Wednesday: ADP Employment, ISM Service Index, Fed's Beige Book

The earliest report tomorrow - the weekly mortgage survey from the Mortgage Bankers Association - is expected to show 30 year mortgage rates at or above 4%. Neil Irwin at the WaPo asks: Will higher mortgage rates kill the housing market? Maybe not!

[R]ising mortgage rates, if they’re rising for good reasons, could actually be net positives for the housing market if they result from more people having jobs and being confident in their prospects.

This gets at one of the realities of the housing market and interest rates: It doesn’t just matter whether mortgage rates are rising, but why they’re rising.

Stronger economic growth makes homebuying more attractive, as people are more confident in their jobs and incomes (Goldman estimates that a 1 percentage point in real GDP growth translates to 1.8 percentage points in annual home price appreciation). Higher inflation can make homebuying more desirable, as you are buying a large asset whose value should rise with inflation while taking on a debt that has a fixed interest rate (Goldman estimates that a 1 percentage point increase in inflation translates to an 0.9 percent rise in home prices).

That being the case, as long as home prices remain below the level where affordability is out of reach, and so long as mortgage rates are rising because the economy is on the mend, the housing market should be able to withstand the blow.

I'm not a fan of "affordability" indexes, but I don't think an increase in mortgage rates will hurt the recovery for residential investment (mostly new home sales). However an increase in rates will sharply reduce refinance activity - something we are already seeing.

Wednesday economic releases:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index. Expect 30 year mortgage rates at or above 4%, and another sharp decline in refinance activity.

• At 8:15 AM, the ADP Employment Report for May will be released. This report is for private payrolls only (no government). The consensus is for 171,000 payroll jobs added in May.

• At 10:00 AM, the ISM non-Manufacturing Index for May. The consensus is for a reading of 53.8, up from 53.1 in April. Note: Above 50 indicates expansion, below 50 contraction.

• Also at 10:00 AM, the Manufacturers' Shipments, Inventories and Orders (Factory Orders) for April. The consensus is for a 1.4% increase in orders.

• At 2:00 PM, the Federal Reserve Beige Book will be released. This is an informal review by the Federal Reserve Banks of current economic conditions in their Districts. In the previous Beige Book, in early April, the report noted "economic activity expanded at a moderate pace".