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12/17/18 – BuyWise Mortgage Interest Rate Update

Happy Monday. Once again it’s Josh Lewis, Certified Mortgage Consultant, with the weekly mortgage market update for December 17th, 2018.

As we promised, in another week or so we’re going to take a look back at the year 2018, what moved interest rates, what happened, see what we can learn from it, and in the first week of next year, we’re going to take a look at guessing and prognosticating where interest rates are going to go next year, and at the minimum look at what’s likely to be moving the markets.

But for now, let’s take a look at the last week. If you remember, a week ago we were concerned that we had had this long, almost 30-day straight improvement of interest rates, and then we had made a run and kind of got pushed back here by the 200-day moving average.

And then if you look, we stayed above the 100-day moving average, so the concern was we had this long protracted move bettering interest rates without much of a correction or a consolidation.

We didn’t really see that. We’ve now just started kind of a sideways trend so for about a week now, we’ve been going sideways here between the 100-day moving average, which is support for us, and the 200-day moving average which is resistance.

So as long as we stay in that range, that’s only about an eighth of a percent in interest from the top to the bottom of the range. So as long as the range holds, there’s not a lot of risk to the downside, or benefit to the upside.

That’s pretty common with this time of year. Markets are kind of slowing down, tuning out. We’re not seeing that in the stock market. The stock market is seeing a lot of volatility and continued to move downwards so what is most important for us in the near term of what is going to happen with interest rates is what happens in the stock markets.

We’re right now in the 10% correction mode, down 10% from the highs in most of the major indexes. Twenty percent is a bear market. There are people calling for a bear market, and there are people calling for this is just a correction and the bull market to continue.

That will be probably the primary mover of where interest rates go in the next 30 to 90 days. So, again, we’ll be keeping an eye on that, but wanted to touch base this week on a couple of additional things that you may have seen in the financial media, whether that be on Fox Business, CNBC, whatever you watch.

So let’s take a look over here and the first thing we want to talk about is the yield curve. You may have seen in the news this talk about yield curve inversion. Let’s talk about what it means or what it is, and then what it means.

So if we look here, we have the light gray chart here, or line, showing where the market was, where the yield curve was in 2016. The darker gray line goes to 2017, and the blue line is where we’re at currently.

And all this is, the left axis here shows what the yields are on different treasury securities, and then along the bottom the length of those securities.

So what we normally see is what we saw in 2016. A three-month treasury yields much less than a 30-year treasury, and the reason for that is you are taking on a much larger amount of risk, tying up your money for 30 years, versus 90 days.

So what we see is when the market starts thinking the economy is going to slow down, and there’s more uncertainty over the long haul than there is in the short run, you’ll see this flatten.

So we flattened last year and continued to flatten a lot into this year to the point where we now have the one-year to the ten-year are really similar. They’re not inverted. We really see this flat yield curve.

So why is that important? It’s important because in the past this has been predictive of recessions, so this chart here, this line is zero.

That is the ten-year treasury minus the two-year treasury and any time it goes under zero, it means the yield on the two-year is higher than the ten-year, and you see any time we get near to this negative territory, we see one of these gray bands, which is a recession.

So, going back one, two, three, four, five in this chart, back to 1980, an inverted yield curve has been predictive of a recession.

So important to remember here, let’s look at this curve, we’re not inverted. It’s been flattening but we as of now are not inverted. And what does that mean?

So if we’re in a positive .46, this is a chart for a Federal Reserve study that showed what is the probability of a recession at different levels of spreads between this is the one-year treasury or the three-month treasury, and the ten-year.

So a .46, which is about where we’re at right now, there’s a 15% chance of recession in the next 12 months. So what this is telling us, there’s 85% chance that we will not see a recession in 2019.

Any why is that important for us on interest rates? Well, recessions are generally deflationary and we see interest rates get better during those time lines.

So if we’re looking at mortgage rates, and what they’re likely to do over the next 12 months, if we thought we were heading into a recession or already in a recession, we would expect better interest rates.

We’re looking at a flat yield curve, we’re looking at a slowing economy, but right now, still expanding, not looking at a recession.

So the last piece or the last thing we want to talk about, on Wednesday the Fed is going to complete their two-day monthly meeting here, and then they’re going to come out with an announcement.

And most likely they’re going to raise the Federal funds rate again, so that will be, I believe, the fourth time that they’ve done it this year. So what we want to talk about is does that directly impact mortgage rates?

The answer for the most part is no. What we’ve seen here is we go back here to 2017, the third hike, the fourth hike, the fifth hike, those all actually led to lower interest rates.

Now they’ve hiked again at six and seven, and interest rates increased. But if we really look back here, if we go back here to 2013, 2014, rates have been pretty flat through this period. Actually if we go back all the way to 2010, we’ve been somewhere between 3.5% and 5%.

The Fed hikes at this point in time are a good thing for long-term mortgage rates because they will keep inflation in check. Inflation is the enemy of fixed income investments like bonds, mortgage-backed securities.

So as long as the Fed is ahead of the curve, even to the point of pushing us into a recession, it will be good for interest rates. Not necessarily good for the economy, but good for interest rates.

So those are the things that we are going to be looking at this week. We’ll be back next Monday and we will take a longer look back at the previous year and see what we can learn about the year ahead and where interest rates are likely to go.

Hopefully you’re having a great holiday season and we look forward to seeing you again next week.

Josh Lewis

For 20 years, Josh Lewis, a Certified Mortgage Consultant, has worked with home buyers and their professional advisors to assure that homeownership is a key foundation to long term wealth creation by creating and implementing custom tailored mortgage plans that minimize ownership costs while maximizing wealth accumulation.