Mortgage Rate Trends: Weekly Market Trends & Forecast
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Mortgage Rates Firming: Blame the Fed
May 1, 2015 -- It's not what they did, but what they didn't do, or rather a perception of what they won't do anytime soon. Although the Federal Reserve closed a meeting with no change to interest rate policy this week and provided little forward guidance about when they will start lifting rates in the future, financial markets took it to mean that the Fed has punted a move to late summer at the very earliest, and possibly not even until much later in the year.
The increasing suspicion that the Fed would hold their fire for longer was pretty well confirmed when the report covering first quarter Gross Domestic Policy was released on Wednesday morning. GDP growth was modest at best in the fourth quarter of 2014, and was expected to have a weak showing in the first quarter of this year, but the 0.25 percent rate posted for the first quarter of 2015 was very nearly a stall. Many currency bets that the Fed would still make a move in June were completely unwound and the dollar sold off, lifting Treasury yields to levels not seen since early to mid March.
While there isn't quite a lockstep arrangement between mortgage rates and yields on Treasuries, there is still an considerable influence from one to the other. With the mortgage-influencing 10-year Treasury yield rising by about 15 basis points during the week, mortgage rates are now in a bit of a firming trend.
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 rose by six basis points (.06%) this week to an average 3.84 percent, a six-week high but squarely in the middle of the range for 2015 so far. The FRMI's 15-year companion had half that increase, rising by three basis points to an average rate of 3.15 percent. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain considerably below their conforming counterparts but bumped up by three basis points to end at 3.62 percent for the week. Meanwhile, the overall 5/1 Hybrid ARM also added three basis points to last week's average, edging higher to land at 3.93 percent. HSH's FRMI includes both conforming and jumbo rates, providing borrowers with a broader view of mortgage conditions.
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There was no expectation of a move by the Fed at this week's meeting, and none came. However, the statement which accompanied the close of the meeting was trimmed back somewhat, with the removal of any "forward guidance" as it pertains to rate policy at the next meeting or two; Instead, the Fed has now positioned itself to be free to make a change at any time. As well, the Fed tested a teleconferencing system with reporters this week, an indication that they may be looking at intra-meeting moves in monetary policy in the future, so they appear to be positioning themselves to have maximum flexibility when it comes time to change rates more regularly, whenever that may be.
As noted above, GDP growth in the first quarter was nearly non-existent. The 0.25 percent rate of growth was well below expectations of perhaps a 1 percent rate or so and was a marked downshift from the even the modest 2.2 percent rate at the end of 2014. Exports were of course a drag, what with the strong dollar during the period, but consumer spending was also the slowest it has been since first quarter of 2014. Some analysts noted that a pattern seems to have formed in this recovery in that GDP growth has slowed in the last quarter of the year since 2009, then put in its weakest showing of the year in the first quarter of the next. As such, the Bureau of Economic Analysis is reviewing whether there are seasonal adjustments which have gotten out of whack. Regardless, that growth was poor during those periods is unquestionable, even if to what degree is unknown or unclear.
As the Fed watches labor market dynamics, one of the key items that might sway them to move rates would be if growth in wages begins to perk up. According to the latest Employment Cost Index covering the first quarter of 2015, total compensation per employee (including benefits) rose at a 0.7 percent clip, a little faster than it ended last year, and has climbed by 2.6 percent over that time. Until recently, wage growth tracked in this report has been subdued, but has picked up over the last couple of quarters. The 0.7 percent rise in wages to begin 2015 has put the annual rate of increase a 2.5 percent, the strongest such value since the fourth quarter of 2008. At that time, the economy was in the midst of recession, and was also the period when the Federal Funds rate was moved to present rock-bottom levels.
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One of the causes of the soft economic climate has been the slowdown in manufacturing. After a recent high mark of 57.9 last October, the Institute for Supply Management's manufacturing index has headed downward each month. In April, no decline was seen; the index was unchanged from March at a reading of 51.5, just a whisker above the flatline value of 50. That the decline has halted may be a sign that the worst has passed here, with a modestly positive value for export orders (the first this year) a clue that the global economy has picked up a bit, brightening the outlook somewhat. The employment measure in the report report show a contraction, so there are yet impacts of the recent decline in activity still being realized.
