7.2. HRSR 11-05-2018 - Laserfiche WebLink

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November 1, 2018 Market Recap: Volatility has returned, generated by the equity market selloff last week. The S&P 500 suffered one of its swiftest 10% corrections and the Dow dropped more than 800 points. Both index declines marked one of the worst sell-offs since February, raising questions whether the almost decade-long bull market is at risk of turning into a bear market. The steepness of the drop prompted investors back into the relative safety of U.S. Treasuries. As most people are aware, U.S. equity markets have been on a historic climb in recent years. The Dow and S&P have each reached multiple record highs since 2016 – buoyed by a strong U.S. economy and solid corporate earnings. As such, the recent sell-off in equity markets seems to be largely attributed to investor fears about rising interest rates and increasing global protectionism (see our prior commentary here). After years of near-zero short-term interest rates, the Federal Reserve is raising its benchmark interest rate (currently a target range of 2.00% - 2.25% and projected to increase to 2.25% - 2.50% at the December 2018 meeting). And as the federal funds rate and treasury yields have gone up, so have other important interest rates, e.g. mortgage and other consumer interest rates. What will happen to the housing market now that rates are rising again? Prior to the 2008 financial crisis, the housing market heated up primarily due to lax lending policies and over-eager home builders constructing speculative properties. Homeownership rates and prices hit all-time highs back then, before crashing down as many borrowers went into foreclosure. In the years following the 2008 financial crisis, rising home prices due to limited supply and low interest rates, along with relatively stagnant wage growth combined to create strong affordability headwinds for many Americans (see Graph below). Until recently, however, those historically low mortgage interest rates were also one of the few tailwinds helping the average homebuyer afford to buy a house.