June 13th, 2015 12:42 PM by Nick Rapplean
As most readers of this update are well aware, one of the biggest questions that have been concerning people who help originate mortgage financing has been when and whether the Federal Reserve would start to push interest rates higher.
Remember: Higher mortgage rates result primarily when the markets begin to foresee a high rate of inflation, because higher mortgage rates--and higher interest rates in general--tend to slow down an overactive economic market. Simply put, higher rates add further costs to things, and thus the purchases of many key items slow because they cost more.
Inflation, therefore, grinds sales and purchases to a slower speed. A lack of inflation, though, generally means that the usual market resistance to its own systems of brakes and balances isn't working well enough, and we face the possibility of stagflation or even deflation.
It's reasonably important to keep this back-story in mind as we look at recent figures, many of them splendid, in the overall market and real estate sector.
The break-away change appeared in April's new home starts and permits for further new homes. For a long time going nowhere, the starts and permits broke onto higher ground. We have been waiting for this--waiting for higher new construction figures to suggest that the new home market is at last moving into creating more of the housing units we so obviously need. We've been constructing maybe 800,000 homes (annualized) in a good month where in fact we really need about 1.5 million.
With supply falling so far behind demand (and, in fact, behind our society's need) the prices of new homes may threaten to rise too high--and of existing homes as well. Not a healthy condition.
At the same time, though, builders miss out on an opportunity to build and sell a lot of product, which is why they're in the business, after all. And many other negative things result, including the ability to take advantage of construction and related jobs as the market stirs to life.
Happily, that's not occurring. And one of the clearest views of what IS happening can be gained by an analysis of what's happening in our jobs market, which is undergoing what economist Mohamed El-Erian today called a "healing."
All the pieces are falling into place for a recovery in our jobs market that is potentially sustainable and strong. Today's jobs report demonstrated the best monthly growth in years. With U.S. Treasury investors expected higher yields in the near term (today, in fact) Treasury yields began to climb significantly. And with an expectation of a faster-growing national economy, Treasury yields are rising.
Intriguingly, the news is a double-edged sword for the stock markets, which usually fare poorly when interest rates are rising. But for bond yields, in this case, there is no such problem. If yields are going to rise, they are indeed going to rise.
So we can expect higher mortgage rates, higher yields, and more concern that the Fed may squeeze rates even higher. All of this, obviously, suggests we may want to prepare for higher rates. But it still isn't a certainty. As El-Erain said, we're in the midst of "one of the loosest tightenings in history." Absent is the usual sense the rates have changed directions and are unlikely to reverse course again,
It is a time, therefore, to keep watching closely. Let's do that together. If you have any thoughts or questions, we're all ears.