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Inside Mortgage Lending Newsletter

For the week of August 22, 2016 – Vol. 14, Issue 34

>> Market Update

QUOTE OF THE WEEK… “Even if you are on the right track, you will get run over if you just sit there.” –Will Rogers, American humorist, actor and author

INFO THAT HITS US WHERE WE LIVE … It’s nice to see home builders aren’t just sitting there. In fact, thanks to their activities, Housing Starts went up 2.1% last month, to a five-month high 1.211 million unit annual rate. Starts are now 5.6% above a year ago, remaining a bright spot in an otherwise moribund U.S. economy. With weather and other considerations, housing starts can be volatile from month to month, so it’s good to look at the 12-month moving average, and guess what–that’s at its highest level since 2008. This should help alleviate the tight housing supply occurring in many parts of the country as we head to the 1.5 million annual start rate experts say we need to meet demand.

Building Permits dipped 0.1% in July, but single family ones are up 2.4% versus a year ago. Builders certainly are hopeful. The National Association of Home Builders (NAHB) confidence index moved up to 60 this month from 59 in July, as positive sentiment grows. The NAHB chairman explained, “New construction and new home sales are on the rise in most areas of the country.” The latest National Appraisal Volume Index for the week of August 7 put appraisals up 5.5% above the prior week’s 1.4% gain. As an indicator of market strength, appraisals have less fallout than mortgage applications, since they occur later in the process and there are fewer multiple orders.

BUSINESS TIP OF THE WEEK… Studies show that people who tell the truth and always do the right thing have a high probability of success, while those who aren’t truthful and cut corners have a low probability. As Mark Twain quipped, “When in doubt, tell the truth.”

>> Review of Last Week

TRADERS TREAD WATER… Folks on Wall Street spent the summer week treading water just like some of them once did at the old swimmin’ hole. But the hole they’re focused on now is Jackson Hole, Wyoming, where Fed chair Janet Yellen will speak at a symposium this Friday. Her words will be duly scrutinized for when the next rate hike will occur. This week, traders could only mull over minutes from the Fed’s July meeting, showing members almost evenly split over whether a rate hike should be near-term or later. The Dow ended down and the S&P 500 flat, but the Nasdaq eked out its eighth weekly gain in a row, its longest win streak in six years.

Economic reports were mixed, which is now the norm. We got the good housing data covered above, but manufacturing was all over the place. The New York Empire Manufacturing Index showed contraction in that region, while the Philadelphia Fed Index crawled back into expansion territory in that neck of the woods. Industrial Production and Capacity Utilization wound up better than forecast. Inflation logged in at 0.0% by July’s Consumer Price Index (CPI), and Core CPI, taking out food and energy prices, was a barely visible 0.1%. This constrains the Fed from boosting rates, but shows the economy treading water–just like stocks did on Wall Street.

The week ended with the Dow down 0.1%, to 18553; the S&P 500 just below its flat line, at 2184; and the Nasdaq UP 0.1%, to 5238.

Thursday, a Fed member who doesn’t vote said they should hike rates “sooner rather than later.” This roiled Treasuries, but the 30YR FNMA 4.0% bond we watch finished the week UP .16, at $107.08. Freddie Mac’s Primary Mortgage Market Survey for the week ending August 18 showed national average 30-year mortgage rates edging back down, erasing last week’s tiny move up and remaining near historical lows. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

DID YOU KNOW?… According to Freddie Mac’s latest Outlook report, mortgage originations in 2016 are expected to reach $2 trillion for the first time in four years.

>> This Week’s Forecast

NEW AND EXISTING HOME SALES, U.S. ECONOMY GO IN WRONG DIRECTION… Analysts expect to see the annual rates of New Home Sales and Existing Home Sales drop a bit in July. So we need to keep an eye on the longer term trend. U.S. economic growth is also slipping, with the GDP – 2nd Estimate  forecast at 1.1% for Q2. That trend is pretty well established, as economic growth has been proceeding at a snail’s pace for the last eight years.

>> 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 22 – Aug 26

 Date Time (ET) Release For Consensus Prior Impact
Aug 23
10:00 New Home Sales Jul 580K 592K Moderate
Aug 24
10:00 Existing Home Sales Jul 5.54M 5.57M Moderate
Aug 24
10:30 Crude Inventories 8/20 NA -2.51M Moderate
Aug 25
08:30 Initial Unemployment Claims 8/20 265K 262K Moderate
Aug 25
08:30 Continuing Unemployment Claims 8/13 NA 2.175M Moderate
Aug 25
08:30 Durable Goods Orders Jul 3.5% -4.0% Moderate
Aug 26
08:30 GDP – 2nd Estimate Q2 1.1% 1.2% Moderate
Aug 26
10:00 U. of Michigan Consumer Sentiment – Final Aug 90.6 90.4 Moderate

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months… In spite of the July FOMC Minutes and recent comments from Fed members, Fed watchers still don’t expect a rate hike this year. Note: In the lower chart, a 12% probability of change is an 88% certainty the rate will stay the same.

Current Fed Funds Rate: 0.25%-0.5%

After FOMC meeting on: Consensus
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: Consensus
Sep 21       12%
Nov 2       19%
Dec 14       46%
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