Most market pundits expected this to happen four years ago, if not earlier.

Most market pundits expected this to happen four years ago, if not earlier.

They expected interest rates to rise, and rise meaningfully with sustained momentum.

Interest rates failed to follow the script. They’ve made up for their ad lib in 2018. Interest rates have trended in one direction – up. They continue to trend up as we write.

In the past week, the 10-year U.S. Treasury note yield has risen 12 basis points. The latest increase means the yield has risen 60 basis points year to date.

As the yield on the 10-year note goes, so go the rate quotes on long-term mortgages. The standard-bearer – the prime 30-year conventional mortgage – has kept pace with the 10-year note. Rates have risen 60 basis points since the beginning of the year. Rates are at a seven-year high. The range based on the national average has risen to 4.75%-to-4.875%.

It appears unlikely that mortgage rates have finished their ascent.

Oil prices have risen relentlessly since the beginning of the year. A barrel of West Texas Intermediate Crude goes for $71 on the spot market. It’s at a three-high. A barrel of WTIC cost less than $30 a barrel only two years ago.

Not surprisingly, transportation costs are on the rise. A recent Wall Street Journal dispatch noted that senior executives at many major U.S. companies report higher transportation costs. The WSJ cited Coca-Cola, Procter & Gamble, Nestle, and Hasboro. These companies are reporting transportation-cost increases in percentages measured in the high-single digits to high-teens.

These companies will push as much of their increased costs as they can onto consumers with higher prices. So, inflation is what we’re really talking about. Consumer-price inflation is a key variable in setting interest rates, particularly on the long-end of the curve. Consumer-price inflation is on the rise.

The April Consumer Price index posted a 2.5% year-over-year increase – its hottest reading since February 2017. The New York Federal Reserve’s Underlying Inflation Gauge (which aims to capture “sustained moves in inflation from information contained in a broad set of price, real activity, and financial data”) was more telling. It rose 3.2% year-over-year in April. That’s the highest reading since July 2006.

The Federal Reserve has wanted more consumer-price inflation for the past seven years. It’s finally getting what it wants. Consumer-price inflation has accelerated this year. That said, Federal Reserve officials are sanguine on the matter.

Federal Reserve Bank of Dallas president Robert Kaplan Kaplan forecast in a recent speech: “In the medium term, I think inflationary forces are still going to be more muted . . . Most of the forces in the world are deflationary.”

For anyone who fills up the gas tank and shops at the grocery store, the deflationary forces are difficult to decipher. Just by eyeballing the joint, we see consumer prices rising.

We mentioned last week that JPMorgan Chase CEO Jamie Dimon forecasts a 4% yield on the 10-year U.S. Treasury note. That yield still has some distance to cover before it hits 4%, but it’s progressing in that direction.

Therefore, don’t be surprised to see rate quotes on the prime 30-year conventional mortgage hit 5% in the near future. Then don’t be surprised to see rate quotes progress higher from there.

Holding Steady for Now

The Home Builder Sentiment Index held at 70 in May. It has held near 70 for 2018. Home builders remain optimistic, though they’re less optimistic compared to a year ago.

Business, fortunately, is still good. Housing starts in April were at a seasonally adjusted annual rate of 1.287 million. This is 3.7% below the revised March estimate of 1.336 million, but it is 10.5% above the start rate compared to a year ago.

As for mortgage activity, business has slowed in recent weeks. No surprise that refinances trend down, but so, too, have purchases. Purchase applications were down 2% in the latest reported week. Activity is still up 4% compared to last year.

We know that some market watchers are concerned that rising interest rates spell the end of the good days for housing. We’re not one of them. Let’s keep in mind that the economy is strong, businesses are reporting record profits, employment is at a multi-year high. These are sufficient positives to suggest that more good days are forthcoming.

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