Mortgage Rate Trends: Weekly Market Trends & Forecast
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Parsing The Fed's Thinking For Mortgage-Rate Clues
April 10, 2015 -- It bears pondering if the soft March employment report elicited a sigh of relief from the Federal Reserve. Although the Fed seems to be committed to raising interest rates at some point this year, minutes from the March FOMC meeting left the impression that they remain unclear as to the timing and potential trajectory for the short-term interest rates they control.
The Fed has taken pains to explain that there's nothing cast in stone -- there's no hard timeline for "liftoff", nor a defined or desired level for interest rates to be at some point in time -- but rather that the process would be driven by the economy, and most especially by labor market conditions. However, what if the economy isn't cooperating by growing at a steady and regular rate? Does a soft economy, but not one in recession or deflation, still require emergency-level interest rates, and if so, for how much longer?
There are plenty of questions but few concrete answers, and until things get clearer, mortgage rates probably can't get out of the rut they're in one way or the other.
HSH.com's broad-market mortgage tracker -- our weekly Fixed-Rate Mortgage Indicator (FRMI) -- found that the overall average rate for 30-year fixed-rate mortgages eased by just three basis points (.03%) this week, slipping to an average 3.78 percent, a 2015 low. The FRMI's 15-year companion joined the fray with a three basis point move of its own, easing to an average rate of 3.12 percent, also hitting a new low for the year. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain well below their conforming counterparts and sported a decline of another two basis points this week, wandering to an average rate of 3.61 percent. Finally, the overall 5/1 Hybrid ARM fell by another five basis points (0.05%), slumping to 2.88 percent on average for the week, the lowest point seen for the 5/1 ARM since June 2013.
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Although the manufacturing sector of the economy is having a rough time of it, what with slow overseas economies and a strong dollar crimping sales, the much larger service sector is holding its own. The Institute for Supply Management's report covering non-manufacturing businesses did turn slightly lower in March, posting a reading of 56.5, down 0.4 from February but remaining quite solidly in expanding territory. Sub-indices for orders and employment both nudged higher, too, and the firm tenor of the report probably allayed fears that the recent economic slowing isn't turning into something more serious.
At the last meeting, the Federal Reserve also indicated that it is still looking to continue to test some of the tools it intends to use to manage interest rates when so-called "liftoff" does come. Although the framework seems ready, it's not clear if all of the mechanical components the Fed hopes to use are fully in place to effectively manage short-term rates. This is a key consideration given that "[FOMC] participants emphasized that during the early stages of policy normalization, it will be a priority to ensure appropriate control over the federal funds rate and other short-term interest rates."
When rates do ultimately change, we do now know that the range for the Federal Funds rate will remain at a width of 25 basis points, with the rate for Interest On Excess Reserves (IOER) at the top of the range and the Overnight Reverse Repo Rate (ON RRP) rate will be at the bottom.
Although we learned a little bit more about how the Fed will manage interest rates, we learned nothing more about when they will begin or the likely trajectory for them once the process gets underway. The minutes said that FOMC members generally agreed "that there were no simple criteria for such a judgment" but that in the context of moving toward maximum employment, and also when there is some certainty that inflation will be moving closer to the 2 percent speed limit, that the "normalization process could be initiated prior to seeing increases in core price inflation or wage inflation."
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Plainly stated: Rates will be moving up before there is direct evidence that they need to move, as least on the inflation side of the coin. If employment continues upward (not so much in March) and if the Fed has an expectation that employment will engender price pressures at some point in the future, they will pull the trigger on rates. The minutes continued on to note that "Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting" while others judged that "conditions likely would not be appropriate to begin raising rates until later in the year" and a couple of outliers said 2016 was most likely.
Reckoning this, and keeping in mind that the meeting took place before the March employment report was released, at the time of the meeting it seems to us that the likelihood of a move was something on the order of 40% June, 50% September/later and 10% next year. After the employment report, it's more likely 20% June, 20% July, 50% September/later and 10% next year. Although the possibility for a June change to rates is diminished, the probability isn't zero, and if the April employment report shows a rebound, it's a good bet that July at least will be on the table.
