Mortgage Matters: Rates Remain Subdued On The Usual Fears

July 2, 2018

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Lumber prices are at a record high. They’re at a record high because of a 20.8% tariff applied to imported Canadian Lumber. The NAHB tells us that record-high lumber prices…

By Brian Barker

Wars always escalate. Trade wars included. One side advances with force. The other side retaliates in kind, and then some.

Escalating trade-war retaliations have extracted a toll on investor confidence. Many investors continue to seek shelter in haven investments. U.S. Treasury securities are the haven of choice for many. Yields across the continuum have drifted lower through June. Yields on the long-end of the continuum have drifted lower than most.

Long-term U.S. Treasury yields hold sway over mortgage rates. The 10-year U.S. Treasury note holds more sway than most. The yield on the 10-year note is at a low for June. Rate quotes on the prime 30-year, fixed-rate conventional mortgage also hold near a month-long low.

Treasury yields dipped further over the past week when President Trump escalated the trade war to include the capital markets. Trump said that he’d like to apply tougher restrictions on Chinese investment in U.S. technology companies. Chinese firms could take no more than 25% ownership in a U.S. technology company.

Fortunately, escalations aren’t infinite. Someone must have pulled the president aside and suggested that he think twice on annexing the capital markets. Trump subsequently backed away from his investment-restriction plans.

The president has experienced significant push-back from his political foes, which is to be expected. He’s also received considerable push-back from his political allies. The Wall Street Journal leans more right than left (at least in its commentary). The Journal has run a series of articles highlighting the costs that the trade war has imparted on U.S. citizens.

One article titled “Tariffs Start to Ripple Their Way Through the U.S. Economy” is telling. The article focuses on tariffs imposed on imported steel. The numbers favor potential costs over potential benefits by a wide margin.

Says the Journal, “As of mid-2017, there were 29,288 steel-consuming firms, employing more than 900,000 workers who face higher prices versus just 916 steel-producing firms with 80,000 employees who benefit from those higher prices and reduced competition.” Eleven jobs are put at risk in steel-consuming firms to protect one job in steel-producing firms.

Fortunately for the innocent bystanders (us), wars eventually end. We suspect that this trade war will end sooner than later. Negative press outruns positive press on the trade war by a wide margin. Politicians detest endless streams of negative press.

We say all that to say this: The trade war has dominated the financial headlines for the past month. The negatives associated with the trade war have held mortgage rates in check.

Perhaps the end is near. With negative press running high, foes and allies alike could be more willing to compromise. More compromise lowers the fear factor. A lower fear factor leads to rising interest rates. This includes rising mortgage rates.

Of course, this is all conjecture on our part, but at least it’s conjecture grounded in a reasonable possibility.

A Nail Manufacturer Gets Nailed

Lumber prices are at a record high. They’re at a record high because of a 20.8% tariff applied to imported Canadian Lumber. The NAHB tells us that record-high lumber prices have added nearly $9,000 to the price of a new single-family home.

This week, we learn that the nails used to frame the lumber could also see record- high prices in the near future.

Mid-Continent Nail, the largest nail producer in the United States, is suffering because of 25% tariffs applied to imported steel. Mid-Continent imports steel from Mexico to turn into nails. The company reports that sales plummeted by 50% in just two weeks after it raised prices to cope with the added costs of the tariffs. The company reports that things are so bad that it could shut its doors by Labor Day.

Given the laws of economics, lower nail supply will lead to higher nail prices should demand hold firm. It’s difficult to project how firm demand will hold. If demand holds, home builders will have to endure yet another significant cost increase.

Home builders will try to pass as much of the added costs onto consumers as they can. That would be unwelcome news for housing markets already saddled with relentlessly rising home prices and short supply. What housing needs more than anything today is lower input costs, not higher.