Economic Commentary

Will Increasing Mortgage Rates Impact Home Prices?

Increasing Mortgage RatesThere are some who are calling for a decrease in home prices should mortgage interest rates begin to rise rapidly. Intuitively, this makes sense as the cost of a home is determined by the price of the home, plus the cost of financing that home. If mortgage interest rates increase, fewer people will be able to buy, and logic says prices will fall if demand decreases.

However, history shows us that this has not been the case the last four times mortgage interest rates dramatically increased.

Here is a graph showing what actually happened:

Dramatic Mortgage Rate Increases

Last week, in an article titled “Higher Rates Don’t Mean Lower House Prices After All, the Wall Street Journal revealed that a recent study by John Burns Real Estate Consulting Inc. found that:

“[P]rices weren’t especially sensitive to rising rates, particularly in the presence of other positive economic factors, such as strong job growth, rising wages and improving consumer confidence.”

Last week’s jobs report was strong and the Conference Board just reported that the Consumer Confidence Index was back to pre-recession levels.

Bottom Line

We will have to wait and see what happens as we move forward, but a decrease in home prices should rates go up is anything but guaranteed.

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Economic Commentary 3

Rodny Davidson
NMLS# 295739
Loan Originator
First Community Mortgage
502.396.2598
r.davidson@fcmhomeloans.com

More Stimulus from ECB Expected 

The decline in mortgage rates this year has caught investors by surprise. Due to increased expectations for additional monetary stimulus from the European Central Bank (ECB), the improvement continued this week, dropping mortgage rates to the lowest levels since last summer. 

While the economic recovery in the U.S. has been a bit choppy, most investors and Fed officials anticipate sustained growth in the 2% to 3% range for several years. The outlook in Europe is not as optimistic, however. In response to slow economic growth and the risk of deflation, ECB officials have increased their support for additional monetary stimulus. Investors expect new measures to be announced as soon as next week. One option is a bond purchase program similar to the one used in the U.S. over the last few years. Bond yields around the world have moved lower due to the potential added demand from the ECB. 

Home sales data for April was released over the past week. April Existing Home Sales rose modestly from March, the first monthly increase this year, and April New Home Sales increased 7% from upwardly revised March figures. Perhaps more significantly, total inventory of existing homes available for sale surged 17% from March to a 5.9-month supply.

Looking ahead,...

Economic Commentary 2

Rodny Davidson
NMLS# 295739
Loan Originator
First Community Mortgage
502.396.2598
r.davidson@fcmhomeloans.com

Improving Job Gains 
Better than expected labor market data was unfavorable for mortgage rates over the past week. Increased concerns about the situation in Ukraine had a greater impact, however, and the flight to safer assets more than offset the jobs data. Mortgage rates ended the week lower, at the best levels of the year.

The headline number for April job gains showed the largest monthly increase since January 2012. Against a consensus forecast of 215K, the economy added 288K jobs in April. Average job gains over the last three months were an impressive 238K, up from 167K over the prior three months. In addition, the Unemployment Rate dropped from 6.7% to 6.3%, the lowest level since September 2008. 

The results of the Employment report likely would have been worse for mortgage rates except that some of the details were less encouraging. According to the survey used to determine the Unemployment Rate, an enormous 806K people left the labor force in April, which was responsible for most of the decline in the Unemployment Rate. The Participation Rate, essentially the number of people able to work who are currently in the labor force, fell to 62.8% from 63.2%, near the lowest levels since 1978. Average Hourly Earnings, a proxy for wage growth, showed no gains. In short, job gains in April reflected a strong rebound from weather-related...

Economic Commentary

Rodny Davidson
NMLS# 295739
Loan Originator
First Community Mortgage
502.396.2598
r.davidson@fcmhomeloans.com

Inflation Remains Low

While there was a great deal of intra-day volatility over the past week, mortgage rates ended the week with little change, remaining near the lowest levels of the year. Most of the volatility in mortgage rates was caused by big moves in the stock market and by news from Ukraine. Since these events had little impact on the long-term outlook for economic growth or inflation, their effect on mortgage rates was short-lived. 

Inflation expectations play a fundamental role in determining mortgage rates and influencing Fed policy. The low levels of inflation seen in recent months have been a major reason for the decline in mortgage rates since the beginning of the year. Fed officials have an inflation target of 2.0%, which they consider the optimal level for the performance of the economy. With readings well below this level for several months, there...