It Still Ain't Happening This Year

Call us presumptuous, but we just don't see it happening. We don't see the Federal Reserve raising its target range on the federal funds rate.

Since the beginning of the year, we've expressed doubts that a fed funds rate increase was in the cards for 2015. U.S. gross domestic product (GDP) has yet to fully materialized. European GDP growth is even more anemic (which is why the Europeans undertook quantitative easing in March). The turmoil in Greece and the deep sell-off in Chinese stocks has further tempered Fed ardor for an interest-rate increase. Of course, things can change over the next couple months, but we don't think they'll change enough to warrant the Fed raising the fed funds rate. Things are simply too fragile.

The fed funds rate influences short-term rates most, but over time it works its way toward the long-end of the yield curve. Private participants exert more influence on the long end at the moment. These participants have pressured yields to rise. That is until this past week. Due to events in Greece and China, yields have fallen. The yield on the 10-year U.S. Treasury notehas dropped nearly 20-basis points.

As the yield on the 10-year note goes, so goes mortgage rates. The 30-year and 15-year fixed-rate loans were down over the past week, though not much. In most markets, borrowers were looking at only a five-basis-point drop . This suggests to us that the impetuous is for longer-term rates to rise once the turmoil on the world stage subsides.

The good news is that the turmoil hasn't taken any steam out of mortgage lending or housing. Purchase activity is again on the rise. Last week, the Mortgage Bankers Association reported its purchase index was up 7% week over week. Year over year, activity is up 32%. Not surprisingly, the trend in purchase lending mirrors the trend in home sales. Both have climbed palpably since early spring.

We see both continuing to climb through 2015. Home price growth remains robust, thus lifting more homeowners into positive equity. Home-price appreciation has also reverted to a more normalized pace. This is good news because double-digit year-over-year price appreciation is unsustainable. Price growth is getting closer to the “Goldilocks” sustainable rate of 3%.

In short, nothing has really changed since the beginning of the year: We don't see a rate increase, and we're as bullish on housing and mortgage lending today as we were six months ago.

Information provided by Jessica Regan.

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