Inside Lending - August 15, 2016

Analysts felt a few rain drops when the Census Bureau announced the home ownership rate fell to 62.9% in Q2, a level not seen in half a century. Explanations for this began with the growing amount of student loan debt. Yet the chairman of the Council of Economic Advisors says this debt is high because there are many more borrowers, and more than 40% of them owe less than $10,000. So it must be affordability. But a house price index that adjusts for the impact of income and interest rate changes on consumer buying power reveals homes are 40% less costly that at the housing peak. Let's hear it for low mortgage rates!

Actually, the home ownership rate is low because there are so many more renters. Since the start of the recession, there are 8.4 million new rental households, a 22% jump, but only 2% fewer owner occupied households. So home ownership fell because of the added renters, many of them millennials right out of college. And when millennials do go for home ownership, since they're the biggest demographic group in our history, it should spur quite a housing boom. The latest research from Fannie Mae already shows that as millennials get older, they're increasing homeownership rates faster than in previous years. Rainbow on the way?

Review of Last Week

Thursday, all three major stock market indexes closed at new record highs, the first time that's happened since 1999. In the interim, we've seen the dot-com bubble burst, plus the Great Recession we're still recovering from, so Thursday's triple record was a welcome development. Unfortunately, Friday saw weak July Retail Sales (flat overall, down 0.3% excluding auto sales), and the Producer Price Index down 0.4%, indicating dreaded wholesale price deflation. These pulled the Dow and the S&P 500 down from their records, though they ended ahead for the week, while the Nasdaq had no trouble closing at another all-time high.

Offsetting Friday's bad data were some good reports. University of Michigan Consumer Sentiment registered an uptick in August from its not bad reading in July. In addition, Business Inventories grew a better-than-expected 0.2% in June showing a slightly more positive outlook in the world of commerce. Even oil prices strengthened, with West Texas crude settling north of $44 a barrel. But we keep getting evidence all is still not well with the U.S. economy. Productivity declined at a 0.5% annual rate in Q2 and Continuing Unemployment Claims went up by 14,000, though Initial Unemployment Claims dipped by 1,000, staying under 300,000 for the 75th week in a row.

The week ended with the Dow UP 0.2%, to 18576; the S&P 500 UP 0.1%, to 2184; and the Nasdaq UP 0.2%, to 5233.

In the bond market, Treasuries traded higher on Friday's weak data, then backed off. The 30YR FNMA 4.0% bond we watch finished the week down .22, at $106.92. For the week ending August 11, Freddie Mac's Primary Mortgage Market Survey reported national average 30-year fixed mortgage rates little changed from the week before. They're still near historical lows, well under where they were a year ago. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

This Week’s Forecast

Like the Queen of England, U.S. home building is expected to keep calm and carry on in July, with Housing Starts down a tad but Building Permits unchanged, both nicely above the one million unit threshold. Inflation should be low, measured by the Consumer Price Index (CPI) and Core CPI (excluding volatile food and energy prices). This is not the level of inflation the Fed wants to see in order to raise interest rates. We may get some insight on this Wednesday in the FOMC Minutes from the Fed's last meeting.

The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of Aug 15 – Aug 19

Aug 15     08:30     NY Empire Manufacturing Index
Aug 16     08:30     Housing Starts
Aug 16     08:30     Building Permits
Aug 16     08:30     Consumer Price Index (CPI)
Aug 16     08:30     Core CPI
Aug 16     09:15     Industrial Production
Aug 16     09:15     Capacity Utilization
Aug 17     10:30     Crude Inventories
Aug 17     14:00     FOMC Minutes
Aug 18     08:30     Initial Unemployment Claims
Aug 18     08:30     Continuing Unemployment Claims
Aug 18     08:30     Philadelphia Fed Index
Aug 18     10:00     Leading Economic Indicators (LEI)
                                                                                                          
Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months... A few more economists think the Fed will dial up a rate hike in December, but the majority still says no. Note: In the lower chart, a 9% probability of change is a 91% certainty the rate will stay the same.

Current Fed Funds Rate: 0.25%-0.5%

After FOMC meeting on:

Sep 21     0.25%-0.5%
Nov  2     0.25%-0.5%
Dec 14     0.25%-0.5%

Probability of change from current policy:

After FOMC meeting on:

Sep 21             9%
Nov  2           11%
Dec 14           45%

Please call me direct with any questions I can answer at 303.668.3350! Apply Now!

Have a great day!

Scott Synovic
Nations Reliable Lending, LLC
Colorado's Mortgage Expert

303.668.3350 Direct
www.scottsynovic.com

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