Interest rates steady

Interest rates for buying a home on the Palos Verdes Peninsula remained steady this week . The following are excerpts from the newsletter on interest rates published by HSH Associates :

"Mortgage rates continue to meander about, largely rangebound, as financial markets try to figure out where we go from here in terms of both fiscal and monetary policy. On the one side are hoped-for or expected changes in tax and regulatory structure that may help boost business profits and the promise of new fiscal outlays that may further goose growth; On the other side is the Federal Reserve, who is looking out over the landscape and is beginning to judge that their policies of keeping interest rates at rock-bottom levels for years is finally having the desired effect on employment and inflation.

In this view, the central bank sees an economy that may need less, not more, stimulus in order to continue a long-running modest expansion.

The Fed has already overtly stated that it believes that it will be raising the federal funds rate perhaps three times this year. Fed Chair Janet Yellen spoke before Congress this week in her semi-annual testimony on monetary policy, and she gave no indication that her view has changed in this regard. In fact, one of her statements was said to make the March meeting "live" for a policy move, as she noted "Waiting too long to remove accommodation would be unwise." Although futures markets did put an increased probability of a move by the Fed at the March 14-15 meeting, that likelihood had retreated to about an 18 percent chance by Friday.

Frankly, we think the markets are underestimating this risk, as the economic data continue to be pretty solid. There has been scant evidence to suggest that the Fed's move in December 2015 had much by way of effect on last year's growth; it's too soon yet to say if the December 2016 rate increase will have an effect, but so far, no discernable negative impact is evident. Make the move in March, and the Fed could probably sit and wait until September before considering another. Skip March, and they run the risk of having to cram three hikes into the remaining 9 months of the year. Data due out in the next three weeks will be key, and whether March or beyond, rates will be again increasing before all that much more time has passed.

Taken all together, there doesn't seem to by much by way of economic weakness to worry about of late. Global growth and turmoil, so important to driving U.S. rates lower in the last few years, seems to be stabilizing, if not improving outright. There are some sore spots we may yet see (Greece debt payments, Italian bank issues, Brexit and more) but markets seem to be taking concerns those in stride, too. Throw in solid consumer spending and any number of whiffs of rising prices, it seems to us that the conditions for higher interest rates are forming, if not already in place.

Perhaps it is simply a case where nominal interest rates moved first (and perhaps too far) in anticipation of data to come, only now the data is beginning to fill in behind them. If that's the case, then we may not see much by way of upward movement for a period of weeks, but if the data continues to suggest upward momentum for growth and prices, that space will fill fairly rapidly, and we'll soon be ready for the next move higher.

At the moment, it doesn't appear that this will start next week. Although underlying interest rates did move up mid-week this week, there was a backpedaling seen on Thursday and Friday, leaving us just a little below where they began the week. With this as a backdrop, we think that the average 30-year fixed-rate mortgage as tracked by Freddie Mac will hold about steady again next week, but it wouldn't be a surprise to see a basis point or two decline... or increase.

One last note of interest: The Mortgage Bankers Association reported that the share of mortgage applications for refinancing hit their lowest level since June 2009. At that time, the average 30-year FRM was at 5.92 percent, so there is truly nothing left in the potential refi pool when rates just over 4 percent can't get a rise out of homeowners."

The following are interest rate quotes from John Alvin of American California Financial: