Are We Still Trending in the Right Direction?

The answer to the above question depends on what trend is being referred to.

When referring to mortgage rates, many market pundits will tell you that we've been trending in the wrong direction. After all, rates are up more than a full-percentage point since April. For the past 12-weeks, though, the rate on the 30-year loan has held steady. For the most part, it has bobbed about within a 25-basis-point range.

Rates have held in limbo, anticipating the Federal Reserve's next move. Fed officials meet next week, and credit markets expect to receive additional information on its plans for “tapering.” Opinion among Fed watchers is split: Some expect the Fed to announce a cutback on its Treasury notes and mortgage-backed securities (MBS) purchases. Others expect the Fed to continue purchasing these securities at the current rate of $85 billion a month.

Forced into a bet, we'd have to side with the Fed continuing buying Treasuries and MBS at the current rate. We say that because job growth is certainly not trending in the right direction.

Despite the unemployment rate dropping to 7.3% from 7.4%, businesses increased payrolls by only 169,000 in August. The number fell short of the consensus estimate for 175,000. The drop in unemployment was the result of lower labor participation: More people simply gave up seeking work.

Economic growth remains sluggish, as it has been for the past five years. Sluggish growth, in turn, points to the Fed maintaining its low-interest-rate policies.

That said, if we were to hedge our bet, we'd add that any tapering will be “very modest” at best. Modest tapering suggests to us that mortgage rates won't move materially higher.

As for home prices, we're seeing signs the trend is peaking.

A survey generated by John Burns Consulting shows far fewer homebuilders raised prices in August. Nearly half held steady, while 5% actually lowered prices – the largest percentage since March 2012.

We can't say we're surprised: We've seen some let-up in home-price growth in recent data from S&P/Case-Shiller, CoreLogic, and others. This suggests the days of double-digit year-over-year price gains is close to over (if not over already) in many markets.

This isn't a bad thing. We've said repeatedly that double-digit year-over-year price growth is unsustainable. A normal market is marked by 3%-to-5% annual price gains.

At the same time, slower price growth will draw more inventory into the market. More potential buyers, believing they've capture the lion's share of price appreciation, will be willing to list their homes.

So the verdict is split: Home prices are trending in the right direction. Given the current state of economic growth, mortgage rates are (or least have) trended in the wrong direction.

Courtesy of Jessica Regan.

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