US Presidents' Housing Achievments (and a rate update)

Good morning!

This Presidents' Day is a wet and windy one here in Rhode Island.  Today, in addition to a brief interest-rate market recap and preview, I thought I'd bring you a history of significant events in United States housing history, and the Presidents who effected those changes. 

In 1862, Abraham Lincoln signed the Homestead Act, which allowed anyone who had never raised arms against the United States to claim title to up to 160 acres of undeveloped land in the west by following a simple, 3-step process.  This was one of the first steps in opening homeownership to African-Americans. 

Franklin D. Roosevelt was very active in housing, creating the Federal Housing Administration as part of the National Housing act of 1934, in response to a homeownership and foreclosure crisis eerily similar to the current situation.  Roosevelt was also responsible for the establishment of the GI Bill, also know as the Servicemen's Readjustment Act of 1944, that led to Veteran's Administration home loans.  

Harry Truman enacted the Housing Act of 1949, empowering the FHA to insure mortgages, and building the foundations for FHA mortgages in their current form.  This Act also called for the construction of over 800,000 public housing units, many of which, like St. Louis' Pruitt-Igoe complex, later faced major criticism. 

In 1965, Lyndon Johnson brought HUD into existence by means of the Department of Housing and Urban Development Act, thus elevating housing to a cabinet level position. 

And then, in 1975 Gerald Ford signed the Real Estate Settlement Procedures Act of 1974, RESPA, reforming closing practices in the real estate filed, prohibiting payment of referral fees among different professions involved in a real estate transaction, and defining the core documentation currently contained in a mortgage application. 

Clearly the Presidents have had significant impact on the real estate industry throughout their tenures.  Last week, however, it wasn't the President, but the Chairman of the Federal Reserve, who strongly influenced interest rates, sending long term rates roughly 1/8 to 1/4% higher on the week.  In my opinion, this wasn't unexpected, rather it seemed that the market was anticipating this movement.  At present, most lenders I have evaluated are offering 30-year fixed mortgages between 6 and 6.125% with 0 points for conventional credit and down payment. 

Last week, I told you I felt that the market was stretched, or overbought, and was headed higher for that reason.  I believe that last week's events have neutralized much of that pressure, and at present long-term rates appear to have reached equilibrium. 

What does this mean? 

Specifically, it means that future interest rate changes will be dictated by news.  Here's what's coming up this week:

Monday 2/18: Holiday - no news

Tuesday 2/19: Home Builders' Index

Wednesday 2/20: Consumer Price Index / Core CPI / Housing Starts / Fed Minutes

Thursday 2/21: Jobless Claims / Leading Indicators/ Philadelphia Fed

Friday 2/22: no events

Of this week's events, Wednesday's inflationary indicator is the event most likely to have meaningful effect on interest rates.  Recent lowering of interest rates by the Fed has led to increased concern about inflation, as higher inflation levels will challenge the Fed's ability to lower rates in the future.  Additional information about the Fed's opinions will be released on Wednesday, and could drive interest rates up or down significantly.  Jobless Claims data could also move interest rates if the data is significantly higher or lower than expected. 

The other thing I suggest eyeing this week is the stock market.  When bond prices are at or near equilibrium (think Goldilocks - not too hot, not too cold), movements in the stock market are more rapidly translated into movements in the bond market, as investors move money out of bonds and into stocks, or vice-versa.  If stocks heat up this week, that could cause a meaningful increase in long-term interest rates, as money will be moved out of bonds, lowering prices and raising yields. 

Based on this, it is somewhat risky to float interest rates this week, however, it doesn't appear that there is a significant probability of an increase.  I would advise this week that you Float, with Caution.  If you have loans closing very soon, Tuesday is the time to lock, as Wednesday presents meaningful upside risk.  That's this week's update.  Watch this space next week for more news from the Professor.