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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Mortgage Rates Ease, Fed Unease?

February 5, 2016 -- The problem with quandaries is you never know when or how they will show themselves. At a time when much of the world continues to exhibit all manner of economic difficulties, we have a domestic economy that seems to be showing just enough resiliency despite these considerable headwinds that it is likely to be giving the Fed fits.

In the central bank's view, certain signals are pointing in a direction that suggests continued growth and ultimately higher inflation; this was the reason for the small move in short-term interest rates back in December. Of late, however, unsettled financial markets, falling oil and commodity prices and a strong dollar all are creating considerable drag. At the moment, it's not fully clear which is the stronger force or will win the day, but in the midst of this the central bank must try to guide markets and conduct monetary policy that won't allow dangerous trends to form in either direction.

Financial markets have marked down to at least some degree the likelihood of many moves by the Fed in 2016. Some forecasters are now calling for none, but since it's only February, it's way to soon to make that kind of call. It is likely that the Fed will skip making a move in March at this point, but we still think perhaps two moves are on tap for 2016. With the potential for rate increases kicked down the road some, mortgage rates have acted as they have done the other two times we faced similar situation last year -- they've declined.

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 declined by a fresh eight basis points, easing back to an average of 3.79 percent and as low as we've seen since April of 2015. The FRMI's 15-year companion also shed eight basis points from last week's total to slip to an average rate of 3.19 percent. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain considerably below their Fannie and Freddie counterparts but followed the trend exactly, also erasing .08 off of last week's tally, causing the average rate to ease to 3.62 percent. Meanwhile, with short-term rates more sensitive to Fed policy than long ones, the overall 5/1 Hybrid ARM declined by a full ten one-hundredths of a percent this week to fall to 2.95 percent, comparable with rates seen last October.

See this week's Statistical Release and Mortgage Trends Graphs.

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The Fed's dual mandate charges them with two things: To promote "full employment" and to promote stable inflation. As with other central banks, the Fed believes this to be annual price gains of perhaps 2 percent. The employment front is is very good shape, even with a deceleration to just 151,000 in January; revisions to previous months carved 30,000 off of December's fat total but added 41,000 to November's figure. Overall the trend is holding at a very solid level, and the gain in jobs was sufficient to move the unemployment rate down to 4.9 percent even as more workers jumped into the labor force.

With a sub-5 percent unemployment rate considered to be pretty "full employment", eyes might turn to see if wages are rising, a key precursor to more widespread price gains. The 0.5 percent rise average hourly wages was the strongest in some time, and earnings are rising at about a 2.5 percent clip, possibly strong enough to start nudging inflation higher, or at least more likely to lift it from current low levels.

This type of trend would typically call for higher short-term rates by the Fed... but there are many other factors for the Fed to consider in their calculations as well.

A broader measure of personal income for December didn't find the same level of strength or even as considerable an increase as did the January employment report -- the 0.3 percent rise reported by the Bureau of Economic Analysis was the same as November and the trend has continued to be a flattening one since an April 2015 spike. Consumers also aren't readily spending the gains they do get, either, as personal consumption expenditures for the month were essentially unchanged. The gains were added to savings, plumping up the nation's savings rate to 5.5 percent, a likely precursor to some additional spending down the road.

Other important factors the Fed must include in their calculations include a manufacturing sector that has now contracted, albeit mildly, for the past four months. The latest review of manufacturing conditions from the Institute for Supply Management sported a below-par 48.2 for January, up 0.2 over December but still in negative territory. Details on current production and new orders were a little better but nothing that suggests the manufacturing misery will end anytime soon.

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A 2.9 percent decline in overall factory orders for December was case in point, as it was the steepest fall of the last year, when 8 of the last 12 months have featured declines in new orders. Orders for non-durable goods have been decline steadily for six months, and orders for durable goods have fallen in five of those months as well.

As well, the nation's imbalance of trade remained mostly steady in December, widening just a smidgen to $43.4 billion during the month, a $1.2 bullion expansion. Imports rose by $0.7 billion, a sign that the U.S. economy is absorbing more low-cost imports, but the 0.5 billion decline in exports reveals the troubles that exporters have in competing with both a currency disadvantage and trying to sell to partners that are already experiencing soft levels of growth. With these as a backdrop, it's hard to be especially cheery about the prospects for a sudden rebound.

However, even in the darkness there are bright spots, though. Sales of new cars and trucks did have a boom year in 2015, and 2016 began on a good note, as an annualized sales pace of 17.6 million was tallied by AutoData. This was a level above forecasts and a bit of a recovery from December's little dip, and sales growth may actually have been hindered a little by the snow event that covered the eastern seaboard a couple of weeks ago.

December saw a very strong bounce in consumer borrowing, too, an indication that the consumer is doing pretty well. The $21.6 billion in new installment loans and non-equity lines of credit was the largest since last September, and was powered by a spike in installment borrowing back to $15.4 billion (car loans, etc.) and buttressed by a $5.8 billion expansion in revolving credit usage (credit cards, etc.) -- the best back-to-back months for revolving credit in some time.

