With one month left in the second quarter, the Dow Jones Industrial Average (^DJI -0.98%) has recovered from its winter woes to post a near-flat 0.5% year-to-date gain.
That 0.5% compares to the blue-chip index's steady 24% climb higher in 2013. In early afternoon trading today, the Dow was down 21 points, poised to end the month about 0.75% higher.
2014 has bucked trends in markets
The same pattern is true in the housing market. After a strong 2013, 2014 was supposed to be the year that interest rates began to rise as the market gained self-reinforcing strength.
Neither of those things have happened. In fact, rates are actually lower and homebuyers are missing in action.
Quantitative easing is ending, and rates are ... lower?
Check out this chart of the U.S. 10-year Treasury rate, which is a proxy for 30-year mortgage rates.
10-year Treasury Rate data by YCharts.
The Federal Reserve is still following its program of near-zero interest rates, but that policy is primarily targeted at short-term rates. Its bond-buying efforts were targeted at lowering long-term rates.
The Fed has been steadily cutting its bond buying by $10 billion per month, so the end looks to be only a few months away. Yet long-term rates such as the 10-year Treasury are moving lower. This outcome is unexpected, to say the least, and likely a short-term phenomena.
This is an opportunity for homebuyers to lock in a low long-term rate at the 11th hour of this low-rate era. Last summer, rates spiked by over 1% on speculation that the Fed would pull back on quantitative easing.
That pullback is a reality today, and the decline in rates this year is likely a reflection of higher market confidence in the Fed's plan today versus the confusion and speculation last year. That said, it won't take long for the market to edge rates higher as the economic fundamentals take hold.
Source: taxrebate.org.uk
Mark Zandi, chief economist at Moody's Analytics, was quoted yesterday as saying that rates will be higher one year from today. The consensus among Zandi and other prominent economists is that 30-year fixed rates will approach 5% by year-end, if not sooner. Those rates today are between 4% and 4.2%.
Despite this cheap borrowing, buyers aren't biting
Conventional wisdom is that when prices decline, sales should increase. That's not happening this spring.
Pending sales of existing homes increased just 0.4% in April, below economist expectations. Compared to last year, April's pending sales were down 9.2%.
At this point in 2013, rates were just beginning their summer spike. That spike effectively killed the booming mortgage refinance market that was driving business at large mortgage banks such as Wells Fargo (WFC -1.11%) and Bank of America (BAC -1.07%).
Bank of America saw mortgage originations fall 63% year over year in the first quarter. That number was 67% at Wells Fargo.
For these banks that rely so heavily on the mortgage business to fuel both growth and profits, the second quarter was supposed to be a rebound period after the struggles in the first quarter.
For business and homebuyers, its going to be a tough spring
At this point, that rebound seems unlikely. Credit standards remain tight, making it difficult for many potential buyers to obtain the loans they need to purchase a home.
For banks, this is a delicate balancing act. Banks need to make loans to remain in operation, but making bad loans is the fastest way to go out of business. Over the long term, these limited-time conditions will not materially impact these businesses. In fact, a quarter or two of weakened performance could be the buying opportunity you're looking for.
For potential homebuyers, the current situation can be maddening. Mortgage rates are so attractive, yet many can't get the credit approval needed to take advantage. And, unlike the banks, the short-term situation today is a fleeting opportunity. Rates will rise sooner rather than later, and when they do it's unlikely consumers will have the opportunity to buy this cheaply again for a very long time.
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