Friday Wrap: Analysis of News and Events for the Week

Markets Steady This Week Keeping Rates Low

A relatively slow week of economic data as the equities wiggle sideways and bond yields drift lower as markets closely watch the coronavirus in China.

The International Monetary Fund’s economic outlook released this week predicts that we will see the world economy grow by 3.3% in 2020, compared to 2019’s 2.9% growth. That would be the first global economic strengthening in three years, according to the IMF. 

They do admit that they are being “hopeful” in this forecast and point out risks like the ongoing trade ordeal between the United States and China as well as the tensions between the U.S. and Iran. The latter could greatly impact oil production and prices which would have a distinct impact on the world economy. The former has made progress, but progress doesn’t mean it’s over. 

“A trade truce is not the same as trade peace,” says IMF Managing Director Kristalina Georgieva. Completion of the first phase of the deal means a “shrinkage of the negative impact, but not an eradication.”

Why a Virus Could Impact the Economy

One thing to keep an eye on has nothing to do with markets, yet. You have probably seen the headlines about the deadly coronavirus in China. As of this week, 17 people have died with more than 600 people infected. There has also been a case reported in the United States in Washington State.

Two cities in China have been essentially locked down in an attempt to curb the spread of the virus with Beijing canceling many public events, including lunar new year celebrations. The impact on markets would be felt because people, quite simply, would stop going out and spending money. There could be a significant slowdown in travel (think tour groups not coming to the United States), people would not go out to dinner for fear of getting infected, etc. Wuhan, one of the cities that has been locked down, is home to more than 11 million people. When you take that chunk of people out of an economy, there is a ripple effect. 

This disease is similar to an epidemic from the early 2000s, severe acute respiratory syndrome, or SARS. With that virus, investors overcorrected and estimated a much larger impact than it actually had. And what they learned was that the impact itself, felt mainly in the oil and industrial metals sectors, was temporary. Also, the current Wuhan virus is not nearly at the levels of SARS just yet, so depending on containment we may not see any effect at all. 

However, China’s economy is roughly 10-times larger than it was when SARS first showed up and China consumes more commodities than any other nation in the world. So when there is a hitch in any part of China’s economy, that can turn into a big problem. 

Housing Prices Predicted to Rise

On May 30, 2019, the average for a 30-year fixed-rate mortgage dropped below 4%, hitting 3.99% according to Freddie Mac. The average has not hit 4% since then which helped spur the surge of refinances in 2019. The average from Freddie Mac as of this week is 3.60% for a 30-year fixed-rate mortgage. The forecast from Fannie Mae economists predicts that rates will stay in the 3.7% range through 2021. The chart below from Freddie Mac shows the trajectory of mortgage rates over the last year. The blue line indicates the 30-year fixed-rate, the green line is the 15-year fixed while the red represents a 5/1 ARM. 

The lower mortgage rates has given consumers more purchasing power which has spurred a lot of people to hit the market. Consequently, the increase in demand will cause home prices to rise. Just this week, Fannie Mae economists changed their forecast for 2020 and are now predicting that home prices will rise at a 4.6% rate this year. Originally, they had forecast a 4.1% home price increase.

Inventory will continue to be a pain point for the housing industry, however. Even though December’s numbers show a 13-year high for housing starts with 975,000 housing starts predicted, those homes may not be affordable for the segment of the population itching to buy. Fannie Mae’s forecast shows the median price for a new home to be $327,000 in Q1 building up to $352,000 in Q4. The prediction also shows median existing home prices at $265,000 in Q1 with a spike in the spring and summer months to $291,000. Despite lower mortgage rates, that price range excludes a lot

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.