February was a blowout month for jobs...
Payrolls rose by 313,000, double most economists’ estimates. The unemployment rate held at 4.1% thanks to an increase in formerly discouraged workers (not counted as unemployed in the official numbers) seeking jobs.
You might think a blowout month for job growth would blow up interest rates. That was hardly the case. Interest rates have drifted lower since the employment report was issued on March 9.
The yield on the 10-year U.S. Treasury note has drifted 10 basis points lower over the past week. Mortgage rates haven’t seen the same percentage decline. Quoted rates have generally held firm, but more cost concessions have been in the offing. Lower costs lower the effective rate.
It all seems counterintuitive. You would expect interest rates to rise, given the current employment situation. But, of course, nothing operates in a vacuum. Mitigating factors tempered the payroll gains.
Tepid wage growth was one mitigating factor. Businesses are demanding more labor, but the supply of labor appears accommodating. Average hourly wages increased only 0.1% in February. Wage growth runs at 2.3% annually, which is within the norms of the past decade. Wage-induced inflation remains a nonstarter.
Economic growth is another mitigating factor, as well as a nonstarter. After tax reform was passed in December, many pundits upped their forecasts for gross domestic product growth (GDP). Expectations have eased since the start of the year. The Federal Reserve Bank of Atlanta recently downgraded its growth expectations for GDP to 1.9% on an annualized rate. This is down from 2.5% annualized growth offered earlier this year.
Investor passion for stocks has also cooled, thus acting as another mitigator. Stocks burst out the gate to the start the year, but the pace has pulled back since late January. The prospect of rising interest rates and the threat of tariff-induced trade wars has put investors on their heels.
Most important, at least on the long-end of the yield curve, is consumer-price inflation. The Consumer Price Inflation continues to point to subdued inflation. The CPI was up only 0.2% in February. The CPI runs at a 2.2% annualized rate. The core CPI, which excludes food and energy, runs at only a 1.8% annualized rate.
Given the information we have today, we expect mortgage rates to hold as they have held for the past two weeks. The 4.5%-to-4.625% range on the prime 30-year conventional loan should persist. Any improvement within the range offers as good a reason as any to lock.
Relief Is on the Way
The U.S. Senate voted 67-31 to pass the Economic Growth, Regulatory Relief, and Consumer Act. The long-winded bill rolls back the more onerous provisions of the equally long-winded Dodd-Frank Wall Street Reform and Consumers Protection Act. Dodd-Frank was legislation passed in response to the 2007-2008 financial crisis.
You can argue that Dodd-Frank imbued the financial system with stability. You can also argue the other way. If Dodd-Frank did imbue stability, stability came at a price.
Bloomberg reported in 2016 that annual direct cost of Dodd-Frank compliance among financial institutions had risen to $10.4 billion. Much of the cost (not counted in the $10.4 billion) is indirect and embedded in additional effort.
Bloomberg also reported that paperwork hours grew to 73 million annually in 2016, up from 61 million the year before. That’s not really news. The trend in annual paperwork hours has only risen since Dodd-Frank was passed in 2010.
As for our neck of the woods, the Economic Growth (etc., etc.) bill will make it easier for small banks and credit unions to originate mortgages. Financial institutions will face reduced regulatory and liability burdens when issuing qualified mortgages. The bill allows lenders to offer a lower rate to a borrower without triggering a three-day waiting period for mortgage disclosure. The bill also treats certain mortgages originated and retained by banks or credit unions as qualified mortgages.
This is all good news for lender and borrower alike. Burdens are reduced, which will reduce origination costs. Reduced costs on the lender’s end will reduce costs on the borrower’s end.
Should the Economic Growth, Regulatory Relief, and Consumer Act pass the House, a likely outcome, mortgage lending will become a more endurable (dare we say even enjoyable?) effort for all involved.