Overview: With a lack of major economic data and no surprises from the Federal Reserve, it was a quiet period for mortgage markets over the past week, and rates ended nearly unchanged.
The two reports on sales of previously owned homes released this week revealed an unexpected degree of both past weakness and reason for future optimism. In January, sales of previously owned homes based on actual closings (existing home sales) declined a little from December to the lowest level since November 2015. By contrast, contracts signed in January for the purchase of previously owned homes (pending home sales) jumped 5% from December, which was far above the consensus forecast.
Signed contracts are a leading indicator of future home sales, and there are a number of other factors that support an increase in activity in coming months. First, several temporary events such as unusually high stock market volatility and the government shutdown may have caused buyers to proceed more cautiously near the end of 2018. In addition, mortgage rates have declined by roughly 50 basis points since early November. Other longer-term trends, such as rising income levels and shifting demographics, also favor stronger home sales.
Fed Chair Jerome Powell delivered his semiannual testimony to Congress on Tuesday and Wednesday. Powell described the U.S. economy as healthy, but he said that a number of potential headwinds could restrain future growth. The primary uncertainties concern the pace of global economic activity, trade negotiations between the U.S. and China, and the impact of Brexit (the British exit from the European Union.) As a result, the Fed will be “patient” in assessing incoming data to determine if there is a need to further raise the federal funds rate. Powell did not provide any new information about future monetary policy, so the effect of his testimony on mortgage rates was minor.
Looking ahead, fourth quarter gross domestic product (GDP), the broadest measure of economic growth, will come out on Thursday. The Institute for Supply Management (ISM) Manufacturing Index and the core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will be released on Friday. The ISM Services Index will come out on March 5. The next monthly Employment Report will be released on March 8. Investors also will be watching for signs of progress in the trade talks between the U.S. and China and for an extension in the March 1 deadline to raise U.S. tariffs on Chinese goods.