It's All About the Interest Rate
The employment numbers for December were released last Friday. As expected, the economy created another 200,000+ jobs for the month, which has been the case for 11 of the past 12 months. To be specific, 252,000 new jobs were created in December.
December's job gains have dropped the unemployment rate to 5.6% – the lowest it has been in seven years. 2014 turned out to be a darn-good year for anyone seeking a job. In fact, 2014 was the best year for private-sector job growth since 1997.
The economy is obviously doing well. Usually with rising economic output comes rising interest rates. This occurs for a couple reasons: namely rising loan demand and rising inflation risk.
But here we are in the second week of January 2015 and interest rates are very low, and in some cases at an all-time low. The yield on the 10-year U.S. Treasury note is down to 1.8%. That's as low as it has been in two years. Meanwhile, the 30-year Treasury bond is down to 2.4%, which is indeed a record low.
Not surprisingly, mortgage rates are also at a multi-year low. Bankrate.com's survey shows the 30-year fixed-rate loan averaged 3.8% over the past week. Freddie Mac's survey has the 30-year loan averaging 3.66%.
Last week, we mentioned that low consumer-price inflation is the principal reason rates remain so low. Falling oil prices are an obvious factor in their being a dearth of inflation. Many consumers are paying less than $2.00 for a gallon of gas these days. Depending on where you live this is $1.00 to $1.50
less than what you paid this time last year. Because oil is so pervasive throughout industry, lower oil prices are helping to keep inflation muted across the economic spectrum.
In Europe, China, Japan, and the United Kingdom, lower oil prices have not only kept inflation at bay, they've darn near extinguished it.
We also mentioned last week that shorter-term German bonds were actually being quoted with negative yields. The same negative yields are being seen in Japan. Given record low yields on many foreign government bonds, the yields on U.S. Treasury notes and bonds look generous in comparison. This means demand for U.S. debt will remain high, which means yields will remain low.
Because of low consumer-price inflation in the States and possible deflation abroad, lending rates are unlikely to move anywhere, except down. We don't expect to see mortgage rates rising anytime soon. That is, we don't expect to see longer-term rates – rates on the 15-year and 30-year loans – rising anytime soon.
But we could see pressure on short-term rates. The Federal Reserve is expected to begin raising the federal funds rate by mid-year. This means short-term loans, particularity the 5/1 ARM and adjustable-rate HELOCs, could see rates rise.
In other words, locking in a longer-term fixed-rate loan appears the least risky, and possibly least expensive, financing option in this market.
Date and Time
Home Builders' Sentiment
Tues., Jan. 20,
10:00 am, ET
Important. Sentiment has leveled off in recent months, but falling interest rates should raise optimism.
Wed., Jan. 21,
7:00 am, ET
Important. Activity has picked up and should maintain an elevated level on low mortgage rates and more accommodating underwriting standards.
Housing Starts (December)
Wed., Jan. 21,
8:30 am, ET
1.035 Million (Annualized)
Important. Stronger economic growth should lead to more starts in early 2015.
Existing Home Sales
Fri., Jan. 23,
10:00 am, ET
5.04 Million (Annualized)
Important. Sales growth remains muted, but recent economic data point to a pick up in sales of non-distressed properties.
Households Are Ready to Borrow
Falling mortgage rates have ignited a mini financing boom. Mortgage Bankers Association reports
mortgage applications were up a whopping 49% in the week ending January 9. Refinances were up 66% week over week. Just as encouraging, purchase applications were up 24%.
Of course, one week does not a trend make, but we like the potential for mortgage (and home sales) activity to rise this year.
First, there is the strength in job grow and economic activity we mention earlier. Second, more households are in a financial position to service more debt. The Federal Reserve
reports that household debt and financial obligations as a percentage of personal income is near multi-decade lows. In fact, mortgage debt is only 4.67% of disposable income on average. For comparison, it was over 7% back in 2007
More people working, more people in a sound financial position, cheap lending rates, and leveling home-price growth all offer persuasive evidence that 2015 could turn out to be a banner year for housing and mortgage lending.