Lending Rates React to a Chronic Case of Inertia

Sept. 17 came and went as expected, with nothing happening. We, along with most traders, were proven right. The Federal Reserve held the federal funds rate near zero, where it has been since Dec. 2008.

Interest rates were not formally raised, but interest rates, in general, and mortgages rates, in particular, formally fell. 

On the former, the bellwether 10-year U.S. Treasury note dropped 15-basis points when the Fed announced no increase in the fed funds rate. On the latter, rates on most mortgage products moved lower.  Depending when you called for a quote, the 30-year fixed-rate mortgage was down 10-basis points or more compared to where it was last Wednesday.  They've inched higher since – rates have been volatile – but you're still likely to get a sub-4% quote on the 30-year loan. 

Fed officials will meet two more times before the year ends: on Oct. 28 and Dec. 16.  As it now stands, traders in fed funds future contracts are betting on a 12% chance the fed funds rate will be increased at the October meeting. They're betting that there's a 32% chance it will be raised in December. 

Few people think a rate increase is in store for 2015, which has been our take since the beginning of the year.  No major central bank is looking to raise interest rates. The U.S. dollar, meanwhile, remains as strong as it has been in years, especially against emerging-market currencies. (Today, a dollar will get you nearly 17 Mexican pesos and over four Brazilian real – a multi-decade high on both.) 

Lower rates have spurred additional lending activity, though activity is being spurred by more than low rates. For the week ending Sept. 18, the Mortgage Bankers Association reports that application activity was up 13.9%.  The seasonally adjusted purchase index was up a strong 9%, and is up 27% year over year.  This is before the full impact of the Fed's rate decision kicked in.

Given the downdraft in lending rates and the updraft in lending activity, we should see an increase in home sales for September. As for August, existing home sales were somewhat sluggish, posting at 5.31 million on an annualized rate. Most economists were expecting around 5.6 million. 

That said, existing home sales have been strong through most of 2015, so a one-off month is no reason for concern. Fundamentally, things still look good. Supply has improved a bit, up to 5.2 months at the current sales pace. Price appreciation is also countenancing toward historical norms.  Year over year, the median price of an existing home is up 4.7% to $228,700.  In many markets, entry-level and lower-priced homes continue to drive aggregate price appreciation. A further deceleration in price appreciation in these niches would be welcomed news for prospective first-time buyers. 

Overall, the outlook is good for both housing and mortgage lending. Expect the outlook to remain good as we head into 2016.  

Information provided by Jessica Regan.

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