Housing prices have recovered significantly since the financial crisis, with new home sale prices up 31 percent since 2011 and existing home prices up 23 percent. In fact, from the perspective of many first-time homebuyers, they’ve already recovered too much. Even through the average interest rate on a 30-year mortgage is just 3.97 percent, Credit Suisse says affordability is the primary reason new buyers have been slow to venture into the housing market. They won’t find things any easier now that the Federal Reserve has raised interest rates for the first time in nearly a decade. While the yield on 10-year Treasury bonds barely budged in response to the hike, Credit Suisse expects yields to rise from 2.24 percent to 2.95 percent by the end of 2016. If the Federal Reserve raises interest rates from a median of 0.375 percent now to 2 percent in 2017 – toward the low end of the Federal Open Market Committee’s projections – the bank’s analysts think mortgage rates would rise to 5.29 percent, raising the average monthly mortgage burden from $940 to $1,009. That would eat up 23.7 percent of the average homebuyer’s monthly income instead of just 20.7 percent. Rising mortgage rates typically cause homebuilder stocks to underperform during Fed tightening cycles, even though such cycles typically come during periods of strong job growth that would otherwise support the housing market. If mortgage rates rise by 1 percentage point over the course of the next 12 months, Credit Suisse expects that to be the case again.
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Inflation: The Market’s New Favorite Indicator
Dec 17, 2015
Time was, the financial markets waited with bated breath for every new jobs report to see how the labor market’s progress might impact future monetary policy. In the wake of the first rate hike in nine-and-a-half years, however, there’s a new market-mover in town. The Federal Open Market Committee made clear on December 15 that the timing of future rate hikes will depend less on labor and more on whether or not inflation is approaching the Federal Reserve’s target rate of 2 percent. In October, core personal consumption expenditures (core PCE) rose just 0.6 percent on an annualized basis, but the Fed forecasts that PCE inflation will increase to 1.6 percent by the end of 2016. The FOMC statement said that low levels of inflation are “transitory” and linked to low prices for both energy and imports of late. Markets will be watching very closely to see if they’re right, with inflation data releases a likely catalyst for market volatility. Credit Suisse believes that inflation data will produce both downside and upside surprises over the course of the coming year, although the market is currently focused on the downside risks. The bank’s analysts think that creates an opportunity for investors to consider opportunities that benefit from increasing rates, as a strong jobs report in January is likely to send yields higher.
