Mortgage Rate Trends: Weekly Market Commentary & Forecast
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Meandering Mortgage Rates
February 17, 2017 -- Mortgage rates continue to meander about, largely rangebound, as financial markets try to figure out where we go from here in terms of both fiscal and monetary policy. On the one side are hoped-for or expected changes in tax and regulatory structure that may help boost business profits and the promise of new fiscal outlays that may further goose growth; On the other side is the Federal Reserve, who is looking out over the landscape and is beginning to judge that their policies of keeping interest rates at rock-bottom levels for years is finally having the desired effect on employment and inflation.
In this view, the central bank sees an economy that may need less, not more, stimulus in order to continue a long-running modest expansion.
The Fed has already overtly stated that it believes that it will be raising the federal funds rate perhaps three times this year. Fed Chair Janet Yellen spoke before Congress this week in her semi-annual testimony on monetary policy, and she gave no indication that her view has changed in this regard. In fact, one of her statements was said to make the March meeting "live" for a policy move, as she noted "Waiting too long to remove accommodation would be unwise." Although futures markets did put an increased probability of a move by the Fed at the March 14-15 meeting, that likelihood had retreated to about an 18 percent chance by Friday.
Frankly, we think the markets are underestimating this risk, as the economic data continue to be pretty solid. There has been scant evidence to suggest that the Fed's move in December 2015 had much by way of effect on last year's growth; it's too soon yet to say if the December 2016 rate increase will have an effect, but so far, no discernable negative impact is evident. Make the move in March, and the Fed could probably sit and wait until September before considering another. Skip March, and they run the risk of having to cram three hikes into the remaining 9 months of the year. Data due out in the next three weeks will be key, and whether March or beyond, rates will be again increasing before all that much more time has passed.
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Price pressures are rising, and consumers are spending more as a result. Or is it the other way around... consumers spending more and demand is lifting prices? Whatever your preference both are moving higher. The Producer Price Index (a measure upstream of the consumer) rose by a stout 0.6 percent in January, about double the expected increase and the largest monthly increase since September 2012. "Core PPI" moved higher by 0.4 percent, too, so the upward influence here wasn't solely from transient items. Moreover, the uptrend for inflation is a bit concerning, as even though the annual rate of headline PPI is just 1.7 percent (and 2 percent at the core) it was only six months ago that we were seeing zero percent annual headline inflation and just 0.5 percent core, so the change has been rapid.
The Consumer Price Index told much the same tale as PPI. CPI rose by 0.6 percent at the headline in January, a figure that was also double expected levels and the fastest monthly rate in more than 3 years. Core CPI rose by half as much, 0.3 percent, but annual CPI now stands at 2.5 percent, a level attained in a rapid recent acceleration, as the annual headline rate was just 0.9 percent six months ago. Core CPI had firmed up a while ago, and while the latest month brings the annual rate back to 2.3 percent this is only slightly above trend already in place.
The Fed's preferred gauge of inflation - core Personal Consumption Expenditures - held at a 1.7 percent annual rate in December, but if other indicators are gathering steam it seems likely that measure will move higher as well. The Fed wants to see core PCE inflation get to a 2 percent level, but needs to trim the stimulus sails before that level is attained or risk overshooting the mark and needing to make more abrupt changes to policy.
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Retail Sales moved 0.4 percent higher in January, a figure rather better than was expected. The stock market pop at the end of the year may have play a role, and there may have been some unrealized holiday spending which powered sales along. So-called "core" retail sales (a measure that excludes vehicle sales at those at gas stations) did even better, rising by 0.7 percent for the month. The bump put spending at a healthy 5.6 percent clip (overall) and 4.4 percent (core), and retail spending has picked up considerably from the modest pace of mid-2016.
Two local measures of factory activity suggest that manufacturing came on line at a faster pace in February, a positive for GDP growth. The Federal Reserve Banks of New York and Philadelphia chimed in with their monthly reviews, and the numbers were solid, even eye-popping: New York's barometer jumped to a value of 18.7, a 2.5 year high value, as orders drove higher and employees started to be again added to books, the first such indication since last June. Just next door, the Philadelphia region saw a boom in February; this indicator bounced all the way of to 43.3, the single highest monthly value since 1983. Already strengthening orders moved even higher and employment gains remained solid. Curiously, (at least relative to the PPI above) measures of prices paid by manufacturers, although trending gently higher, remained fairly subdued.
