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Mortgage Rate Trends: Weekly Market Trends & Forecast

HSH Market Trends
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Mortgage Rates Stumble Back To 2014 Lows

August 22, 2014 -- Not that it took much for them to get there, but 30-year fixed mortgage rates managed to again hit 2014 lows; it is the third such touch of the bottom for rates since May. Given the already low and stable pattern for mortgage rates over the past fourteen weeks, this isn't exactly earth-shattering news, but is is of course welcomed by potential homebuyers and refinancers.

Coupled with an improving job market and a faster pace of economic recovery, the low and stable pattern for mortgage rates appears to be having at least some beneficial effect on home sales. If credit conditions are also actually beginning to ease at the margins, we may just see the housing market gain some additional traction -- if not this fall, then next spring, before the Fed is expected to begin the process of lifting short-term interest rates.

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 decreased by two basis points (0.02%) sliding back to 4.18 percent. The FRMI's 15-year companion failed to move at all, holding steady at an average rate of 3.43 percent. FHA-backed 30-year FRMs bucked the slight downward trend, actually increasing by one basis point on average to tick up to 3.91 percent, as these fully-insured offerings remain the best-priced long-term mortgage product in the market. Finally, the overall 5/1 Hybrid ARM retreated by the most this week, featuring a five-basis point decline to dip to 3.07 percent, its lowest average value since the end of July.

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

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While sales are new homes are recorded the moment a contract is signed, sales of existing homes aren't tallied until the deed changes hands and the mortgage is closed. As such, sales reported by the National Association or Realtors are reflective of conditions in the market anywhere from 30 to 60 days ago (longer, in some cases). In 2014, sales of existing homes began to revive somewhat in April, as mortgage rates had begun a decline in mid-January which continued though March, April and May. At that time, the decline in rates flattened out leave us approximately where we are at the moment, give or take a few basis points.

The latest NAR report covering July (and reflective of demand in June and May) found home sales running at a 5.15 million annualized rate, a second consecutive 2.4 percent increase and a continuation of a pretty steady set of sales gains since a winter swoon. Supplies of unsold homes held again at 5.5 months of inventory, still a little below what is considered an optimal level. Year-over-year comparisons of selling prices are still rising, but in the mid-single digits, helping to better preserve affordability than the double-digit increases so common in 2013.

While we'll get a look at sales of new homes in July next week, there are some signals that things may have perked up there as well. The National Association of Homebuilders index of member sentiment moved up by two notches in August, landing at a pretty solid 55 for the month. This was the highest value for the series since January, with optimism boosted by improvements in single-family sales, expectations for sales over the next six months and a pick up in traffic at model homes and showrooms. Much of the improvement in the index was driven by a big gain in the midwest, which offset declines in the south and west and a more modest gain in the northeast.

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It could be that builders are simply happy to be putting up homes at a more rapid pace, too. In July, starts of new homes rose a stout 15.7 percent, climbing to a 1.093 million annualized rate of construction initiation. This was a better than expected pace and improved upon an upwardly-revised June report. Start of single-family homes rose by 50,000 during the month (an 8.3 percent bump) but multi-family starts rose by almost double that pace, adding 98,000 units in a 28.9 percent rise for the month. Also, permits for future construction rose by a solid 8.1 percent to a 1.052 million (annualized) rate, so the future appears pretty bright, too.

Minutes of the last Federal Reserve Meeting were released this week. The July 29-30 affair culminated with no change to monetary policy excepting another trim to QE, reducing the Fed's accumulation of MBS and Treasury bonds to a total pace of $25 billion per month. The Fed has already clearly stated its intention to end QE with the October meeting, so we can expect another $10 billion trim in mid-September and then termination of the program come Halloween. Thereafter, the Fed will continue to recycle some money from maturing securities, keeping their balance sheet level for at least a while.

After that, it's not yet clear what the Fed will do; how to conduct monetary policy with a bloated balance sheet has been the topic of discussion at the last few meetings, and this one was no exception. It looks increasingly likely that the Fed will again use the Federal Funds rate as a primary tool, manipulating the stated Funds rate as a policy marker but also in conjunction with the payment of Interest on Excess Reserves (IOER, in Fed-speak) to help enforce the desired level of Fed Funds. Other tools will also be used to greater or lesser degree to move interest rates, but the Fed has not yet decided whether it will keep all its holdings until maturity or sell some as conditions warrant. Whether to to divest assets or not, or when or how quickly, could have some considerable implications for long-term interest and mortgage rates, but for the moment, their intentions appear to be leaning toward holding them to term.

