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It Looks Like a Done Deal

March 13, 2017

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This has been one of the quickest change of sentiments we’ve seen in some time.

Less than a month ago, no one gave meaningful odds that the Federal Reserve would raise the federal funds rate at its March 14-15 meeting. Traders in fed funds rate futures contracts were betting with less than 25% odds a rate increase would occur. As we write, the odds are 86%.

 The mortgage market has certainly taken the plunge. The trend in rates — across product and duration — is up significantly over the past week.

Surprising to some, the rising trend in lending rates has brought a rising trend in lending activity. The Mortgage Bankers Associations’ latest weekly reading on mortgage lending shows an increase in both purchase and refinance activity.  We’re not terribly surprised. Many potential borrows wait for a potential pullback in a flat market. They anchor to a past rate. But when rates begin to pull ahead and show no signs of a pullback, they switch to action from inertia. 

Purchase activity has been a bright spot since the beginning of the year (and really since the election).  Rates have moved higher, but activity remains brisk. Year over year, purchase activity is up 4%. This confirms our sentiment for the past couple years: A mortgage rate is no longer the overarching arbiter in the decision to buy. 

Other economic variables have come into play. Job growth remains brisk and economic growth appears poised to finally ramp up. More people can afford to service a higher-rate loan. What’s more, a higher lending rate should lead to higher mortgage credit availability. Higher spreads will lead to more lending opportunities to more borrowers. (Though many in the media complain about tight lending standards, the fact is that the MBA’s Mortgage Credit Availability Index has risen 75% in the past four years.)

History supports optimism in the face of rising mortgage rates: In 2004-through-2006, the Fed raised the fed funds rate over four percentage points. Over that time, mortgage rates rose… and so did home sales and home prices. Of course, history doesn’t repeat exactly, but as Mark Twain pointed out, it does frequently rhyme. 

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