Mortgage rates — it’s all political right now

Executive Summary

Mortgage rates have been running sideways since the dramatic post-election jump upward, arbitrarily bumbling up and down with the market responses to (largely) political news. Yesterday was one of those down strokes with the 10 Year Treasury (reasonable proxy for mortgage rate trends) dramatically breaking downward, plunging through the 100 day simple moving average.

10 Year Treasury — Strong downturn

Meanwhile, housing inventories continue to tighten causing home prices to rise in an increasingly seller’s market — forcing home buyers to need to be more aggressive with purchase offers. But, income growth does not seem to be strong enough to support these rising prices, which could stall true housing growth.

Weekly Analysis of the Market

This week is expected to be an economically dynamic week. There are two highly divergent narratives afoot in the market. One side would submit that the economy is beginning to heat up and needs moderation, while the other sees it at still sputtering and likely to slip back into recession with the slightest Fed or political misstep.

Which of these narratives is likely to drive this week’s mortgage and stock market?

Here’s my opinion:

First and foremost, since the election, it’s all about politics. Fundamentally the economy has changed little since the election of President Trump. However, his rhetoric on his initiatives unequivocally moves markets. Post-election, his stated agenda of business friendly, tax reducing, and healthcare recasting jolted stock market exuberance.

However, the Trump administration and the markets are being reminded of the adage, “Easier said than done.” The disconnect between talk and implementation has caused the markets and mortgage rates to bumble along gaining and retracting back to post-election levels.

On a daily basis, you can roughly predict the direction of mortgage rates by the success or failure of the President’s agenda.

Point in case, the scuttling of the Republican’s recast of Obamacare sent the stock market lower and mortgage rates followed

In the near-term, you can probably predict daily rate movements more by political movements than substantive economic influence.

Meanwhile, there is the more traditional economic drivers like jobs, manufacturing, services, as well as general business performance. On this front, everyone is reading the tea leaves differently.

This week we get an update on jobs, with the question being: Can the employment continue its strong growth despite lower jobless claims? We will also get reports on manufacturing and services growth from the Institute for Supply Management (ISM) surveys.

The same question applies here:

Can strong growth and economic expansion continue?

Ironically, the question of sustained growth is hedged by the fact that we have already sustained the third longest period of economic growth in history — albeit muted and shallow.

The bottom line for the next couple of weeks: I think we can expect more of the same trends in the mortgage market.
  • Mortgage rates move up and down within a relatively tight band — making them relatively flat and immaterial
  • Home inventory will continue to tighten and force buyers to be aggressive with purchase offers, giving sellers the upper hand
  • Inventory shortages will produce natural incentives for new home construction, but this is a slow trend to turn because of risk, capital investment, and skilled labor shortage that turned to alternative employment in the last downturn
  • Therefore, the strongest short-term trend is that home values continue to climb, assuming wage/income growth can catch up.

There is a lot to digest in this edition. What questions or comments do you have? What did I miss?

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.