A warm January in much of the country trimmed utility output, dragging down the monthly measure of Industrial Production by 0.3 percent. However, there was good news to be seen in the report, as manufacturing output rose by 0.2 percent (5 of the last 6 months have been no worse than unchanged, a good string) and mining output rose by 2.8 percent. Higher oil prices due to rising demand and the agreement to limit supply by OPEC has allowed more domestic rigs to come back to life after the price crash of 2015 mothballed a lot of them. There remains plenty of available capacity to increase output before any sort of bottlenecks become a problem, as the percentage of production floors in use eased to 75.3 percent for the month, a figure well below historic norms.
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Homebuilder enthusiasm about current market conditions remains high, if diminished somewhat from late last year. The National Association of Home Builders index of member moods posted a reading of 65 in February, a two-point step down from January (itself a two point step down from December). Still a very solid value, builders felt as though single-family sales were quite robust (a value of 71), that the next six months would work out very well (73) but traffic of potential homebuyers at showrooms and models did dip by 5 points to 46, the slowest pace since October. It may be that winter weather and the recent bump in mortgage rates has cooled interest of potential buyers a bit. A diffusion index, values above 50 in the NAHB series indicate expansion, and below, contraction in the various activities they measure. Reading in the 60s and 70s are very, very good.
Builders are happy when they are busy, of course. In January, construction of new homes tailed off by 2.6 percent, with housing starts slipping to a 1.246 million annual pace. That decline was due to a dip in always-erratic starts of multifamily units, which slipped from 471,000 in December to 423,000 in January. Single-family starts actually pushed higher, and this larger segment of the market rose by 1.9 percent to an annual 823,000 clip, a figure good enough to be ranked among the best of the economic expansion so far.
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Claims for new unemployment assistance remain at extraordinarily low levels. Having touched a cyclical (and 43-year) low of 234,000 in the week ending February 4, there was just a 5,000 upward rise in claims in the week ending February 11 to 239,000 new applications filed. At the moment, the indication is that the labor market is somewhat tighter in February than January, so we could be looking at another very solid month for hiring. We'll know how strong the month was in about two weeks' time when the February employment report is out.
The economy seems to be doing well now, and available indications are that this is likely to continue. The Conference Board's index of Leading Economic Indicators rose by a solid 0.6 percent January and has legged higher in the last two months. Although it probably better reflected the month in which its components were assembled, a LEI moving higher for months does suggest at least enough economic momentum to perhaps move us though the end of the first quarter. The running estimate from the Federal Reserve Bank of Atlanta puts GDP growth in the first quarter at about a 2.4 percent rate. The fourth quarter of 2016 managed only a 1.9 percent rate, and it would seem that we'll miss the first-quarter "stall" in GDP we saw in each of the last few years.
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Taken all together, there doesn't seem to by much by way of economic weakness to worry about of late. Global growth and turmoil, so important to driving U.S. rates lower in the last few years, seems to be stabilizing, if not improving outright. There are some sore spots we may yet see (Greece debt payments, Italian bank issues, Brexit and more) but markets seem to be taking concerns those in stride, too. Throw in solid consumer spending and any number of whiffs of rising prices, it seems to us that the conditions for higher interest rates are forming, if not already in place.
Perhaps it is simply a case where nominal interest rates moved first (and perhaps too far) in anticipation of data to come, only now the data is beginning to fill in behind them. If that's the case, then we may not see much by way of upward movement for a period of weeks, but if the data continues to suggest upward momentum for growth and prices, that space will fill fairly rapidly, and we'll soon be ready for the next move higher.
At the moment, it doesn't appear that this will start next week. Although underlying interest rates did move up mid-week this week, there was a backpedaling seen on Thursday and Friday, leaving us just a little below where they began the week. With this as a backdrop, we think that the average 30-year fixed-rate mortgage as tracked by Freddie Mac will hold about steady again next week, but it wouldn't be a surprise to see a basis point or two decline... or increase.
One last note of interest: The Mortgage Bankers Association reported that the share of mortgage applications for refinancing hit their lowest level since June 2009. At that time, the average 30-year FRM was at 5.92 percent, so there is truly nothing left in the potential refi pool when rates just over 4 percent can't get a rise out of homeowners.
For a interim forecast for mortgage rates and the economy, one which runs through late March, have a look at our Two-Month Forecast. For a year-long review of expectations, see our 2017 Outlook.
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 Calculator to learn exactly when you will no longer have a mortgage balance greater than the value of your home.
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