Talks stall on Capitol Hill as market awaits stimulus plan
Congress has avoided a government shutdown, but there is no stimulus deal quite yet. Thursday, the House of Representatives adjourned after passing a week-long extension to government funding as Republicans and Democrats continue to debate over a second federal stimulus package.
The lack of movement on Capitol Hill pushed Dow futures down by more than 200 points on Friday morning, setting up the major indices for their first negative week in almost a month. This drop happened despite positive news regarding COVID-19 vaccines, which are expected to begin distribution next week.
Stocks were also affected by the dismal data concerning unemployment. Jobless claims jumped to their highest level since September, hitting 853,00 this past week. The Labor Department's report also shows continuing claims increased by 230,000. That's the first time that continuing claims have gone up since August.
Treasury yields, which had been steadily climbing this week, slumped on Thursday in reaction to the news of unemployment and lack of agreement in Washington D.C. The benchmark 10-year note yield fell to 0.906% and was trading down at 0.891% early Friday morning.
The rate of inflation over the past year has remained unchanged at 1.2%, according to the latest data from the Bureau of Labor Statistics. Moreover, consumer prices increased by just 0.2% in November, with cheaper gasoline and groceries offset by more expensive clothes, home furnishings, recreation and alcoholic drinks. Before the pandemic lockdowns and shutdowns began in March, inflation was running at a rate of 2.3%.
HOME PRICES UP, SO IS HOME EQUITY
Mortgage rates remained flat this week with the 30-year fixed rate mortgage average from Freddie Mac still coming in at 2.71%. What Freddie Mac's Chief Economist Sam Khater noted this week is rates "resisting their typical correlation to Treasury yields, which have recently been moving higher. Although today’s mortgage spread (average mortgage rate vs. 10-year Treasury yield) is about 1.8 percentage points and still has some room to move down if the 10-year Treasury continues to rise, it’s encouraging to see that the spread is almost back to normal levels," said Khater in the report.
Due to the low rates, refinance activity picked up in the past week. The latest survey from the Mortgage Bankers Association showed a 2% increase in refinance application week-over-week, with an 89% increase annually. Joel Kan, the MBA's Associate Vice President of Economic and Industry Forecasting, noted that "The purchase market is also poised to finish 2020 on a strong note. Applications fell slightly last week but were around 3 percent higher than the two weeks leading up to Thanksgiving. Reversing the recent trend, there was also a shift in the composition of purchase applications, with an increase in government loans pushing the average loan balance lower."
As we've talked about for several months now, the pandemic-influenced demand for homes combined with a serious lack of inventory have combined to drive home prices up. A silver lining in the pandemic housing world is the increase in homeowner equity. CoreLogic reports that skyrocketing home prices have equated to about $1 trillion in gained equity.
The company's data shows that homeowners with mortgages have seen equity increase by 10.8%. In the report, CoreLogic's chief economist Frank Nothaft said the increase in equity is extremely important during uncertain financial times. “The average family with a home mortgage loan had $194,000 in home equity in the third quarter. This provides an important buffer to protect families if they experience financial difficulties.”
Because of the increase in home equity, there's also been more than an 18% drop in borrowers with a negative equity position. That means borrowers who owe more than their house is worth. Currently, about 3% of homeowners are in a negative equity position.