UK Votes to Exit

Jun 27 2016

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A shocking British vote to exit the European Union sent both stocks and mortgage rates much lower on Friday. The other economic news had little influence. As a result, mortgage rates ended the week lower, near the best levels since early 2015.

While the final polls ahead of the vote were close, the vast majority of investors expected the UK to vote to remain in the European Union. When the outcome indicated that the UK will exit the EU, the resulting uncertainty caused investors to swiftly shift to safer assets on Friday. Global stock markets sold off sharply and bond yields declined, including mortgage-backed securities (MBS). Since mortgage rates are set based on MBS prices, mortgage rates moved lower.

The British exit (Brexit) is expected to result in slower economic activity. The degree is difficult to predict. The uncertainty is heightened by the prospect of other countries in Europe proposing similar referendums. It is likely that European trade will be hindered by higher tariffs, companies will be more hesitant to hire new workers, and investors will be slower to commit capital to the region. However, this was viewed as positive for mortgage rates, since slower global economic growth reduces the outlook for future inflation. 

In the U.S., low mortgage rates have contributed to healthy housing market activity. Sales of previously owned homes in May rose to the best level since 2007. This occurred despite a low level of homes available for sale. Strong demand and low supply pushed the housing market to two records in May. The median price of homes sold rose to the highest level on record, and the days on the market fell to a record low.

Looking ahead, the reaction to the British vote will continue to influence U.S. mortgage rates. In the U.S., the third estimate for first quarter GDP will be released on Tuesday. The report on pending home sales and the core PCE price index will come out on Wednesday. Core PCE is the favorite inflation indicator of the Fed. The ISM national manufacturing index will be released on Friday. Mortgage markets will close early on Friday in observance of July Fourth. 

Topics: Ali Vafai, The Money Source, housing market, mortgage rates, european union

Data Exceeds Expectations

Mar 01 2016

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The major U.S. economic data released over the past week was stronger than expected. Upside surprises were seen in GDP, durable orders, housing, and inflation. The impact on mortgage rates was small, however, and rates ended the week just a little higher. 

The Core PCE price index is the monthly inflation indicator preferred by the Fed, and the readings for January showed that inflation is rising more quickly than expected. Last week's CPI inflation report contained a similar message. 

Core PCE, which excludes the volatile food and energy components, was 1.7% higher than a year ago, up from 1.3% just two months ago, and the highest level since February 2013. Low levels of inflation have helped keep mortgage rates low. If the trend toward higher inflation continues, it would be negative for mortgage rates. 

The housing data released over the past week was mixed, but the much more significant report was encouraging. January existing home sales, which make up about 90% of all home sales, increased to near the best level in seven years. They were 11% higher than a year ago. New home sales, which make up the rest of the market, declined in January. Low mortgage rates and solid job gains are having a nice effect on home sales. 

Fourth quarter GDP was revised higher from 0.7% to 1.0%, above the consensus for a decline to 0.4%. GDP, the broadest measure of economic activity, recently has been volatile from quarter to quarter. The consensus is that 2016 will start on a better note. First quarter GDP growth is expected to rise to 2.0%, well above the levels seen during the first quarters of 2014 and 2015. 

Looking ahead, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, Pending Home Sales will be released on Monday. The ISM national manufacturing index will come out on Tuesday, and the ISM national services index will come out on Thursday.

Topics: The Money Source, Pink Unicorn, Core PCE, employment rate, housing market, housing data, mortgage rates, US economic data

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