The problem is, though, is that when the Fed will move will continues to be a guessing game: Although two FOMC members thought it might be a good idea that the Fed "should seek to signal its policy intentions at the meeting before liftoff appeared likely", two others balanced that argument with by noting that "doing so would be inconsistent with a meeting-by-meeting approach" so we're not likely to get any more clues to go by than we had before.
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As far as where rates will go once the process gets underway, "several [members] noted that they expected economic developments would call for a fairly gradual pace of normalization or that a data-dependent approach would not necessarily dictate increases in the target range at every meeting."
All in all, the Fed's not yet clear on when it will start the process, is still testing tools to make certain they have everything they'll need in place to manage the process, and still isn't certain on how quickly we'll get back to "normal" interest rates, with the whims of the economy dictating the pace and size of the changes as we go. Will all this uncertainty still in place, the soft employment report probably provided a breather of sorts for committee members, who don't yet appear to have reached the kind of consensus needed to take that first step.
The Fed did note that it won't need to see evidence that inflation has returned as a precursor for raising rates -- a belief that it will return will be sufficient. For the moment at least, the general trend for core inflation has been pretty flat, even as headline inflation and other price indicators continue to retreat. Costs for goods coming into the United States declined by 0.3 percent in March, as the stronger dollar put more downward pressure on import prices. Overall, imported goods cost almost 11 percent less this March than last, in part due of course to lower oil prices. However, even excluding petroleum products and fuels from the equation, prices still eased by 0.4% and are 1.9 percent below year-ago levels. Prices of goods destined for other shores from ours increased by 0.1 percent, the first uptick since last July, but the trend for export prices remains a downward one, with export costs 6.7 percent below a year ago at this time.
Consumer borrowing continued to expand in February. The pattern here hasn't changed all that much; most borrowing is being done for auto lending and education loans, with more discretionary spending on revolving accounts waxing and waning. The use of revolving credit shrank by $3.7 billion dollars in February, a second consecutive decline in balances, but installment borrowing rose by $19.2 billion as auto sales popped higher. With the economy on firmer footing over the last year and the job market improved, it might be expected that the trend would see more spending for new autos and somewhat less on education, and also that consumers would start to use their plastic more frequently. So far, that's not so much the case, with savings tending to rise and cash being used instead of credit for more routine things. In some ways, given high interest rates on credit cards and low returns on cash savings, this makes perfect sense.
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Inventory levels at the nation's wholesalers increased again, rising by 0.3 percent in March. As the economy has cooled over the last few months, stockpiles of unsold goods have increased, and sales during March declined by 0.2 percent, a third consecutive fall; in fact, sales have declined in five of the last seven months, so it's little wonder that there haven't been more orders to keep factory activity going. The combination of slowing sales and rising inventories put the inventory-to-sales ratio at 1.29 months again in March, the highest levels since 2009.
Claims for new unemployment benefits ticked higher in the week ending April 4, rising by 14,000 to 281,000 for the week. After more erratic behavior though February, new claims have settled solidly below the 300,000 mark, suggesting that job growth remains on track.
An undecided and data-dependent Federal Reserve leaves markets to twist in the wind, so to speak. With no Fed meeting or official news until the end of the month, mortgage and other interest rates will probably spend most of the time just wandering about, waiting for something to kick them one way or the other. Warmer data will tend to move them a touch higher, weaker data will tend to see them flat; absent a significant domestic or global event, rates really don't have a lot of space to fall. All the while, the clock ticks and we move steadily toward a point where the Fed will eventually make a move.
A bit more data for the Fed and markets to chew on is due out next week, including retail sales, a couple of housing and manufacturing indicators, producer and consumer price indicators, consumer sentiment, and more. We are entering next week on a rather directionless note for a change, and since the data are mostly likely to present a mixed bag, we'll call for a rise of a couple of basis points in HSH's FRMI.
For a longer-range outlook for rates and the economy, one which will take you up until late April, have a look at our new Two-Month Forecast. For a really long-range outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".
Still underwater in your mortgage despite rising home prices? Want to know when that will come to an end? Check out our KnowEquity Underwater Mortgage Calculators to learn exactly when you will no longer have a mortgage balance greater than the value of your home.
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