Mortgage News Weekly 2/16/21

In this Issue…

A Look Into the Markets

Mortgage Market Guide Candlestick Chart

Economic Calendar for the Week of February 15 – February 19

A Look Into the Markets

Home loan rates crept up to the highest levels in a month as the financial markets sense COVID is loosening its grip on society while the Treasury and the Fed continue to provide never-ending stimulus.

Consumer Prices Remain in Check

This past Wednesday, the Core Consumer Price Index (CPI), which strips out volatile food and energy costs, was reported at an anemic 1.4% year-over-year pace. The Fed wants and is looking for inflation to run hot before even thinking about hiking rates. This means the CPI rate would literally have to double from current rates before the Fed has to consider rate hikes.

The Fed’s “Other” Mandate

In addition to maintaining price stability or managing inflation, the Fed has another mandate which drives its monetary policy decision, and that is maximum employment.

This week, Fed Chair Powell was speaking to the New York Economic Club and made it very clear where he sees unemployment and the prospect of rate hikes. Even though the official unemployment rate is 6.3%, Fed Powell suggested that the “real” unemployment rate is closer to 10%. And because unemployment is too high, the Fed is not even close to thinking about raising rates.

Fed Punchbowl to Remain Open for Years

With unemployment too high and inflation too low, we should expect the Fed Funds Rate to remain at current levels for years. This means short term rates like auto loans, home equity lines, and the like will see no increase in rates for some time. Yes, this is also bad news for savers who like to keep money in the bank, as there will be no meaningful savings interest available at banks.

Additionally to help keep long-term rates relatively low, the Fed’s current bond buying program is likely to remain in place for some time. This, as both inflation and employment are short of the Fed’s goals.

When Fed Buying Doesn’t Meet Selling Demand

This past week was an eye-opener. On Wednesday, the Fed purchased nearly $9B worth of mortgage-backed securities (MBS), which would normally drive prices higher and rates lower. However, there was a problem: over $20B was available for sale. If buying demand doesn’t meet selling demand, rates creep higher, and that is what we saw this week, despite an enormous amount of bond buying.

No Inflation – Don’t Tell That to Lumber

Consumer price inflation and the way it is measured may suggest there is no problem with inflation at the moment, but don’t tell that to lumber. Those prices are soaring and causing builders to continue raising prices on new homes.

Bottom line: The Fed continues to support the housing industry by purchasing bonds and holding rates low until they get what they want: higher inflation and full employment. So, if you or someone you know would like to talk about the incredible opportunity, please contact me.

Looking Ahead

It’s all about stimulus. Will Congress push through a $1.9T package? Or will it get trimmed down? Something big is coming and it must, because come March the enhanced unemployment benefits go away.

There are some important economic reports to track as well, including Retail Sales, Empire Manufacturing Index, and Housing Starts.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is the Fannie Mae 30-Year 2% Coupon, where current closed loans are being packaged. The right side of the chart shows prices resting on support at the 200-day moving average (purple line). If prices fall beneath this floor of support, rates will creep another leg higher. If prices can bounce off this floor, we will see a modest improvement in rates.

Chart: Fannie Mae 30-Year 2% Coupon (Friday, February 12, 2021)

Economic Calendar for the Week of February 15 – 19

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