Fall In Mortgage Rates Welcomed During Spring Home Buying Season
Markets were generally upbeat this week as several key inflation readings trended lower. Nonetheless, we recommend paying close attention to service inflation. It is proving to be sticky and is the measure being closely monitored by the Fed. Services make up the bulk of business expenses, and the Fed is keen to see this metric fall to a range of 2% to 3% from around 5% per annum. Of additional concern is the rise in oil prices as OPEC cuts production and oil settles above $80 per barrel. The betting markets are over 60% that the Fed will raise short-term rates by another .25 basis points before pausing. Although our feelings are in line with the betting markets on the one-and-done on the Fed rate hikes, they differ from the consensus view that the Fed will pivot by late summer to lower short-term interest rates. Our thinking is that the inflation dragon needs to be slain. Ensuring that inflation is put back in the box will require the Fed to keep interest rates higher for longer. With financial conditions easing again along with the recent rally in the equity and bond markets, the Fed can justify another rate hike. They can do so veiled as an attempt to increase short-term interest rates above the average inflation to the so-called restrictive territory.
JP Morgan reported earnings this morning and the bank had a very good quarter. Comments from the CEO, Jamie Dimon, soothed markets on the overall state of the economy and the resiliency of the banking sector. For the moment, while the economy is slowing, it is still doing better than feared. The banking crisis seems to have abated, and inflation is coming down slowly. Even so, one must listen to the great Warren Buffet, who is not so sure the banking crisis is over. Dissenting views are just part of what makes this market so tough to dissect. After 30 years of low-interest rates, the move to a higher neutral interest rate is affecting the economy on many levels. It is stressing banks, hitting valuations on apartments and office buildings, and making it much harder for consumers and businesses to qualify for loans. Persistent inflation is impacting consumer spending. The reworking of global supply chains is putting a floor on input costs as the world moves from just-in-time inventory to certainty of inventory in a post-COVID world. All of this and more is what makes the Fed’s job so difficult and why handicapping the direction of interest rates and the economy is a fool’s errand.
Humanizing the Loan Process
Mortgage applicants have adjusted to the higher rate environment. Higher interest rates mean a lower mortgage for many, so the pre-approval process is crucial. There are lenders out there that will think outside the box and are helping borrowers maximize their loan dollar amounts. Liquid asset depletion, relying more on a recent profit and loss statement, RSU income, to name a few, can add more income to a borrower looking to qualify for a home mortgage. This type of common-sense underwriting is more prevalent with smaller banks and credit unions that look to humanize the loan underwriting process, offer competitive interest rates, and genuinely desire to help borrowers in their community.