Good News Abounds, But Interest Rates Continue to Fall

It has been awhile, but economic growth has finally kicked into gear. Gross domestic product (GDP) growth for the second quarter was revised higher to 3.9% on an annualized rate. For most of 2015, and a good chunk of 2014, GDP growth has wallowed at 2% or lower. 

More encouraging, most everyone contributed to the growth spurt. Personal spending was stronger than most economists expected. At the same time, businesses upped their rate of fixed investment. Spending matters, to be sure, but investing matters just as much. You can't have personal spending without the investment to produce the goods and services on which to spend money. 

Speaking of investment, rising home builder investment in land, material, and labor continues to pay dividends. New home sales were up strongly in August, with sales posting at 552,000 units on an annualized basis. This is the highest monthly rate since February 2008. A 15,000 upward revision to July's tally added to momentum.

Expect more home builder investment and more new home sales in the months to come.   Supply remains tight, and prices remain strong. The former stands at 4.7-months supply at the current sales pace; the latter shows the median sales price at $292,700, a 0.5% monthly increase.  Low supply plus a favorable price trend equals more investment. 

As for overall home prices, the S&P/Case-Shiller Home Price Index showed prices up 5% year over year in July. The rate of appreciate continues to ease, but no one should be alarmed. The rate is simply reverting to the historical long-term rate (2% to 4%). This is a good thing. Prices in many markets have been rising faster than incomes, preventing potential first-time buyers from taking the plunge. Unfortunately, the rate of price appreciation in the lower-price niches continues to run at an accelerated pace. Younger buyers are still having a tough time entering the market. 

Given the recent spat of solid economic news, you'd think interest rates would trend higher. That hasn't been the case. The yield on the 10-year U.S. Treasury note has shed 25 basis points over the past two weeks. As the yield on the 10-year note goes, so goes long-term mortgage rates. Rates on 30-year fixed-rated mortgages are hovering near a four-month low. Quotes as low as 3.75% haven't been uncommon. 

What's more, rates continue to fall in spite of Federal Reserve Chair Janet Yellen saying the Fed is likely to raise rates this year. But market participants still aren't buying the narrative, which is understandable given the Fed's propensity to cry “wolf.” Federal funds rate futures are trading with only a 12% chance of a rate hike in October and 35% chance in December. 

As for us, we continue to stick with our January 2015 prognostication: No rate hike until 2016. All things the same, sub-4% on the 30-year fixed-rate loan should hold for the remainder of the year.

Information provided by Jessica Regan.

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