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Mortgage Rate Trends: Weekly Market Trends & Forecast

HSH Market Trends
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Fed Provides "Some" Clues

July 31, 2015 -- What's in a word? Perhaps little, perhaps much. In the end, it all depends on the word or who is uttering it. In terms of communication goes, one word isn't much to go on.

The Federal Reserve ended its July meeting on Wednesday, and while no change to policy was expected or came, we did see the most subtle of changes in the message the Fed uses to describe its thinking.

In characterizing its present stance of policy and when the Fed might make a change to the short-term interest rate it controls, the Fed indicated that it would be likely to make the first move when it has seen "some" further improvement in the labor market. Previously, it merely said "seen further improvement." While "some" isn't much to go on, it is an acknowledgment that the job market has improved, and only needs to improve a tad further before the Fed will feel comfortable kicking off what is likely to be a very slow and protracted process of normalizing interest rates.

For their part, mortgage rates have eased a bit in recent days; although each recent message from the Fed says they will make a move before long, financial markets are starting to sense that it will be a long, slow process.

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 fell by five basis points (0.05%) this week to an average of 4.06 percent, its lowest rate since early June, while the FRMI's 15-year companion ticked lower by four basis basis points to an average interest 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 managed a three basis point decline, landing at an average 3.85 percent. Lastly, the overall 5/1 Hybrid ARM retreated by four basis points, coming to a halt at an average rate of 3.05 percent for the week. HSH's FRMIs are combined averages and include both conforming and jumbo rates, providing borrowers with a wider view of mortgage conditions.

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

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We'll get a new look at the labor market come next week (and again in early September, well in advance of that FOMC meeting). At the moment, and unless the next two reports are well below expectations, we are of the mind that we will see a quarter-point lift in the Fed Funds target rate at that time... and that this may be it until perhaps February 2016.

For the Fed, the process of changing monetary policy in this upcycle is more complicated than perhaps ever before. The Fed will not only be stating where it wants the Fed Funds Rate to be (as it has in the past), but it has a number tools that have not yet been tested in real market conditions that it needs to assess, including paying interest on excess reserves (paying interest to banks to park money with the Fed), reverse-repo agreements (where the Fed buys securities from banks and agrees to replace them at a later time), as well as term-deposit facilities and mechanisms to help support money-market funds. The Fed needs to test these in real time, and it would be better to assess them in a more-benign environment of low inflation and during a modest change to rates than at a later date and in perhaps more urgent circumstances.

Although they've not committed to any time frame, there is also something to be said about the Fed's need to retain credibility with regards to its rhetoric. More than two years have passed since then-Fed Chair Bernanke mused that QE would need to come to an end at some point, setting off the so-called "taper tantrum" and roiling markets. The Fed has since intimated that rates will need to be lifted at some point, and recently this has featured a "sooner rather than later" sort of bent. If the Fed keeps kicking the first change down the road despite using this language, it risks unintentionally surprising the markets at a later date. This is rarely a good thing.

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It is also the case that the Fed has expressed a preference to make small moves sooner than large catch-up ones later, which would risk undue market disruption. Whether the economy can stand higher rates remains an open question, but the shock-and-awe value of rock-bottom interest rates is pretty much gone by this point, and with the economy entering a seventh year of an expansion (a meager one, at that) a more pertinent question might be whether it still needs emergency-level interest rates to properly function.

Although the economy has picked up since the now-common winter stumble, its not as though it is roaring. The advance estimate of second quarter GDP showed a 2.3 percent growth rate, about as lukewarm as you can get. The first quarter's 0.2 percent decline did get a considerable upward revision and is now pegged at a 0.6 percent rise. That's the good news; the bad news is that annual revisions to previous years put the economy on a collective 2 percent growth rate over that time, so the recovery (such as it has been) has been weaker than previously thought.

In the latest GDP report, the measure of inflation the Fed prefers did flare higher as the effect of falling energy prices faded. After two negative quarters, Personal Consumption Expenditure inflation posted a 2.2 percent rate in the second quarter. "Core" PCE popped higher, too, rising to 1.8 percent in the present period from 1 percent in the prior one. The Fed will of course use an annual rate, not a quarterly, but the uptrend is present and will kick their favorite measure closer to the 2 percent rate the Fed hopes to see.

  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
  

But if the most menacing inflation is sparked by sharply rising wages, there's not much yet to be seen. The Employment Cost Index, perhaps the most comprehensive look at the cost of keeping an employee on the books, rose a scant 0.2 percent in the second quarter, down from a 0.7 percent rise in the first. It was the smallest quarterly change since the series began back in 1982. The report noted that wage growth slowed to just 0.2 percent (from 0.7%) and benefit costs rose just 0.1 percent. Without faster wage growth, it's quite difficult for prices to rise throughout the economy, and so inflation may not have much available traction going forward.

Orders for durable goods popped 3.4 percent higher in June, better than what was expected and a nice change after two months of declines. Orders for transportation-related equipment skewed the figure higher, but leaving them out left a nice gain of 0.8 percent, and so-called "core" durable goods orders (no defense spending, no aircraft) sported a 0.8 percent rise for the month, only the second positive value this year.

Perhaps some of those orders were received by firms in the district served by the Federal Reserve Bank of Richmond. Their local barometer of factory activity rose for a third consecutive month, with the indicator rising to a value of 12.4, the second highest in a year's time. Although new orders rose nicely here, employment metrics in the report showed only meager gains at best, so perhaps productivity is picking up again.

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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 state-by-state statistics are now here.
Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Jul 24 Jun 26 Jul 25
6-Mo. TCM 0.13% 0.08% 0.06%
1-Yr. TCM 0.33% 0.29% 0.11%
3-Yr. TCM 1.07% 1.07% 0.98%
5-Yr. TCM 1.68% 1.71% 1.69%
FHFA NMCR 3.85% 3.75% 4.18%
SAIF 11th District COF 0.687% 0.680% 0.682%
HSH Nat'l Avg. Offer Rate 4.11% 4.13% 4.18%

What should we make of the recent diminishment in consumer moods? It's hard to know what's causing folks the blues. Is it the Iran nuclear deal? China's slowdown and stock-market mess? The brinkmanship over Greece? Pending elections? It's hard to say for sure, but the latest reading of consumer confidence from the Conference Board turned rather dark in July. The indicator's value dropped by 10.5 points, falling back to 90.9 for the month, the lowest in about 10 months. although the assessment of present conditions was trimmed somewhat (2.9 points) the outlook for the future dropped by 12.9, so it is worries about tomorrow that is weighing most heavily on the minds of those surveyed.

Although not as pronounced, a more dour outlook was noted in the final July report on consumer sentiment from the University of Michigan survey of consumers. A three-point fall in the headline was noted, as it slipped from 96.1 in June to 93.1 in July, but as with the confidence report above, there was a more marked decline in the assessment of the future than of the present.

The Fed meeting behind us, there comes a big week of data just ahead. Only the employment report might sway the Fed's thinking in one way or the other, but with weekly claims for new unemployment benefits touching ultra-low levels in July, it's a good bet that the report will be pretty sold. Other than that, reports of consequence include the twin ISM reviews of manufacturing and service activity, personal income and spending, the imbalance of trade, construction spending and even a fresh look at bank lending policies. A busy week on tap, but it would appear that we will start the week with rates on a downward note. Whether we finish that way is anyone's guess, but we think they'll probably hold a decline of a few basis points by this time next Friday.

For a longer-range outlook for rates and the economy, one which will take you up until late August, 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".

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