +1.7 1.6
Tuesday, Jan 31
8:30 Q4 Employment costs (%) +0.5 0.6 0.6
9:00 Nov CaseShiller 20 mm SA (%) +0.9 0.7 0.6
9:45 Jan Chicago PMI 50.3 55.0 54.6
10:00 Jan Consumer confidence 111.8 113.0 113.7
Wednesday, Feb 01
7:00 w/e Mortgage Market Index 384.7 397.4
8:15 Jan ADP National Employment (k) 246.0 165 153
10:00 Jan ISM Manufacturing PMI 56.0 55.0 54.5
10:00 Dec Construction spending (%) -0.2 0.2 0.9
14:00 N/A FOMC rate decision (%) 0.50-0.75 0.625 0.625
Thursday, Feb 02
8:30 Q4 Labor Costs Preliminary (%) +1.7 1.9 0.7
8:30 Q4 Productivity Preliminary (%) +1.3 1.0 3.1
Friday, Feb 03
8:30 Jan Non-farm payrolls (k) +227 175 156
8:30 Jan Unemployment rate mm (%) 4.8 4.7 4.7
8:30 Jan Average earnings mm (%) +0.1 0.3 0.4
10:00 Jan ISM N-Mfg Bus Act 60.3 61.2 60.9
10:00 Jan ISM N-Mfg PMI 56.5 57.0 56.6

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