Mortgage rates are determined by the supply and demand for money. And that supply and demand is directly influenced by what is expected to happen in the economy – mostly the United States economy. And it would seem that our economy is doing well enough to suggest that rates may eventually indeed creep higher.
Although the second quarter is in the rear view mirror, the third estimate of GDP for the period showed our economy rebounding even more impressively following the weather-related contraction at the start of the year. GDP in the second quarter rose at a 4.6 percent annualized pace compared to a previous print of 4.2 percent. But orders for durable goods (those lasting longer than three years, like cars and washing machines) plunged 18.2 percent in August. The drop primarily reflects payback from record aircraft orders placed in July. Excluding transportation, orders improved 0.7 percent.
What about the housing market? Existing home sales disappointed, slipping 1.8 percent over the month. The decline follows four months of solid gains, leaving sales up 10 percent since March. Still, sales remain down 5.3 percent over the past year. The sluggish pace of sales comes as the glut of distressed inventory that had attracted investors and other buyers looking for a deal has been substantially reduced and the market continues to rebalance toward a more normal mix of sales.
Still largely missing, however, are first-time homebuyers. As household formation picks up, most believe that existing sales will resume their gradual upward trend. New homes sales data for August lend some support to optimism that the housing recovery remains on track. Sales for new homes jumped 18.0 percent over the month to a 504,000 unit annualized pace. Although the leap likely overstates the current strength of sales, the trend is improving. On a three month average basis, new home sales are at a fresh post-recession high. The pickup follows the renewed optimism expressed by home builders, who have seen rising sales and prospective buyer traffic.
The metrics showing the direction of our economy rarely all point in one direction. But as economic indices continue to come out, the general sense is that things are indeed improving, which in turn typically leads to pressure for rates to move higher.