Wednesday’s speech by Fed Chair Powell was favorable for mortgage rates, while the recent economic data caused little reaction, and rates ended the week lower.
Similar to recent comments from other Fed officials, Fed Chair Jerome Powell’s speech hinted at a slower pace of monetary policy tightening, which was good news for both stocks and bonds. Of note, Powell said that the federal funds rate is “just below” the neutral rate, while he had described it as “a long way” from neutral in early October. At the neutral rate, monetary policy neither boosts nor hinders economic growth. Investors still expect a rate increase at the next Fed meeting on December 19, but the outlook for the number of hikes in 2019 has dropped substantially over the last few weeks.
In October, the pace of housing market activity showed little change from September. Sales of previously owned homes, which make up roughly 90% of the market, rose slightly from September, but they remained lower than the levels seen a year ago. Sales of new homes, which represent the remaining 10% of the market and are more volatile month to month, declined more than expected in October. However, the results for September were revised higher by an amount similar to the shortfall in October.
A shortage of inventory has been a major factor holding back home sales in many regions, and the news on this front was not particularly encouraging. In October, overall housing starts rose a little from September, but the increase was due to multi-family units, and single-family starts declined from the prior month. The monthly housing market index compiled by the National Association of Home Builders (NAHB) showed an unexpectedly sharp decline in builder confidence to the lowest level in more than two years.
On Tuesday, the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, announced that the baseline conforming loan limit for one-unit properties in 2019 will increase to $484,350 from $453,100 in 2018. The Housing and Economic Recovery Act (HERA) requires that loan limits for Fannie Mae and Freddie Mac be adjusted each year to reflect the change in the average U.S. home price. According to the FHFA, home prices increased on average 6.9% from Q3 2017 to Q3 2018, and therefore loan limits will increase by the same percentage. HERA allows higher limits in certain high-cost areas and, for 2019, the ceiling for loans in those areas will be capped at $726,525, or 150% of the baseline limit. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the baseline loan limit will be $726,525 in 2019 for one-unit properties.
Looking ahead, the important monthly Employment report will be released on Friday. As usual, these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing index will be released on Monday and the ISM national services index on Wednesday. In addition, a G20 meeting will take place this weekend, and investors will be watching for signs of progress on trade negotiations between the U.S. and China.
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