Provided inflation continues to be at or below the Fed's desired levels, the Fed retains leeway in how long to keep rates low even after QE and recycling of funds has ended. Expectations are for the first rate hike in mid-2015, but this could come a little earlier if the economy and job market continues to improve (or inflation kicks higher), or a little later if increases are more grudging. The headline figure for the Consumer Price Index told of a 0.1 percent rise in prices during July, a downshift from a 0.3 percent rise in June. So-called "core" CPI (a figure exclusive of volatile food and energy prices) also rose by 0.1 percent. Over the last year, headline CPI is now running at a flat 2 percent; core is close behind at 1.9 percent. The Fed's preferred measure of price pressures is different than these more common indicators, but it too has moved closed to the Fed's speed limit of 2 percent in recent months.

Economists from the Fed and around the world met this week in Jackson Hole, Wyoming for an annual conference. Federal Reserve Chair Janet Yellen gave a speech at the affair, and focused on both shortcomings and improvements in the U.S. labor markets. In her speech, Ms. Yellen noted that "The labor market has yet to fully recover", but the minutes from the last Fed meeting indicate that the Fed has been somewhat surprised that it has improved as quickly as it appears to have, especially this year. Layoffs are down, hiring is up, and initial claims for unemployment benefits have settled at levels last seen before the Great Recession began. In the week ending August 16, some 298,000 new applications for assistance were filed, the third time in the last five weeks we have seen a sub-300,000 figure. Present low levels of layoffs suggest that we should expect to see another 200,000 new hires happen this month (perhaps more), a figure to be revealed when the August employment report comes out on September 5.

One indication of manufacturing health bounced higher in August. The latest index from the Philadelphia Federal Reserve covering factory activity in its district rose from a value of 23.5 in July to 28.0 in August, even as new orders and employment gains cooled a little bit. After posting a negative number as recently as February, the Philly index has moved steadily higher for the past six months as economic growth rebounded in the second quarter and apparently the third, as well.

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HSH's Statistical Release features charts and graphs for eleven mortgage products, including Hybrid ARMs.
Our state-by-state statistics are now here.
Current Adjustable Rate Mortgage (ARM) Indexes

Index For The Week Ending Year Ago
  Aug 15 Jul 18 Aug 16
6-Mo. TCM 0.05% 0.06% 0.08%
1-Yr. TCM 0.10% 0.11% 0.12%
3-Yr. TCM 0.89% 0.96% 0.68%
5-Yr. TCM 1.59% 1.69% 1.50%
FHFA NMCR 4.08% 4.18% 3.40%
SAIF 11th District COF 0.668% 0.667% 0.951%
HSH Nat'l Avg. Offer Rate 4.20% 4.22% 4.59%

While no one knows what the future will bring, the index of Leading Economic Indicators from the Conference Board suggests that more improvement is to be expected. The LEI rose by a solid 0.9 percent in July, continuing a six-month string of positive readings and good enough for the second highest of the last year. While the LEI purports to foretell growth in the months ahead, it may better reflect conditions in the month when the components of the indicator are gathered. Regardless, the uptick is more good news for now, and possibly the future, too.

With a little more than a week until Labor Day, the unofficial close of summer, there seems to be little on the horizon at the moment to disturb the present flat pattern for mortgage rates. One week, we'll see a small flare higher for rates, only to see that dissolved over the next week or two. With last minute-vacations for some, and back-to-school for others, this time of year is usually pretty quiet, at least until the pace of life begins to quicken again in the week and weeks after Labor Day. This being the case, mortgage rates aren't likely to do much for the next week, even as a fresh pile of data will most likely continue to confirm a solidifying economy.

Next week, we'll look for more clues for the direction of mortgage and other interest rates in the Chicago Fed's National Activity Index, Confidence and Sentiment indicators, an update on GDP for the second quarter and more. A slight bump higher two weeks ago has now been erased, and then some, but with solid data, it's probably time for another slight upward move. We'll call it a 3-4 basis point increase for the week at most.

For a longer-range outlook for rates and the economy, one which will take you up until mid October, take a look at our new Two-Month Forecast.

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