An Inauspicious Start to 2016

Most of us enter a new year with a sense of optimism. The slate has been mentally cleared and we're ready to start anew.

As is often the case, though, reality can have a way of tempering optimism. Here we are less than a week into 2016 and the economic news has been mostly a buzz-kill.

The stock market, for one, leaves much to be desired. Stocks have traded down over the few trading days in 2016. Investors are worried that China's economy will slow, thus reducing demand for goods and services from around the world, including our slice of it. If China's economy slows, the reasoning goes, so will the U.S. economy.

Unfortunately, we already have enough to worry about on the growth front. The Federal Reserve Bank of Atlanta estimates that fourth-quarter gross domestic product (GDP) grew at just 0.7% on an annualized rate, down from a prior estimate of 1.3%. JP MorganChase recently cut its fourth-quarter GDP estimate in half to 1% from 2%. Looking to 2016, economists at Duetsche Bank scaled back their first-quarter GDP forecast by half a point, to 1.5%.

Because no market is an island, an all-around slowdown in GDP growth wouldn't be good for housing. Sales were already sluggish through the final quarter of 2015. We don't expect to see an uplift to start 2016. Lending activity points to more of the same. In the two weeks ended January 1, purchase application activity was down 15% compared to the prior two weeks, according to Mortgage Bankers Association data.

We do have some good news to report.

Residential construction spending rose 0.3% for a second-consecutive month in November. Spending on new single-family homes rose strongly in 2015, with the year-over-year growth rate expanding to 9.3%. Spending on multi-family homes is up 24.5% year over year. Housing construction and new-home sales are meaningful contributors to GDP growth.

Mortgage rates should remain a back-burner issue, at least for the immediate future. Mortgage rates across the rate spectrum have been staid since the Federal Reserve raised the federal funds rate last month. Longer-term rates did drift slightly higher to end 2015, but we don't expect them to drift much higher, if they drift at all. In fact, given recent price action in the 10-year U.S. Treasury note, we could see the 30-year and 15-year fixed-rate loans drift lower. The yield on the 10-year note is again below 2.2%.

As we explained last week, long-term lending rates are showing little inclination to move higher. This is mainly due to a lack of worldwide inflation. Oil prices hit an 11-year low this week. Most other commodity prices are also at multi-year lows. If we get a whiff of any meaningful inflation, we doubt that it will occur in the first-quarter of 2016. Therefore, we doubt that we will get any meaningful mortgage-rate increases in the first quarter.   

Information provided by Jessica Regan.

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