Monday, May 18, 2015

What's in Fed Tea Leaves Regarding Mortgage Rates?

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We get a closer look this week at the behind-closed-doors discussion during last month’s Federal Reserve meeting. More detail will be useful because there’s confusion about when the Federal Open Market Committee might actually begin to raise interest rates. In addition, there are several key reports due on the housing market.

This week's economic readings include:
  • The National Association of Home Builders releases its May sentiment index.
  • The Commerce Department reports on April housing starts and building permits.
  • The Federal Reserve releases minutes from the April FOMC meeting.
  • The National Association of Realtors reports on April existing home sales.
  • The Labor Department releases the April consumer price index.

Handicapping rate-hike timing

Throughout most of the past year, the consensus among economists (as discerned by our Bankrate Economic Indicator survey) was for a “liftoff” in interest rates as early as June. The central bank hasn’t boosted short-term rates, now parked between zero and one-quarter of 1 percent, since 2006.
The timing of an increase appears to have been delayed after a weaker-than-expected first quarter. The forthcoming minutes will be mined for clues on when the rate hike might come.

April FOMC statement revisited

The official statement from the Fed’s policymakers gave us an idea about what they want to see before they'll pull the rate-raising trigger. The FOMC expects it will need to boost rates “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Alan MacEachin, corporate economist at Navy Federal Credit Union, says he’ll be “looking for indications in the minutes that reflect the degree of confidence among members of the FOMC that both of these events will occur in the near future.”

The difference between a consensus and “diversity of opinion” will help him to determine whether a rate hike could be coming in September or sometime later instead.

The scent of rising inflation?

Last week’s reading on wholesale prices, by itself, didn’t provide much reason to believe that inflation is picking up. In fact, it was moving in the opposite direction. The producer price index was down 0.4 percent, falling short of expectations.

Gus Faucher, senior economist at PNC Financial Services Group, thinks a transition may be in the cards. “With energy prices now at a bottom, inflationary will stabilize, then gradually move higher," he says. "This will give the FOMC the "confidence" it's looking for that inflation will move toward 2 percent.”

Faucher also points to acceleration in compensation costs within the Employment Cost Index as a sign of “a gradual pickup in near-term inflation.”

Home sales and the mortgage rate surge

Mortgage interest rates have risen for three straight weeks. Bankrate’s average for the 30-year fixed-rate mortgage was slightly above 4 percent last week. If those levels hold, or are exceeded, could that put a dent in the somewhat tenuous housing market recovery?

“Typically, mortgage rates don’t begin to act as a drag on housing until they hit around 6 percent and we are a long way from that,” says John Canally, economist with LPL Financial.

PNC Financial’s Faucher adds that the rise in rates is being countered by a variety of positives for the market, including new rules aimed at encouraging lending -- “particularly to first-time buyers.” He says affordability, reflecting the blend of home prices and interest rates, is good.

Upbeat sales forecast despite rising rates

The National Association of Realtors' chief economist, Lawrence Yun, commented last week that a relative shortage of homes available for sale is helping to push up prices and dampen affordability. While keeping a close eye on those trends, the trade group still expects sales of previously-owned homes this year to rise to the highest level since 2006.

An exception is in the Northeast, “where outside of Boston, contract activity and price appreciation have stagnated since late last year because of slower economic growth and weaker local job markets,” Yun noted.

No doubt the industry will be hoping that remains the exception and not an indicator of things to come for the rest of the country.

Information Provided by Donna Antonucci
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