Federal Reserve Chair Janet Yellen made bold declarations this week when she predicted that another economic downturn similar to the recession nearly a decade ago is unlikely in our lifetime.
Her comments came during a talk in London with British Academy President Lord Nicholas Stern, and were a public show of confidence in the financial wherewithal of America’s recovering banking system.
Yellen said the Fed has learned lessons from the financial crisis and has taken steps to improve the nation’s banks. She added that the system is much sounder and safer than in years past.
Most of that renewed stability she attributes to tighter regulations the Fed mandated in the aftermath of the crisis. Some of those rules included a requirement that banks with more than $50 billion in assets to undergo annual stress tests to gauge their capacity to continue operations in the event of a downturn.
Last week, the country’s 34 largest banks passed the first round of stress tests proving they held enough capital to withstand a crisis the same magnitude of the 2008 banking calamity that nearly crumbled the economy.
On Wednesday, the Fed gave its endorsement for all except one of those banks to increase dividends during the second part of its stress tests. In response, bank stock climbed on Thursday, and major banks, such as Citigroup and Morgan Stanley, announced plans to repurchase stock and boost payouts to shareholders to levels not seen since before the crisis.
“This is the big payoff after seven years of pushing the industry to get to a place where capital planning is well ingrained,” David Wright, a managing director at Deloitte’s advisory business, told Bloomberg News. “They reached the summit.”
This is good news for mortgage markets. As I covered in last week’s blog, when banks are healthy and pay out dividends, it adds capital to the mortgage market. More capital in the market creates more liquidity, fueling the secondary mortgage market and allowing lenders to finance more homes.
Oil takes on the bear
As bank stocks surge, oil prices continue to plummet.
Oil began a steady decline in 2014 as demand for energy in many countries flatlined due to weak economic growth. That descent has been ongoing, aside from a brief period of recovery in 2016. Prices reached to more than $50 a barrel before slipping again this March. Oil moved into bear market territory earlier this week, declining 20 percent year to date. As of today, oil has bounced back a few dollars inside of bear market territory. Time will tell on this one. We should expect continued volatility in this sector and keep a watchful eye on its impact to rates.
For the consumer, there’s not much to complain about — falling oil prices translate into lower gas prices, which, of course, means less money at the pump and more cash in consumers’ pockets.
But for oil companies and major oil exporting countries, such as Russia, Venezuela, Canada and much of the Middle East, lower oil prices is a prickly problem because they’re getting less revenue. A sustained decline in prices could create economic instability.
While there is no direct correlation between oil and the mortgage market, there is a cause-and-effect relationship we can explore. When oil prices fall, the phenomenon places downward pressure on interest rates because investors are moving their money out of oil-producing countries and to bonds in stronger economies, such as the United States.
Pending home sales flop
Low home inventory maintained its squeeze on buyer activity in May, with the National Association of Realtors’ pending home sales index showing a 0.8 percent drop in the number of buyers signing housing contracts. That number is now 1.7 percent lower than it was in May 2016.
This was the third straight month contract signings slumped, and is another indicator of the housing shortage and pricing issues prevalent throughout the market. Although new-home and existing-home sales have increased in recent months, home prices continue to soar. Mortgage professionals in talks with potential buyers should focus on how low interest rates can make all the difference for those considering entry into the market.
In the markets:
Volatility is back in play after a few months of a slow grind lower to 2.13% on the 10 Year Treasury Monday. A global bond selloff that started Tuesday continues, pushing some yields to their highest levels in more than a month as investors digested messages from central banks this week on rolling back easy-money policies. In the U.S., the 10 Year Treasury has taken some pain and is currently trading at 2.28%.(see chart). This is a significant move in a short period of time and certainly “bears” watch as we are now looking at a bear steepening trade. As you know, mortgage rates will follow this trend higher.
Investors have largely ignored the Federal Reserve’s warnings that it intends to stay the course for raising interest rates. Several central banks around the world made comments on opening the door to tighter policy, which, in turn, spooked bond investors.
Countries such as Germany’s 10-year government bond increased to a high as 0.44% on Thursday, its highest level in about a month, and the French 10-year government bonds rose 7.8 basis points to 0.80%.
We need to watch all of this closely as economic fundamentals will really drive where rates go over the coming weeks and months. If this week’s move becomes the trend, loan officers will need to work with borrowers to get loans locks before rates start to really move higher.
Happy Fourth of July
Finally, I want to wish you all a very Happy Fourth of July. On Tuesday, the United States turns 241 years old — another milestone commemorating the signing of the Declaration of Independence and honoring the sacrifices of those who laid the groundwork for our democracy. I encourage you to use this day to enjoy your friends and family and celebrate the significance of this day and what it means to live in a country that, while not perfect, remains a remarkable example of what’s possible when people and businesses are free.