Mortgage Rate Trends: Weekly Market Commentary & Forecast
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Fed, Markets Waiting For Data
November 20, 2015 -- The Fed has certainly made it as clear as they can that the economy is performing close to a level which makes it right for a move in the short-term interest rates they control. Markets have mostly steeled themselves and prepared for the change; however, and although the certainty is pretty high, it's not a 100 percent done deal that a move will occur at the next meeting in December. There yet remains a fair bit of data which might be sufficient to push us over that edge, or not, or some unforeseen market episode (such as occurred at the end of the summer) to give the Fed pause, much as it did in September.
So we and markets wait and watch data along with the Fed looking for clues and answers. Is the economy heating up, or merely grinding along? Are we near "full employment" or not? Are price or wage pressures forming somewhere, threatening to break into more broad-based inflation, and if so, how soon? Are consumers spending their money freely, or not so much? Is housing continuing to exhibit strength despite firming interest rates of late... and the promise of more to come? These questions, and easily dozens of others, all need at least educated guesses if not outright answers in the next few weeks. Suffice it to say that almost all decisions by the Fed require are based a bit on faith, since they must be made based on expectations of the future.
One thing is pretty clear, though: Now in a prepared-for-the-Fed stance, mortgage rates aren't going anywhere very fast until something pushes them one way or another.
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 three basis points (0.03 percent) this week, slipping to 4.03 percent on average. The FRMI's 15-year companion managed a slightly larger decrease, shedding four basis points to slip back to an average rate of 3.35 percent. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain considerably below their conforming counterparts and trimmed three basis points (0.03 percent) off of last week's figure to edge down to 3.81 percent. Meanwhile, the overall 5/1 Hybrid ARM (a product more sensitive to any potential future Fed move) saw a decline of five basis this week, landing at an average rate of 3.17 percent. The dip in rates broke a two-week increase which had fixed rates near 2015 highs and 5/1 ARMs in new territory for the year.
See this week's Statistical Release and Mortgage Trends Graphs.
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Although we tend to focus on more current data, it's useful to try to consider the larger picture. The U.S. economy certainly has improved over time and likely no longer needs emergency-level interest rates to keep moving along, but growth has been rather uneven at times despite the Fed being in a very stimulative position for a long while. Financial assets have recovered, housing has also improved to a real degree, and labor markets are solid even though participation rates remain quite low. Inflation isn't much an issue at the moment.
The world remains an economically troubled place, and other central banks are doing what they can to help provide stimulus and try reduce or reverse deflationary drag. Those slow economies, stimulus measures and currency devaluations have made life difficult for U.S. exporters, even as goods coming here are cheaper in the aggregate. Low energy prices are on balance a plus, but also serve to hurt manufacturing and mining interests, putting some downward pressure on economic growth.
No data that comes in the next month will change this picture appreciably, for better or worse, but any injection of uncertainty into how the path ahead might unfold could even the odds of a Fed move or even see it kicked down the road to the next meeting.
Even when the Fed does start to lift rates, the minutes of the October meeting suggest that we may not see rates get back to what is considered "normal" in this business cycle; the old "normal: was a Fed Funds rate of perhaps 3.75 to 4 percent. But couched in a very technical discussion of future Fed policy and levels of interest rates, was a notation that the "level [of rates] that would be consistent, in the long run, with maximum employment and 2 percent inflation would likely be lower than was the case in previous decades." They also expressed concern that even when they rise, the federal funds rate is likely to remain closer to zero than not for a longer period, leaving the Fed little room to lower rates enough to offset any sudden shock or downturn. With such a concern, it's a fair bet that QE-style programs will remain a portion of the Fed's arsenal, even as it hopes to start to trim its bloated balance sheet of mortgage-backed securities and Treasury bonds.