With the soft quarter as a backdrop, it's unsurprising that personal incomes were flat in March. Although wages did rise by 0.2 percent, the headline figure was dragged backward by a slump in dividend income, still-weak interest income and other drags. That said, folks actually did increase consumption spending during the month, which moved 0.4 percent higher. The imbalance in outgo relative to income served to trim the nation's rate of saving back to 5.3 percent, still high relative to last year, if off last month's peak. With consumers reluctant to take on new revolving debt throughout the recovery, the accumulation of savings has been key to keeping spending moving forward, if only at a modest pace.
One of the items folks are spending money on (and taking on debt, too) is for new cars and trucks. Compared to March, April sales were a little lackluster, with AutoData reporting that new vehicles moved off dealer lots at a 16.5 million (annualized) rate, down from a 17.1 million pace the month prior. Although the level of sales is still quite solid, the slippage in April isn't exactly welcome news for manufacturers and suppliers.
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Construction spending hit the skids in March. The 0.6 percent decline was well short of expectations, and there wasn't much by way of bright spots to be seen in the report. Outlays for residential projects slumped by 1.6 percent during the month, public works projects declined by 1.5 percent and have declined in 4 of the past 5 months. Only manufacturing projects kept the headline number from falling further, helping commercial spending to show a 1 percent rise for the month. Construction spending added to GDP on a regular basis last year, but so far this year has been a drag; the last positive construction spending figure was seen back in December.
In a different sign that labor markets may be tightening a bit, weekly claims for new unemployment benefits dropped to a 15-year low of just 264,000 in the week ending April 25. The employment report for April is due out next Friday and is generally expected to move back toward trend growth of around 200,000 new hires after a weak 126,000 was tallied for March.
At this point, it appears likely that it would take at least a couple of months of solid employment reports to put a September (or even July) move by the Fed back in play, but this would need to be surrounded by other corroborating data, such as inflation trending higher. As prices had been pushed down by a strong dollar and collapsing gasoline costs, it's reasonable to expect that the recent increases in gas prices will have some effect on inflation, moreso if the dollar fails to re-strengthen in the next month or two. We'll see, but this could be a factor as we go.
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Consumer moods are mostly in a holding pattern overall, with available indicators moving in slightly opposite directions. The Conference Board's measure of Consumer Confidence shed 6.1 points in April, easing to a value of 95.2, about where we closed out 2014 and began 2015, give or take a little. The decline was fostered by diminishing optimism about both present and future circumstances, but there was a bit of a rebound in the number of folks who think they might by a house this year, so it's not all gray skies. Conversely, the final reading on Consumer Sentiment from the University of Michigan featured a slight upward bump for April, where the indicator added 2.9 points on a more upbeat assessment of both present conditions and those expected in the future.
The weak first quarter GDP data and a lack of any recent indications of rising strength to offset it should have seen interest rates mostly flat, perhaps even easing a little bit this week. However, the unwinding of investor bets on the dollar and the expected timing of the first Fed move was a far stronger and unexpected influence on rates. The result is that interest rates moved a bit higher, not only here but also in the yields of government bonds in other countries. This rise in local yields may tend to keep some offshore investor money from heading this way, reducing the likelihood of a fast retracing of this week's firming of our own rates.
After a four-week flat spot (at or near 2015 lows) mortgage rates have started to tick upward again, so volatility is back to at least some degree. That said, there are no present indications that we'll be breaking any new ground for rates anytime soon, but we do expect to see more volatility next week as a wide range of new economic data is due. If there is a upturn in strength in the ISM service-business report and/or if Friday's employment report rebounds more strongly than expected, we could have some additional space to move to the upside. With those yet unknown, we'll look for another six basis point lift (or perhaps a touch more) in our FRMI by the time the week is through.
For a longer-range outlook for rates and the economy, one which will take you up until late June, 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
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