Daily Quote: A new year is like a blank book. The pen is in your hands. It is your chance to write a beautiful story for yourself. Happy New Year!!!
What Exactly Is A “New Year”?
What really makes a year “new”? Is it something as arbitrary as the changing of a calendar or the fact that we’ve once again completed a full orbit around the sun? Or is a new year defined by some change which makes the future differ from the recent past regardless of the date it occurs?
If you ask me the new year really began on November 9th 2016. That’s the day everyone woke up to discover (despite what mainstream media was quite certain of) that Hillary Clinton was not going to be the 45th President of the United States and that the demise of the Republican party was greatly exaggerated.
Not Sure If 2017 Can Truly Be Labeled a “New Year”?
I get the strong impression some are struggling to identify whether this really is a whole new operating environment we find ourselves in or whether we’ll soon be back to the pre-election rate environment of low rates and significant refinance volumes. While I couldn’t be more opposed to the view that we’ll see pre-election rates again I do understand why there is doubt. After all, for the last 5 or 6 consecutive years we’ve ended each year with higher rates than we started with only to see a Q1 rate rally as the economy slowed. In addition, recognition of a significant change in your operating environment then requires significant action…and people hate taking action almost as much as they hate change.
Then Explain to Me What’s Different This Time?
The main difference between pre-November 9th and post November 9th is that, for the first time in 7 years, we have an Executive and Legislative branch geared up to pass meaningful pro-growth initiatives. Infrastructure building, Healthcare reform, tax cuts on both the personal and corporate side, defense spending, a push towards less regulation, and tax repatriation strategies for domestic entities to bring $3 - $4 trillion of profits back into the US. And don’t forget about an increase in Treasury issuance to help pay for some of this. All of these are unquestionably growth oriented and inflation producing activities assuming they get passed.
But even though none of this has been passed yet and “The Donald” isn’t even in office until January 20th, it’s critically important for you to understand that the markets are forward-looking instruments when it comes to expected inflation and growth. To understand this more, here is some basic Econ 101 math:
10-Year Treasury Interest Rates = Expected GDP Growth + Expected Inflation + A Time Premium (to compensate you for not having your money for 10-years.) So if we were in a world of 1.0% - 1.5% GDP growth and 0.0% - 1.0% inflation then you’d expect a 10-year Treasury yield of about 1.5% - 2.0%. Now if the expectations for both of them move higher, say, due to a high probability of impending pro-growth legislation, the market immediately prices their expected change in growth and inflation expectations into Treasury yields and they go higher. And that is why we’ve seen such a significant increase in rates so quickly. Make sense?
Got It…But Will All Of This Really Get Passed?
Time will tell what ultimately gets passed but here are a few telltale signs much will get done quickly:
So What Does This Mean For Mortgage Participants?
I know I’ve thrown a lot at you but I thought you’d appreciate some of the detail in order to gain a better understanding of the many moving pieces here. So here is a summary of what mortgage participants can/should expect during the next 116 days:
So in my opinion we enter what could still be a very productive origination environment for the right MLO’s and the proper platform. Incomes are more important than interest rates when it comes to home purchases, a strong economy is always good for housing, home builders are coming back online, rent is gruesomely expensive in many areas, and some form of credit relief for 1st time home buyers is likely to create some additional demand. So you can still thrive in this operating environment if you make the changes necessary and hold yourselves and your teams accountable for what it takes to adapt quickly.
|1/3/2017||9:45||Markit US Manufacturing PMI||Dec F||54.2||54.3||54.2||--|
|1/3/2017||10:00||ISM Prices Paid||Dec||55.5||65.5||54.5||--|
|1/3/2017||10:00||ISM New Orders||Dec||--||60.2||53||--|
|1/3/2017||10:00||Construction Spending MoM||Nov||0.50%||0.90%||0.50%||0.60%|
|1/4/2017||7:00||MBA Mortgage Applications||30-Dec||--||--||--||--|
|1/4/2017||14:00||FOMC Meeting Minutes||14-Dec||--||--||--||--|
|1/4/2017||Wards Domestic Vehicle Sales||Dec||13.70m||--||13.85m||--|
|1/4/2017||Wards Total Vehicle Sales||Dec||17.70m||--||17.75m||--|
|1/5/2017||7:30||Challenger Job Cuts YoY||Dec||--||--||-13.00%||--|
|1/5/2017||8:15||ADP Employment Change||Dec||175k||--||216k||--|
|1/5/2017||8:30||Initial Jobless Claims||31-Dec||260k||--||265k||--|
|1/5/2017||9:45||Markit US Services PMI||Dec F||53.4||--||53.4||--|
|1/5/2017||9:45||Markit US Composite PMI||Dec F||--||--||53.7||--|
|1/5/2017||9:45||Bloomberg Consumer Comfort||1-Jan||--||--||46||--|
|1/5/2017||10:00||ISM Non-Manf. Composite||Dec||56.7||--||57.2||--|
|1/6/2017||8:30||Revisions: Seasonally Adjusted Household Survey Data|
|1/6/2017||8:30||Change in Nonfarm Payrolls||Dec||180k||--||178k||--|
|1/6/2017||8:30||Two-Month Payroll Net Revision||Dec||--||--||-2k||--|
|1/6/2017||8:30||Change in Private Payrolls||Dec||170k||--||156k||--|
|1/6/2017||8:30||Change in Manufact. Payrolls||Dec||0k||--||-4k||--|
|1/6/2017||8:30||Average Hourly Earnings MoM||Dec||0.30%||--||-0.10%||--|
|1/6/2017||8:30||Average Hourly Earnings YoY||Dec||2.80%||--||2.50%||--|
|1/6/2017||8:30||Average Weekly Hours All Employees||Dec||34.4||--||34.4||--|
|1/6/2017||8:30||Labor Force Participation Rate||Dec||--||--||62.70%||--|
|1/6/2017||10:00||Factory Orders Ex Trans||Nov||--||--||0.80%||--|
|1/6/2017||10:00||Durable Goods Orders||Nov F||-4.60%||--||-4.60%||--|
|1/6/2017||10:00||Durables Ex Transportation||Nov F||--||--||0.50%||--|
|1/6/2017||10:00||Cap Goods Orders Nondef Ex Air||Nov F||--||--||0.90%||--|
|1/6/2017||10:00||Cap Goods Ship Nondef Ex Air||Nov F||--||--||0.20%||--|