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As far as fresh data goes, housing starts dipped by 11 percent in October, easing back to an annualized rate of 1.06 million during the month. Although single-family starts edged down by 2.4 percent to 722,000 units, a more precipitous fall in multifamily starts of about 25 percent (to 338,000) caused the majority of the overall decline. Building permits for future activity gained by 4.1 percent, so activity here seems likely to be at least fair as we head into 2016.
The decline in activity had a predictable effect on the moods of the nation's homebuilders. The National Association of Homebuilders index slipped from 65 in October to 62 in November, as both current and expected levels of activity both fell back from recovery highs even as traffic at showrooms and open house continue to move higher.
There are a number of measures of inflation to consider. The one that the Fed prefers is a measure of personal consumption expenditure (PCE) prices, which has been running at a core rate of about 1.3 percent of late. However, somewhat higher core inflation is being reflected in the Consumer Price Index, where the measure that excludes food and energy held a 1.9 percent rate for a second month, a rate at the higher end of a very steady pattern. Headline CPI, pushed and pulled by the vagaries of volatile input costs, registered a 0.2 percent rise in October -- food costs edged up 0.1 percent and energy by 0.3 percent for the month, but the year-to-year difference in CPI-measured prices revealed a minuscule 0.1 percent rise over that period.
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We know that manufacturers continue to have a difficult time of it, but the latest November looks at at least three regional Fed districts indicate a bit of easing of the pain. The New York Federal Reserve's Empire State index was still solidly negative this month, but the -10.7 reading from its barometer was a bit better than the -11.4 tallied in October. Down the New Jersey Turnpike, the Philadelphia Fed's indicator managed to get back in the black, rising 6.5 points from a negative position to reach a positive 1.9 for the period, while out in the heartland, the Kansas City Fed saw a two-point lift in their index, good enough to make it to 1 and generally continuing an improving trend which began way back in June. Despite the gains, there isn't much by way of heat to be seen here, but it is at least a better grade of lousy for the most part.
Industrial Production fell by 0.2 percent in October. The aggregate level of activity also reflected a slight pickup in manufacturing (+0.4 percent), but the headline figure was dragged back again by another decline of 1.5 percent in mining output and a 2.5 percent decline in utility usage. The active amount of production floors in use fell back to 77.5 percent for the month, returning to a level last seen in June, and about 2.5 percentage points below long-run averages, so there's plenty of capacity available should demand strengthen.
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HSH's Statistical Release features charts and graphs
for eleven mortgage products, including Hybrid ARMs.
Our legacy state-by-state statistics are now here.
Although there's no direct correlation, the indication from initial weekly unemployment claims is that the November employment report (not out until December 4) is likely to be rather less than the outsized one that October was. For much of October, new claims were running at about 40-year lows, but have ticked higher in November. This is not to say that the 271,000 new applications for assistance in the week ending November 14 (nor the back-to-back 276K readings in the weeks prior) are high by any means, but rather that the pattern has changed to something more akin to that seen in August and September, when job growth averaged about half of October's level. We'll know if this is the case in a couple week's time... and a lower rate of employment gains will be a key in the Fed's decision to make a move or hold fire.
If the index of Leading Economic Indicators from the Conference Board has anything to say about it, economic activity improved in October. The LEI rose by 0.6 percent, its highest reading since back in June, and one that comes after a flat-to-mildly negative four-month string. If nothing else, it shows that the economy rebounded a bit to start the fourth quarter, but as the third quarter managed only a meager 1.5 percent growth rate, this wasn't all that hard to do.
It's a holiday week next week, with three-day workweeks for many. Despite that, a fair bit of new data is due out to be digested along with Thanksgiving dinner, including an update to GDP, new and existing home sales, personal income and spending, and more. The retailer's "Black Friday" is also upon us, and early returns will provide an indication if consumers will be spending more freely for the holiday season. Mortgage rates may find a little space to wander before the holiday, but we might see a basis point or two decline from this week's levels.
For a longer-range outlook for mortgae rates and the economy, one which will close out 2015, 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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