Wednesday, February 24, 2016

Interest Rates Rise!!....AND Drop??

I dork out on economics, both macro and micro.  We've had some interesting movement in the stock market lately which has shattered preconceived notions.  Look no further than oil prices. Makes my head spin.  One of the most interesting however is the correlation with interest rates both at the fed level and in the real estate market.  Historically this relationship has been direct.  When the fed raises rates you'd almost always see the mortgage rate rise.  Things have changed so far this year and the rise in the federal reserve rate has had an inverse relationship with the home mortgage market.
Do you remember how almost everyone assumed that if the Federal Reserve raised their target interest rate in December (which they did) then mortgage rates would probably rise too? Well Freddie Mac now tells us that their survey shows that the average interest rate for a 30 year fixed loan dropped from 3.96% in December to 3.87% in January.
Now for the boring insight...
Investors have been flooding into the bond market as a safety play, scared by the losses in the equity markets. This has caused the 10 year T-bill to drop to its lowest yield since 2012. Mortgage rates tend to follow the 10 year Treasury yield rather than the Fed Funds rate.
This means mortgages are actually slightly cheaper than they were last quarter. You would think that demand might be up as a result, right? Well we are seeing increases in the ARMLS under contract counts, with UCB listings up 59% from Jan 1 and Pending listings up 50%. However these are not as favorable as last year's equivalent increases which were 66% and 58% respectively.
In addition, closed sales though ARMLS are not very impressive in 2016 so far. On the positive side, we are up 6.1% in monthly unit volume from this time last year, but we were up 9.3% last month and the rolling 7-day sales rate has been falling for the past 2 weeks. This is unusually weak for the middle of February. We would normally see closed sales rates increasing sharply by this point in the year. I think it is fair to say that demand is holding steady, but there is no sign of any positive response to the lower interest rates.

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