Mortgage Rates Hit With A “Reverse-Bang”

April 12, 2015 - 4 min read

“Reverse-Bang” In Mortgage Rates

The week began with a reverse-bang.

Last Friday’s payroll report was distinctly weak, and fell a lot that day. However, Monday morning, markets immediately un-did themselves.

Right back to where they were — interest rates in the high-3s and the 10-Year Treasury just under 2.00%. A clear sign to consumers that the bond market has awakened from denial.

The Fed is coming. Two if by land, one if by sea, but either way, the Fed is coming.

Fed Minutes Show Few Surprises

One of the forces on last week’s mortgage rates was the Federal Reserve’s release of minutes from its March 17-18, 2015 meeting. In many places, the minutes were described as showing a Fed “divided.”

No, the Fed is not.

The control group of the Federal Reserve — comprised of Fed Chairwoman Yellen and the governors; and regional Fed presidents including Dudley, Williams, Rosengren, Evans, and Lockhart — is in complete agreement. The group agrees that the should raise the Fed Funds Rates from its current range near 0.00 percent later this year, save for the the U.S. economy beginning to swoon.

The increase will most likely occur during the summer, and at a very low slope. And, without further warning. The warmer the economy appears, the sooner the Fed will raise the Fed Funds Rates.

If the economy runs a tad cool, expect for early-fall.

Any other class of Fed chatter seems to come entirely from the other regional presidents, who seem unaware and uninterested how their hawkish world view may be out of sync with reality.

Nevertheless, the bond market is a big place, and much of it is convinced that the Fed will remain near 0% forever. It won’t.

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Housing Susceptible To Bond Market Movement

Housing remains especially susceptible to changes in the Fed Funds Rate which, some believe, will result in higher mortgage rates.

The Fed has held mortgage rates down via quantitative easing (QE) and other programs, but low inflation rates have had similar effect. Eventually, inflation rates will rise and mortgage rates are expected to rise with it.

So, the big question is: When mortgage rates, will the housing market withstand it?

Remember that last year, most mortgage forecasts called for interest rates to rise. Yet, they never did and eventually fell back into the 3s. Housing, however, still did not ignite in the presence of cheap financing.

Instead, the housing market has stumbled forward, underperforming against nearly all of Wall Street’s forecasts.

This spring, however, there are flickers of improving health.

There are up-ticks in purchase mortgage applications, for example. And volume is soaring, relative to prior years.

What Does Housing Health Look Like?

So, what does housing health look like?

I live in the hottest U.S. housing market — Denver, Colorado. Why us, and not elsewhere?

First, Denver home prices stayed flat between 2001 until ignition in January 2013. We had no bubble. We had a mini-bubble 1998-2000, but other than that, values have been flat.

Flat is good, and long flat is ideal. During twelve years of flat prices, purchasing power accumulated — even with wages growing at two, or three, or four percent, it amount to a lot of accumulated power.

Meanwhile, between 2000 to 2015, the state population grew by one million people, which is a 25% increase in residents, with many of them within commuting range of Denver. And, this happened while prices were flat.

And, because of accumulated development along with Colorado’s mania for open space preservation — outside a municipality, the minimum lot size in Colorado by law is 35 acres — Colorado is short of land.

Near Denver, it’s very short; and, near Boulder, we can see the last single-family building sites ever. The Denver-area economy is diversified, with stable payrolls in government, IT, biotechnology, and entrepreneurial.

So, when purchasing power meets scarcity — ka-BOOM.

Home prices rose within an annual range of up to 8% in 2013 and 2014 and, this year, attractive new listings are being sold by listing offices before they ever hit the market.

The ones which do make it to market may get 40 showings in the first 2 days. Offers now routinely waive appraisals with buyers committing to make up whatever cash gap exists betweens a lender’s required appraisal and an originally agreed-upon price.

A new bubble? Perhaps.

Other cities our like Denver, but most are not. Most others have neither the scarcity, nor the long-term flatness of values, nor even the regional income growth.

The Fed knows housing is still fragile, but... they are coming.

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Lou Barnes
Authored By: Lou Barnes
The Mortgage Reports contributor
Lou Barnes is a credit and mortgage market expert with nearly 30 years of experience.