Fed plays waiting game, rates hold low and steady

An odd end to the week as the stock market dropped and analysts don't seem to understand exactly why. The Dow Jones dropped 150 points midday Thursday before rebounding slightly, and the benchmark 10-year Treasury note yield dipped to 1.486% in early trading Friday morning.  

The coronavirus is a lingering concern for markets as more cases are being reported and fear of a widespread pandemic spreads. The minutes released by the Federal Reserve Open Market Committee members' meeting this week reflected that concern, calling the virus a "new threat" and an uncertainty moving forward.

Despite the uncertainty, the Fed has said it will not ease interest rates now or in the foreseeable future. The minutes show they decided that leaving rates unchanged now "would give the Committee time for a fuller assessment of the ongoing effects on economic activity of last year's shift to a more accommodative policy stance and would also allow policymakers to accumulate further information bearing on the economic outlook."

Their stance is not rigid, however, and the minutes indicate a desire to remain flexible should there be any extreme swings with the current spread of the coronavirus or a change in trade relations between the United States and China. 

Campaign 2020 spotlights Fannie and Freddie

Presidential candidate Mike Bloomberg has revealed his own plan to reform the housing industry and it includes a plan to merge Fannie Mae and Freddie Mac.

Bloomberg wants to work with Congress and regulators to:

• Gradually merge Fannie and Freddie into a single, fully government-owens mortgage guarantor, to ensure that taxpayers are fully compensated for the risks they are assuming – and that lower-income households are well served.
• Have the guarantor transfer downside risk to private investors via specialized securities, retaining just the catastrophic risk that only the government can bear.

Also contained in Bloomberg's plan is an allowance for community banks "to make mortgage loans to whomever they deem creditworthy." 

The Trump administration is currently working to remove Fannie and Freddie from conservatorship before Mark Calabria, the current head of the Federal Housing Finance Authority, sees his term expire. 

Rates staying put

We are still seeing an incredibly low average of 3.49% for a 30-year fixed-rate mortgage according to Freddie Mac. Freddie Mac's data shows that purchase applications are up 15% year-over-year and residential construction is also surging.

Single-family building permits just hit a 12-year high in January, according to the Commerce Department. Permits rose by 987,000, a 6.4% month-over-month gain, which is its highest level since June 2007. The construction report was so strong that Goldman Sachs added one-tenth of a percentage point to its Q1 gross domestic product estimate. 

Construction companies getting back into production mode is extremely important as housing inventory continues to wilt. We have seen seven straight months of decreasing inventory, according to the National Association of Realtors. But the NAR's chief economist Lawrence Yun says we could see the tide turn as the year progresses because of the increase in construction. "Spring months could still be quite tough for buyers since it takes time to convert housing starts into actual housing completions," Yun said. "As trade-up buyers move into these newly completed homes in the near future, their existing homes will be released onto the market."

Existing homes may become even tougher to come by as prices keep going up due to low inventory and consistent demand. Year-over-year, December home prices rose by 4% according to CoreLogic's Home Price Forecast. And in January, Redfin's data shows that home prices rose by a whopping 6.7% hitting a median price of $306,400.