Weekly Economic Update - Flattend, Not Falling

We planned to continue catching up from Thanksgiving by giving out full attention to the home sales reports we skipped over last week. Other matters suddenly intervened and existing, new, and pending sales got less ink than we planned.

The headlines go instead to the tumbling stock market and the rare occurrence of an inverted yield curve, which happened early this week.  A cause for concern, as an inversion has preceded each of the last seven recessions. The experts say not to worry – there is usually a long lag involved – in the meantime, mortgage rates have moved lower.

No, despite the hype over the last half week, the sky has not fallen, although the stock market did--a lot. Investors fled to the bond market, which always means lower interest rates. There was then a flurry of nerves because the yield curve flattened, that is the spread between interest paid on two sets of treasury notes, in this case the 3- and the 5-year, fell below zero, thus a technical inversion.

Because the spread between short- and long-term yields has inverted ahead of each of the past seven recessions some people got (and this is another technical term) spooked. However, as Bloomberg’s Brian Chappatta points out, the inversion/recession relationship is neither historically infallible nor instantaneous. The last time it happened, in August 2005, was 28 months ahead of the Great Recession. A lot can happen in that time, and Chappatta says one thing he expects is that the Federal Reserve will leave interest rates steady. It might even cut them a bit--although not for a while.

As long-term rates fell over the last week, the yield on the 10-year note dropped 15 basis points; mortgage rates followed suit. Freddie Mac said the average 30-year fixed-rate this week was 4.75%, down 6 basis points from last Thursday.

Sam Khater, Freddie Mac’s chief economist, says, “Mortgage rates declined this week amid a steep sell off in U.S. stocks. This week’s rate reaction to the volatile stock market is a welcome relief to prospective homebuyers who have recently experienced rising rates and rising home prices.”

Home Sales Update

Rather than give short shrift to Thanksgiving week’s home sales reports, we decided to devote this week’s issue to them. So much for advance planning. A week late and still a little less attention than they deserve.

Because it has been in short supply, we go to the good news first; existing home sales broke their long losing streak. Not a big gain, but since it was the first since March, even 1.4% seemed stupendous. Sales still lagged the October 2017 numbers by 5.1%.

New home sales did not fare as well. Once again analysts awaited a rebound from a four-month slide but instead got an 8.9% dive from September and 12.0% lower year-over-year. Some of the loss, however, resulted from an upward revision to September’s numbers, which retroactively gave that month the first gains since May.

Finally, the Pending Home Sales Index (PHSI) didn’t extend September’s uptick, only the second increase in six months, slipping back 2.6% to 102.1. This is 6.7% lower than the October 2017 index and marks the 10th straight month of annual losses. The PHSI is a leading indicator of existing home sales, so we aren’t pinning much hope on their extending that one-month winning streak into November.

Hope you had a great Thanksgiving!

12.07.2018

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