The service side of the economy is faring well, but even then, less so of late. The ISM's non-manufacturing tracker showed that January was a drag; the barometer declined by 2.3 points for the month, landing at 53.5 and signaling a much milder pace to activity. It was the lowest figure seen here since April 2014, and there has been a pronounced deceleration seen here since a recent October 58.3 peak. New orders for services eased a little, and employment metrics stumbled to their lowest levels in months.

  Find these only at HSH.com!
   Mortgage data: Today's Surveyed Rates Historical Mortgage Rates Mortgage Trend Graphs
   Calculators: Downpayment Decisioner Tri-Refinance Calculator PMI Cost Calculator
   Resources: Housing & Salary Study Mortgage Rate Surveys Website Tools and Widgets

So is the economy accelerating, creating jobs, lifting growth, wages and inflation... or not? At the moment, more clues say "not", but not all say that, either.

Worker productivity slumped by a full 3 percent in the fourth quarter of 2015. Perhaps this is a result of the strong pace of hiring -- new workers can't be expected to be fully up to speed, after all -- or perhaps the cause of the hiring spurt, as thin ranks of existing workers can't keep up with production goals. Whatever the reason, the Fed prefers a stronger pace, as higher productivity levels lift living standards with lesser effect on inflation. In the present climate, and even though wage gains are only starting to rise, the costs of labor per unit produced is running at a 4.5 percent clip, and these costs can be ultimately translated into higher overall costs for goods and services.

Construction spending edged higher in December with a 0.1 percent rise in total outlays. The trickle higher was the result of increases in spending for housing (+0.9 percent) and a 1.9 percent increase in outlays for public works projects. However, the headline figure was pulled back down to earth by a 2.1 percent decline in spending on commercial projects. As such, the report was a bit of a mix-and-match one.

Claims for new unemployment benefits nudged higher in the week ending January 30, landing at 285,000 for the period. As we've noted in recent weeks, there has been a gradual uptrend in claims suggestive of a bit of softening in the labor markets. This may have also be reflected in the uptick in announced job losses tallied by the outplacement firm of Challenger, Gray and Christmas, who reported 75,114 job cuts in January, more than triple a rather low December number. Perhaps the weaker January employment report is a result of these trends, but we'll need to see if they persists.

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Does mortgage history repeat? Usually. Find out what happened last week/month/year with MarketTrends archives!

HSH's Statistical Release features charts and graphs
for eleven mortgage products, including Hybrid ARMs.
Our legacy state-by-state statistics are now here.
Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Jan 29 Jan 01 Jan 30
6-Mo. TCM 0.44% 0.49% 0.08%
1-Yr. TCM 0.47% 0.66% 0.17%
3-Yr. TCM 1.05% 1.35% 0.84%
5-Yr. TCM 1.42% 1.78% 1.28%
FHFA NMCR 3.97% 3.85% 4.00%
SAIF 11th District COF 0.655% 0.644% 0.686%
HSH Nat'l Avg. Offer Rate 3.87% 4.07% 3.80%

At the moment, and at least in theory, we have the financial markets and the global economy pulling in one direction and certain aspects of the U.S. economy and the Federal Reserve pulling in the other. At the moment, the world and financial markets are exerting the stronger influence, as witnessed by slumping stock markets, falling bond yields and rock-bottom oil prices.

However, if labor markets continue to tighten and wages continue to tick higher, the Fed can't forever ignore these trends and may need to act to temper them at some point. Given all the other issues, can they actually raise rates in this kind of climate, and what would the repercussions be? It's a quandary, all right, and one which probably promotes sleepless nights, too.

Of course, it may be that the uneven economy and rough financial markets will do the heavy lifting for them, with business spending and investment retrenching to a degree that slows hiring and more. That's not to say that we would necessarily have to slow to a point of recession, only that growth of perhaps 1 percent (give or take a little) may be a level that makes the Fed more comfortable with the present level of short-term interest rates.

With nothing wholly clear about the economic climate, and with all manner of cross- and headwinds to deal with, it's little wonder that investors continue to plow funds into Treasuries, which have at least decent returns relative to other sovereign bonds and present a working safe haven from unsteady equity markets both here and abroad. Can rates go lower? Never say never, but more likely is that some investors will start bargain hunting in stocks, stabilizing averages; others will follow, trekking out of bonds and lifting yields a little as we go.

Next week is almost void of new U.S. data to consider, and even with the decline in yields and stock prices on this week, we may just level off for next week. Call it a decline of only a couple of basis points in HSH's FRMI by the time next Friday rolls around.

For a longer-range outlook for mortgage rates and the economy, one which will take us almost to Daylight Savings Time in March, have a look at our new Two-Month Forecast.

If you're wondering where we'll go after that, you might have a look at our new 2016 outlook.

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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Daily FRMI rates are available at HSH.com; Check out our weekly Statistical Release here (and archives here).

For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President

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