Keeping you updated on the market! For the week of August 4, 2014 -------------------------------------------------------------------------------- MARKET RECAP Growth Is on the Way Actually, growth is here. It feels a long time coming, but we finally received solid news on the economy: Gross Domestic Product (GDP ) grew at an annualized rate of 4% in the second quarter, easily breezing past the consensus estimate for 3.2% growth. Residential-investment growth was particularly encouraging, increasing at a 7.5% annual rate. This is important. Economists frequently point to the consumer as the main economic driver. But before you can consume, you must produce, and investment is reflective of production. More residential investment points to more housing starts, more housing rehabilitation, and ultimately more housing sales. Even more encouraging, residential investment is still at a historically low level as a percentage of GDP. This suggests there is still plenty of open space for residential investment to run, and thats good news for the long-term outlook on housing. The trend toward more normalized pricing is also good news. At the beginning of the year, we mentioned that a ratcheting down in the rate of price appreciation was likely. Recent price data from Trulia, Zillow, and other sources point to a slowdown. The latest data from the S&P/Case-Shiller Home Price Index , show the year-over-year run rate in its 20-city index at 9.3% for May, compared to 10.9% and 10.8% in the previous two months. To be sure, housing in many markets is still recovering from the financial crisis and market bust of 2008, so double-digital price gains should be expected. Over time, though, single-digit annual gains are the norm. At this point, the norm is what we are anticipating. We are also anticipating normalized sales volume, and it appears we are heading in that direction. Pending home sales for existing home are showing strength, with the Pending Home Sales Index posting a solid 102.7 for June (though down slightly from a very strong May). The index points to an uptick in existing home sales in coming months. As for new home sales, the trend has been down over the past few months, but recent gains in builder confidence and in residential investment point to an updraft in sales. Lets hope it plays out that way, because new-home activity – construction, sales, financing, etc. – is a key driver of overall economic growth. Are Lower Mortgage Rates on the Way? When the unexpectedly strong GDP news hit the news wires on Wednesday, mortgage rates jumped: The quote on the 30-year fixed-rate loan was up as much as 10-basis points in some markets. But once the market fully absorbed the shock, rates started drifting lower. (Bankrate and Freddie Mac both show the weekly national average little changed, but an average isnt a current market rate.) With a stronger economy and rising job growth, you would think that mortgage rates will also rise. The likelihood increases further when these factors are coupled with the Federal Reserve pulling back from quantitative easing, which will cease in October. The conventional wisdom has been that the Federal Reserves quantitative easing – buying U.S. Treasury notes and bonds and mortgage-backed securities (MBS)– has lead to lower overall interest rates, and thus lower mortgage-lending rates. The relationship appears logical: By creating demand for these securities, the Fed has imbued the market with lower interest rates. But that might not have been the case. GaveKal Capital produced an intriguing report this week that shows the opposite effect: When the Fed increased its purchases of notes, bonds, and MBS, rates actually rose. When the Fed reduced its purchases, rates actually fell. GaveKal offers a rationale for this phenomenon: The Feds purchases of notes, bonds, and MBS inject new money into the economy; therefore, they are stimulative to growth and inflation expectations, which lead to higher interest rates. Fewer purchases, on the other hand, lead to lower expectations, and rates fall. GaveKals model of interest rates based on the Fed ceasing quantitative easing is also intriguing. GaveKal has modeled the yield on the 10-year Treasury note down to 1.5% for 2015. Because the 30-year fixed-rate mortgage trades at roughly two percentage points higher than the 10-year note, this translates to roughly 3.5% on the 30-year loan. Its an interesting model, but not totally persuasive. Many other factors come into play, not the least of which is actual economic growth and rising labor costs, so we dont see a 3.5% rate on the 30-year loan in the future. But GaveKal does give us something to ponder that we hadnt pondered before.
Posted on: Tue, 05 Aug 2014 18:20:59 +0000
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