You should not have been surprised that mortgage rates did not change last week after the Fed announced a 25 basis-point increase. Rates essentially remained unchanged because mortgage rates already incorporate the assumption that the Fed will continue increasing rates.

The following chart shows how mortgage rates moved down only slightly while the Fed was dropping rates from 2001 through 2003 and, conversely, we believe rates will tend to move up only slightly as the Fed continues to raise mortgage rates. There are other factors that could cause rates to rise, but don’t expect the Fed to be the primary culprit. Mortgage rates are based on a long-term outlook because most buyers of mortgage rates are looking at a 10-year horizon (the average time it takes for a mortgage to be refinanced/paid off).

Our grading system of the economy and the housing market is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student. Here is our current report card:

Economic Growth: C

Economic growth remains near historical averages. Last week’s announcement that May’s job growth did not meet expectations was completely overblown in the press. There are 1.39 million more people on payrolls than one year ago, which is a solid 1.1 percent growth rate.

Leading Indicators: B-

All five of the leading indicators we track declined very slightly this month, but not enough to cause concern. The outlook for economic growth remains slightly better than average.

Mortgage Rates: A-

Fixed rates remained relatively unchanged this month, while adjustable rates rose 15 basis points. Adjustable rates are likely to rise more quickly than fixed rates if the Fed continues to raise rates.

Consumer Behavior: C+

All three consumer indices rose this month, with consumer confidence rising above 100 for the first time in two years. The improving job market appears to be having a positive effect on consumers.

Existing-Home Market: B+

The pace of existing-home sales cooled slightly in May, although the number of people filing mortgage applications to purchase a home rose in June. The outlook for the next few months looks very rosy.

New-Home Market: B+

Home builders set a new record in May, with an annual pace of 1.37 million homes sold. This is 11 percent higher than the previous record, which probably means there was a bit of a statistical fluke in May and you should expect a decline in June that will be announced later this month. I am certain that some of the newspapers will run headlines regarding the major decline–don’t pay attention to them.

Housing Supply: B-

Not surprisingly, single-family permits also set a new record as builders began the process of building the homes for the record level of sales volume. Total housing starts remained relatively unchanged at an annual rate of 1.97 million.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis.


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