Mortgage Rates Moved Up From Narrow Ranges

Mortgage rates surged higher today, ultimately making it back to levels not seen just before the elections last year in late October.  Part of the reason rates were able to cover so much ground in a single day is that the recent range has been exceptionally narrow.

Given that the tax bill passed the House today, it is easy to assume the move in rates is related only to this, but it is not.  The move in rates is its own animal, having to do with the year-end trading environment in bond markets and other esoteric motivations not related to any headline events.  

Republicans over-joyed promising the world to us in terms of higher wages, less taxes and amazing economic growth. The bond market took a huge hit as the 10yr closed at 2.47% and MBS pricing down 34BPS. Stocks were a little weaker but generally not much movement. The Senate will vote tonight, and Trump is planning a huge signing ceremony. No one interested in the resulting increase of US debt - that is a bridge that we will deal with in a few years. The bill passed the House by a vote of 227-203, overcoming united opposition from Democrats and 12 Republicans who voted against it. Middle-income households would see an average tax cut of $900 next year, while the wealthiest 1% of Americans would see an average cut of $51,000, according to the nonpartisan Tax Policy Center. The argument for the lop-sided cuts is that the wealthy pay 90% of all taxes.

What will the cut do for the housing industry?  Most of the surveys I have seen are that it may make housing less affordable, other surveys saying it would not do anything to improve housing markets. The tax bill tax allows interest payment deductions on mortgage debt up to $750,000, down from the current $1 million. Lot of hand-wringing about the reduction, most coming from very high cost markets like both coasts. In the mid-west $750,000 covers most of homes.

Now that the tax bill is about to be law what next for the over-extended equity markets?

It is doubtful the stock market will repeat this year’s growth, in fact I expect that that long-awaited sell-off (correction) will happen in Q1 2018. The Fed and the other major central banks have been looking for inflation at any moment for the last three years, 2018 may finally meet those expectations. If these optimistic growth forecasts and wage increases actually happen, interest rates on the 10yr may move up and double the current rate.  I doubt that the stock market will be able to hang on if this happens, but as I have stated many times before, I am only a mortgage loan officer following the bond markets.  Also, note that we are coming up to elections next year.

In summary, the tax bill is becoming a reality and the markets are using this news as a stepping stone for the future.  My thoughts have been to lock in as rates have made more pushes upward than down.