Rates continue to tumble, inflation throws curveball to Fed - Movement Mortgage Blog

Mortgage rates have dropped once again. According to Freddie Mac, the 30-year fixed-rate mortgage average fell for the seventh time in the last nine weeks to 3.73%. That is its lowest level since November of 2016. Just a week ago the 30-year fixed-rate average was 3.84% and this time last year we were sitting at 4.55%.

The chart below shows the steep decline even over the last few months. 

Chart to show that rates continue to tumble
Chart courtesy of National Mortgage News


Freddie Mac Chief Economist Sam Khater said in a press release, “While the industrial and trade related economic data continues to dominate the news, the drop in mortgage rates over the last two months is already being felt in the housing market. Through late June, home purchase applications improved by five percentage points compared to the previous month. In the near-term, we expect the housing market to continue to improve from both a sales and price perspective.”

The 15-year fixed-rate mortgage average also dropped to 3.16%. Just last year the 15-year fixed-rate was sitting at 4.04%. 


Rare moment for stocks and bonds


Once again this year there are reports that the United States and China are on track to come to a resolution on the trade deal. According to reports from the Wall Street Journal, Chinese President Xi Jinping is prepared to present President Trump with terms that would settle the trade battle that’s been going on for months.

Some of the conditions include forcing the U.S. to drop its ban on the sale of Huawei Technologies, dropping tariffs on Chinese goods and the expectation of China to buy more U.S. goods. 

A spokesman for the Chinese Ministry of Commerce, Gao Feng, had a sort of ultimatum for the U.S. at a press conference Thursday, saying “We urge the U.S. to immediately cancel its pressure and sanction measures on Huawei and other Chinese companies, and push for the stable and healthy development of China-U.S. trade relations.” (Feng spoke in Mandarin and it was translated by CNBC).

This announcement from China came on the heels of U.S. Treasury Secretary Steve Mnuchin saying the deal was about 90% done and there is “a path to complete this.” If nothing tangible comes from the trade talks happening this week in Japan at the Group of 20 summit, we would expect stocks to trade lower in the short term.  

Right now, stocks are in a very rare spot. For just the 10th time over the last 39 years, the S&P 500 and long-term bonds are up 5% to start the year. Data from Bespoke Investment Group shows that when this happens, the S&P has an average annual gain of 11.3%.

Typically, when the stock market is doing great, bonds are not and vice versa. That’s not the case right now. Both short- and long-term investments are thriving. The big questions are why is this happening and what does that mean for you?

Chief Investment Strategist from The Leuthold Group, Jim Paulsen, said “The stock market appears optimistic about the future of this recovery, whereas the bond market is acting increasingly nervous,” adding “…for equity investors we continue to lean toward the view that what doesn’t kill you will likely make ‘the stock market’ stronger.

The government also just returned its third reading on the first quarter gross domestic product data confirming another 3.1% GDP growth in the first quarter. We were at 2.2% growth from October to December of last year. 

However, consumer spending was revised lower with business investment in intellectual property products coming out stronger than previous reports. Also, gross domestic income grew at a paltry 1.0% in the last quarter. Fed Chair Jerome Powell addressed those numbers, describing the economic growth from trade and inventories as “not generally reliable indicators of ongoing momentum.”

An interesting development was reported this morning as the core personal consumption expenditures index, the Fed’s preferred measure of underlying inflation, went up to 1.6% from a year earlier. Spending and incomes also both recorded strong gains last month. Those two pieces should support economic expansion. However, if there is a consistent flow of positive economic news in the next few weeks, that could make the Fed decide to leave rates unchanged next month instead of cutting as has been expected. 


New home sales drop, prices mostly flat


New home sales dropped by 7.8% from April to May despite interest rates well below 4%. Year-over-year new home sales are down by 3.7%, according to the Commerce Department. Keep in mind these numbers include contracts, not closings, and these homes are brand new construction not existing home sales. 

One main issue builders face is the price of construction with tools and supplies becoming more expensive and labor at a shortage. They’re also facing competition from lower prices on existing homes. Look around at any new development and you’ll rarely see signs advertising homes priced at or below $300,000. According to the data, the number of homes sold in May with a price point between $200,000 and $299,000 went up. 

More people buying less expensive homes would push the median price down for builders. Right now, builders are being forced to offer more incentives to compete with the price of existing homes. According to the government data, the median sales price for a new construction home dropped by 2.7% to $308,000 in May.

For the 13th-straight month, home prices have slowed down according to the latest data from the S&P 500 CoreLogic Case-Shiller price index. The 20-city index was stagnant from April to May and is up just 2.5% from a year ago. So while home prices are still going up, they’re going up much slower than the last year or two. 

The Federal Housing Finance Authority price index did show an increase of 0.4% against expectations for a more modest increase. The FHFA price index compiles and averages the data of home refinances along with repeat sales of the same property. 

It is interesting to note the data release this week from ATTOM Data solutions, showing the average American still can’t afford to buy a home in most cities. According to its report, home price appreciation has outpaced wage growth in more than a third of markets. 

ATTOM’s Chief Product Officer Todd Teta is taking a positive approach to the data, saying it may indicate a good rest of 2019 for potential homeowners. “A closer look at the data reveals milder-than-usual increases for the spring, and none as severe as in previous years since the recession. Therefore, this can help indicate the market may be easing, following similar indicators from recent home-flipping and foreclosure data trends.”


Gold surges


The recent tensions with Iran are partly the reason for gold surging this week, hitting its highest level in six years. A combination of the sanctions against Iran and the Federal Reserve being pressured to lower rates had gold futures trading as high a $1,424.90 per ounce. That was the precious metal’s highest trading level since August of 2013. Right now gold is on track for its biggest one-year gain since 2017.




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Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.