The Fed Will Be Watching

A View from the Beach

March 6, 2018 –


The minutes of the Federal Reserve’s January meeting were released the week before last. These minutes indicated that the Fed is comfortable that an expansion with “substantial underlying economic momentum” could sustain additional increases in interest rates this year. This statement was of no surprise to the markets, as rates have been increasing for several weeks now in anticipation of action by the Fed due to a strong economy.

With the next meeting of the Fed just two weeks away, obviously this statement heightens the possibility of a rate increase announcement at the March meeting. A rate increase at this meeting is not a certainty, but it definitely could happen. What could keep the Fed from holding off at this late juncture? The volatility of the stock market could be a factor, especially if additional drops become precipitous. Additionally, late economic data showing the economy is not as “hot” as expected would be taken into consideration.

The most important data is to be released this week. The jobs report is the first reading of data for February and is watched closely by the Fed. The Fed will be watching both the amount of jobs created, but also will be looking for any signs of stronger wage inflation. We may actually need a disappointing jobs report with no acceleration of inflation to convince the Central Bank from holding off at this point.


The Markets. The rise in rates for home loans continued at a slower pace in the past week. For the week ending March 1, Freddie Mac announced that 30-year fixed rates increased to 4.43% from 4.40% the week before. The average for 15-year loans rose to 3.90% and the average for five-year adjustables fell to 3.62%. A year ago, 30-year fixed rates averaged 4.10%, higher than today’s level. Attributed to Len Kiefer, Deputy Chief Economist, Freddie Mac — “Optimistic testimony on Capitol Hill from Federal Reserve Chairman Jerome Powell sent Treasury yields higher as Powell stated his outlook for the economy has strengthened since December. Following Treasurys, the 30-year fixed rates jumped 3 basis points in this week’s survey. The 30-year rate has been on a tear in 2018, climbing 48 basis points since the start of the year and increasing for eight consecutive weeks. We think that the strength in the economy and pent up housing demand should allow U.S. housing markets to post modest growth this year even with higher interest rates. We really have to wait for housing markets to heat up in spring, but early indications are that housing demand remains robust despite these rate increases.” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
Current Indices For Adjustable Rate Mortgages
March 2, 2018

Daily Value Monthly Value
March 1 January
6-month Treasury Security  1.85%  1.62%
1-year Treasury Security  2.05%  1.80%
3-year Treasury Security  2.36%  2.15%
5-year Treasury Security  2.58%  2.38%
10-year Treasury Security  2.81%  2.58%
12-month LIBOR  2.293% (Jan)
12-month MTA  1.282% (Jan)
11th District Cost of Funds  0.753% (Dec)
Prime Rate  4.50% (Dec)

 A clarification has been issued by the Internal Revenue Service about the deductibility of interest that is paid on home-equity and junior-lien products. The Tax Cuts and Jobs Act of 2017 was approved by Congress and signed into law last year by President Donald Trump and enacted on Dec. 22. Under the law, joint taxpayers can deduct interest on home loans up to $750,000. Married taxpayers filing separately can each deduct interest on loans up to $375,000. Among the provisions of the legislation is a suspension of the interest deduction for home-equity loans, home-equity lines of credit and second mortgages from 2018 until 2026. But an exception exists, according to IR-2018-32 issued by the agency. The clarification comes in response to many questions submitted to the IRS by taxpayers and tax professionals. When HELs & HELOCs are utilized to buy, build or substantially improve the residential properties used as security for the loans, the interest is deductible. An example of a deductible expense is when the proceeds from the loan are used to build an addition to an existing home. But if the proceeds are utilized to pay off personal expenses like credit cards, no deduction is allowed. As was the case under the prior law, the loan must be secured by a primary residence or second home, not exceed the cost of the home and meet other requirements. The IRS clarification was applauded in a written statement from the National Association of Home Builders. “This is a major victory for remodelers and for home owners who want to invest in their homes,” NAHB Chairman Randy Noel said in the statement. “NAHB has been pushing hard for this outcome since December.” Source: Mortgage Daily


Home-building activity blew by expectations in January, with housing starts up 9.7 percent to a rate of 1,326,000, according to the latest data from the U.S. Census Bureau and the Department of Housing and Urban Development (HUD). Single-family housing starts increased 3.7 percent to 846,000. Starts for units in buildings with five units or more came in at 431,000. Additionally, permits increased 7.4 percent from December to 1,396,000, according to the data. Single-family permits were down 1.7 percent, however, to 866,000, while permits for units in buildings with five units or more came in at 479,000. Completions totaled 1,166,000 in January, falling 1.9 percent. Single-family completions increased 2.2 percent to 850,000, while completions for units in buildings with five units or more came in at 305,000. “Terrific news on housing starts in January with a solid 10 percent gain,” said Lawrence Yun, chief economist of the National Association of REALTORS® (NAR), in a statement. “This rise in single-family housing construction will help tame home price growth, and the increase in multi-family units should continue to help slow rent growth. The large gain in housing starts in the West (10.7 percent) is especially welcomed, as that region has been facing acute housing shortages. Ultimately, there is still large room for improvement given the fact overall housing inventory is currently near historic lows.” According to Yun, the ascent could cause the Federal Reserve to hit pause on rates. It will announce its decision to hold or raise them in March. “This boost in housing supply not only helps the economy but may also help the Federal Reserve temper the pace of future short-term rate hikes,” Yun said. “That’s because the slow upward creep in the broad consumer price inflation is principally being driven by rising housing costs. Simply put, more housing supply means a lower inflation rate, and potentially a slower pace of interest rate increases by the Fed.” Source: RIS Media

Optimism for homebuying increased to record highs to start the year. Fannie Mae’s Home Purchase Sentiment Index was up 3.7 points to 89.5 in January, reversing the decline in December. The net share of those who thought now is a good time to buy rose 3 percentage points and those who thought now was a good time to sell was up 4 percentage points. The net share of optimistic sellers was 23 percentage points higher than January 2017. There was an increase in the net shares of those expecting home prices to rise in the next 12 months (52%), those who are not concerned about losing their job (73%), and lower interest rates (minus 50%). “HPSI rebounded from last month’s dip to a new survey high in January, in large part due to the spike in consumers’ net expectations that home prices will increase over the next year,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Results may continue to fluctuate over the coming months as consumers sort out the implications of the newly passed tax legislation on their household finances.” Source: Fannie Mae

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