Concerns overseas bolster a slowly improving economy here at home.
Housing: Movers and Shake-ups
The Commerce Department reported February New Home Sales rose 2 percent from January, as expected by analysts. Year-over-year sales, however, are down 6.1 percent from February 2015, and inventories of new homes are on the low side.
February Existing Home Sales slipped 7.1 percent after hitting six-month highs in January, but year-over-year sales were up 2.2 percent.
Many economists see a pent-up demand for housing, as does the National Association of REALTORS® which called for more construction to shake up supply constraints. The surge in February Housing Starts may be a sign that the call is being answered.
What the Fed Said
The Fed took a dovish stance in its monetary policy statement last month and opted to maintain low short-term interest rates to stimulate the economy. In a surprising move, the Fed also said it sees two hikes to its benchmark Fed Funds Rate this year, instead of the four they previously mentioned.
The Fed Funds Rate is the rate banks use when lending money to each other overnight. It is not directly tied to long-term rates on consumer products like purchase or refinance home loans, so a hike to it does not necessarily mean home loan rates will rise. The Fed noted that there is still room for improvement in our economy, plus there is concern about the global economy overall.
Inflation: Holding Pattern
One thing the Fed will be monitoring in the coming months is inflation. While there are few signs of inflation at the wholesale level, consumer inflation as measured by the Core Consumer Price Index (which excludes food and energy), came in at 2.3 percent from February 2015 to February 2016.
This is the highest year-over-year reading in eight years and it’s an important one to note. Inflation reduces the value of fixed investments like Mortgage Bonds. Since home loan rates are tied to Mortgage Bonds, inflation can be one factor that causes both Bonds and home loan rates to worsen.
Overseas: Uncertainty Reigns
On the flip side, when the economy is sluggish in the U.S. or there are signs of global uncertainty (like the terrorist bombings in Brussels or measures to ward off deflation in the Eurozone), money managers tend to get out of higher risk Stocks and invest in less risky Bonds. When that happens, the demand for Bonds increases. This can help Mortgage Bond pricing and home loan rates improve.
The Bottom Line
Home loan rates remain near historic lows, and provide great opportunities for homebuyers and homeowners considering a refinance. If you have any questions about current loan rates or products, please don’t hesitate to contact me.