The Market Preview

July 11th, 2018

Steve Hollander – Hollander Real Estate
Jackie Doran – Capital Partners Mortgage, LLC

Mortgage Rates Fall; Recession Fears Rise
 The trade imbroglio between the political powers that be in Washington and the political powers that be in the rest of the world continues to weigh on market sentiment. Market participants remain cautious. Heightened uncertainty has kept many of them bottled up in haven investments.

U.S. Treasury securities (long-term securities in particular) remain the favored haven. Yields on the longer-end of the curve have eased. The yield on the 10-year U.S. Treasury note has drifted closer to 2.8%. The yield is down 15 basis points over the past two weeks.

Mortgage rates have also drifted lower, though the drift has been less pronounced than the drift on the 10-year note. The range still holds at 4.625%-to-4.75% for the prime 30-year conventional loan. Rate quotes hold near the lower end of the range these days.

Given the unlikely scenario of any participants in the trade imbroglio retreating, many market participants will remain bottled up in their haven. This suggests to us that mortgage rates are unlikely to burst out of their range to move higher. Floating to save a few basis points appears a reasonable risk to accept in this market.

The story is different on the short-end of the yield curve. There, yields continue to rise.

This shouldn’t be unexpected. The Federal Reserve exerts most of its influence on the short-end of the yield curve when it raises its federal funds rate (the overnight lending rate among commercial banks). The prospect of additional increases in the fed funds rate has kept yields on the short-end of the curve on an upward trajectory.

Yields on the short-end of the curve rising while yields on the long-end of the curve fall have induced another worry — an impending recession. Market participants are worried that the yield curve could invert. Short-term yields could rise above long-term yields.

The worry isn’t unfounded. The yield curve has been a reliable recession predictor. Nine of the past 10 recessions have been preceded by an inverted yield curve. When the yield curve has inverted, the subsequent recession occurred 12-to-18 months later.

The spread between the yield on the two-year U.S. Treasury note and the 10-year U.S. Treasury note is scrutinized most. The spread between the two securities has contracted to 30 basis points. The spread was 50 basis points at the start of the year. The spread was 90 basis points a year ago.

So what’s the cause?

Market participants will buy long-term debt if they anticipate a recession. They buy the long-term debt because they anticipate the Fed will change course: It will lower the fed funds rates to counter the recession. The price of long-term debt rises more than short-term debt when interest rates are cut. Market participants anticipate booking a capital gain.

That said, it’s still mostly good for now. But if the economic costs associated with the trade imbroglio accumulate, it might not be less good a year from now.

This Trend Is No Longer Our Friend
We are 10 years removed from the bursting of the housing bubble. Prices have recovered, and then some. Home prices at the national level are at an all-time high. They continue to gain altitude.

CoreLogic reports that prices in its home price index were up 7.1% year over year in May. The year-over-year gains have ranged between 5% and 7% each month over the past five years. That the latest price increase is at the high-end of the range this late into the recovery is somewhat extraordinary.

Supply remains the issue. We have a dearth of it. Unfortunately, the dearth will continue into the foreseeable future. The soaring costs of principal building materials will hinder housing supply growth.

Random-length lumber prices are up 44% from a year ago. CME futures contracts are up about 52% for the same period. Lumber prices tend to peak this time of year and then bottom in the autumn months. This time could be different. This year, lumber is saddled with a 20.8% tariff applied to imported Canadian lumber. Canada has historically been a key supplier of lumber to the U.S. housing market.

Jackie Doran
Capital Partners Mortgage, LLC
Loan Officer
NMLS # 364090
(561) 716-0448
© 2017 Capital Partners Mortgage, LLC. All Rights Reserved. This communication does not constitute a commitment to lend or the guarantee of a specified interest rate. All loan programs and availability of cash proceeds are subject to credit, underwriting and property approval. Programs, rates, terms and conditions are subject to change without notice. Other restrictions apply. Jackie Doran NMLS # 364090, . 11290 Legacy Ave, North Palm Beach, FL 33410. Capital Partners Mortgage, LLC  1515 N. University Drive, Suite 102D, Coral Springs, FL 33071. Corp NMLS# 1084639 ( Equal Housing Lender.