Disappointing jobs data for the month of March has pushed long-term mortgage rates to historic lows. The jobs report has also heightened concerns about the employment picture and the economy as a whole. At the same time, it means that the Fed’s rate hike decision may be delayed. This may lead to mixed results for various stakeholders if mortgage rates remain low even as economic activity slows.
Job Additions Decline
Only 126,000 jobs were added in March, only around half the number estimated by economists. This is the lowest number of job additions since Dec 2013. Additionally, data for both January and February was revised downward, which means that 69,000 fewer jobs were added during these months taken together.
Job additions also fell below 200,000, bringing to an end an unbroken run of 12 such successive monthly gains. Following March numbers, hiring for the first quarter stands at 197,000. This means that the decline in March is a cause for concern. Additionally, this compares unfavorably to the average of 289,000 job additions in last year’s fourth quarter.
Mortgage Rates Slump
According to Freddie Mac’s FMCC Primary Mortgage Market Survey, average fixed mortgage rates declined as a result. The 30-year fixed-rate average declined from 3.70 last week to 3.66, its lowest level since the first half of Feb 2015. The rate was at 4.34% a year earlier.
Additionally, the 15-year fixed rate average slipped from 2.98% to 2.93%. The rate has remained below 3% for the last three weeks and was at 3.38% a year earlier. Hybrid adjustable mortgages showed a slightly different trend. While the five-year rate declined, the one year rate has remained flat over the last five weeks.
Fed Remains Cautious
On Monday, New York Fed President William Dudley said the timing of hiking rates “will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.” A permanent voting member on the central bank’s policy panel affirmed that the Fed needs to “determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.”
Meanwhile, minutes from the Federal Open Market Committee’s (FOMC) meeting on Mar 17-18 stated officials were divided on the timing of raising interest rates. At a conference sponsored by the San Francisco Fed at the end of last month, Yellen said that an improving economy “may warrant an increase in the federal funds rate target” at the end of the year. Given this particular report, even a late-year rate hike remains in doubt.
Impact on Banks
Last week’s data from the Mortgage Bankers Association (MBA) shows that the increase in purchase applications has outweighed the decline in refinance applications. While the refinance index declined 3%, the purchase index surged 0.7%. The gauge of total loan applications increased 0.4%. This is its highest level since Jul 2013, a consequence of strong housing purchases and low mortgage rates. According to the MBA’s chief economist: “Purchase volume has increased for three straight weeks now on a seasonally adjusted basis.”
Overall, the impact on banks and REITs will be mixed in nature. If the overall economy slows, the demand for fresh mortgages may remain depressed with fluctuations in mortgage rates and significantly lower refinancing activity. Also, there will be fewer avenues for new originations. So lenders might continue to see lower profit margins. This is why the likes of Citigroup Inc. C, JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and The PNC Financial Services Group, Inc. PNC may face some trouble on this front.
At the same time, first quarter earnings from the sector are likely to receive a boost from mortgage lending. This is because low rates had pushed up refinancing activity during the quarter. From end-December to mid-January, the MBA’s refinancing index increased nearly two times. It may be some time before they generate fees for banks. However, some loans have possibly closed by that quarter.
REITs to Gain?
REITs usually stand to gain from lower borrowing costs. Surely, the jobs report and dovish comments from the Fed delay the prospect of a rate hike. On the other hand, positive economic data is needed to strengthen the industry’s fundamentals and build demand for commercial properties. Since it is unlikely that a rate hike will come before the Fed is satisfied with the jobs situation, the likes of Regency Centers Corp. REG Pennsylvania Real Estate Investment Trust PEI and SL Green Realty Corp. SLG have little cause for concern.
A rate hike after an economic recovery would significantly benefit REITs. This is because an improving economy would mean more economic activity, leading to increased demand for space. And since supply has been slow with a tepid economic recovery thus far, this increase in demand would lead to higher rents and occupancies.
In Conclusion
The implications of lower mortgage rates can only be determined after examining economic data to be released in the days to come. If job additions rebound next month, gains will accrue for several stakeholders. On the other hand, if economic growth continues to struggle, rates and those which stand to gain may also suffer the consequences.
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