Zonda Newsfeed: Rates Drop Below 4.3%. Is That Good Or Bad?

Uncertainty remains the name of the game for 2019 with trade and policy concerns, slowing global growth, a partially inverted yield curve, and a housing market bent (but not broken).

Our fieldwork shows choppy home sales depending on product, price, and location. Communities that adjusted prices from mid-2018 highs generally have seen a corresponding bump in traffic. Mortgage rates are down to a 13-month low at 4.28% (!), which is positive for homebuyer purchasing power, but it is not all good news. More on that below.

Mortgage Rates Retreat

After nearly touching 5.00% in November, rates on 30-year fixed rate mortgages are down to 4.28%.

• Lower rates returned more than $20,000 on average to buyers in purchasing power compared to the November highs.
• Declining mortgage rates are uncommon in a strong economy. Historically, rates rise when times are good.
• The 10-year Treasury yield is highly correlated with mortgage rates. The 10-year Treasury yield is trending down and we’ve seen a corresponding drop in mortgage rates. On the surface, this seems positive, but yields are lower because investors are uneasy about future economic growth. As a result, there’s more demand for safe government assets, driving the yield down.

Mortgage Applications Show Positive Trend

The Purchase Mortgage Applications Index reported by the Mortgage Bankers Association provides a weekly look at the housing market.

• Purchase applications nationally are 2% higher than the early 2018 levels.
• Our proprietary data from Zonda shows a sizable increase in new home contracts in January ’19 compared to December ’18 for most top markets. The bump is expected year-after-year but comes as a relief after the housing standstill in 4Q18. January contracts are not back to levels seen in the same month in 2017 or 2018, however.
• Be careful not to put too much weight on causation. Historically, lower mortgage rates do not necessarily cause higher sales. In fact, mortgage rates and sales are not even strongly correlated. The bump in mortgage applications this year does correspond with lower rates, but doomsday economic data, alarming media reports, and stock market volatility have subsided over the same period.

Wages Hit Cycle-High

Wages grew 3.4% year-over-year the same month the Case-Shiller Home Price Index registered a 4.2% annual clip.

• Wages are moving in the right direction but cannot make up for the divergence between income and homes prices throughout the expansion. Affordability remains one of the topic issues for the housing market.
• A tight labor market should continue to put upward pressure on wages. This is good for consumers but can strain employers as other costs rise as well.

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