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January 15, 2018


MARKET RECAP

Mortgage Rates at a 6-Month High: Blame China?

The “Butterfly Effect” attempts to explain how a butterfly flapping its wings in China causes a hurricane in the United States. If the butterfly had not flapped its wings at the precise moment in space and time, the hurricane would never have occurred.

Something flapped concerning China this past week. It wasn’t butterfly wings, though; it was mostly gums.

A Bloomberg reporter tells us that the Chinese government is reviewing its holdings of U.S. Treasury securities. The reporter insinuated that China was contemplating reducing its Treasury holdings. China owns $1.2 trillion of U.S. debt.

When the Bloomberg story hit the wires, the yield on the 10-year U.S. Treasury note spiked 10 basis points. As yields on the 10-year Treasury note go, so go yields on mortgage-backed securities (MBS), and so go quotes on 30-year fixed-rate conventional mortgages.

Quotes on a prime 30-year loan, at the national level, were averaging 4.125% (and sometimes higher) this past week, according to Mortgage News Daily. This is a six-month high.

Yields on the 10-year note and quotes on the 30-year mortgage have subsequently eased. The Chinese government says it isn’t so: China’s foreign exchange regulator denied that the government would reduce its U.S. Treasury portfolio.

China isn’t necessarily doing us a favor when it buys our debt. It’s in China’s best interest.

China owns $3.1 trillion in foreign reserves. U.S. Treasury securities are the only instruments liquid enough to park the majority of these reserves. By holding U.S. Treasury securities, the Chinese are ensured of a fluid, predictable market. This matters because the U.S. dollar is the reserve currency of the world. The majority of foreign exchange and trade is transacted through the U.S. dollar.

So, it appears a butterfly didn’t flap its wings in China. Gums, on the other hand, were flapped, and not only at Bloomberg and in China.

Bond guru Bill Gross, portfolio manager at Janus Henderson Group, declared a bear market in bonds last week. Gross raised concerns among his followers that U.S. Treasury prices could slide (causing yields to rise) in 2018. Like the flight path of our Chinese butterfly, the direction of interest rates is difficult to predict (meaning difficult to accurately predict).

We mentioned last week that the economic environment for interest rates, including mortgage rates, supported rates holding at higher levels. Given the positive outlook for world economic growth, higher interest rates appear more likely than lower interest rates.

In this market, at this time, we see any pullback in mortgage rates as a good enough reason to lock. We’ll see where the butterfly takes us next week.

 

Economic

Event

Release
Date and Time
Consensus Analysis

Mortgage Applications

Wed., Jan. 17,

7:00 am, ET

None

Moderately Important. Gains in purchase activity point to rising home sales.

Home Builder Sentiment Index

(January)

Wed., Jan. 17,

10:00 am, ET

75 Index

Important. Builder optimism remains high. We should see a rising trend in home starts to start 2018.

Home Starts

(December)

Thurs., Jan. 18,

8:30 am, ET

1.3 Million (Annualized)

Important. Starts finished up in 2017. The trend will likely be maintained in 2018.

 

A Rousing Start to Housing in 2018

We predicted that housing would continue to lead the U.S. economy in 2018. Initial data suggest that we didn’t venture far out on a limb.

Mortgage activity heated up in the first week of the year. Purchase applications for home mortgages rose by a seasonally adjusted 5%. This first mortgage-activity report for 2018 points to housing maintaining strength established in the fourth quarter of 2017.

A recent report from the Federal Reserve Bank of Kansas City points to a strong housing market through 2018. The report, titled “Pent-Up Demand and Continuing Price Increases: The Outlook for Housing in 2018,” highlights what the title says. Housing demand will remain strong, prices will continue to rise. A few particulars in the report are worth highlighting.

Much of the pent-up demand resides with the younger generation. The Kansas City Fed tells us that the number of young adults age 30-to-34 living with their parents remains high. It stood at 15% in 2016 compared with 9.5% a decade earlier. Child and parent alike (particularly parent) would like the percentage fall.

Home starts remain low by historical standards, according to the Kansas City Fed. Single-family starts, which have historically accounted for roughly 80% of new units, have only partly rebounded from the last recession. Home builders still have a lot of room to grow.

To be sure, home prices have trended above historical averages in many markets. The Kansas City Fed reasons, though, that homes aren’t necessarily overvalued. Relative to single-family rents, national home prices are only moderately higher than the average in the 1990s.

A strong start to 2018, which leads us to believe that we’ll see a strong end to 2018.

 

Sales@intouchtoday.com


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