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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Rates Post Small, Likely Temporary Dip

October 20, 2017 -- After weeks of mostly stutter-stepping upward, mortgage rates stepped back just a bit this week, but signs indicate that this was a temporary move. Equity markets continue to press higher, setting new records as we go and drawing at least a bit of cash from bonds. We could be just days away from an announcement of a change (or not) at the helm of the Federal Reserve, and movement on the budget in Washington may pave the ways for tax cuts or fiscal stimulus. As we learned in the weeks after last November elections, expectations of cuts and new spending priorities can push interest rates higher, and to a degree, they are at the moment.

The economy continues to grid along, but possible with just a slight bit of acceleration as summer came to a close and fall began. The Fed's regional survey of economic conditions (a.k.a. the "Beige Book") provides a summary of activity in each of the Federal Reserve's 12 districts every six weeks or so. In the six weeks that led up to the previous report (to August 28), seven districts reported "modest" growth, one "modest to moderate" and four "moderate". Advance this by six weeks, and the report covering the period through October 6 saw a 6-1-5 balance, so at least one district had some economic acceleration during the period.

The economic recovery and expansion has now featured long stretches of such characterizations. There nothing specifically wrong with a durable, measured pace of growth, especially one where inflation isn't a concern, but goosing plodding growth and bent toward a lighter regulatory hand may be part of the consideration for the selection of the next Fed chief. Five candidates are said to be in the running; two would likely continue present policies, two would likely lean more toward more rules-based monetary policy and be more reformist, and one is rather more of an unknown when it comes to policy and reform considerations. Although markets will of course adjust to the predilections of whomever holds the title, it is a fair bet that this would come after a more turbulent period for the markets as investment positions are readjusted. Of course, it's also useful to remember that the Fed uses a rate-policy setting committee, so consensus among members must usually be built before policies are changed.

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Although a lack of inflation continues to something of a mystery to the Fed, there are little signs here and there that suggest that a period of disinflation is passing, and that such softness in prices may actually be transient, as the Fed has expected (or hoped). Another such clue came in the form of the aggregate cost of imported goods coming into the U.S.; in September, import prices rose by a stout 0.7 percent, and that on the heels of a 0.6 percent lift in August. Prices were lifted by a bump in petroleum costs, but even outside them rose by 0.3 percent, matching August's increase. Compared against a year ago, headline import prices are rising here at a 2.7 percent clip, and we are even exporting a bit of price pressure to our trading partners, as export costs rose by an aggregate 0.8 percent for the month after an 0.7 percent rise in August. At 2.9 percent, annualized export costs are also at a five-month high. How much of these increases will bleed into core inflation or even headline inflation isn't clear, but rising input costs will serve to at least keep prices firm, if not increasing outright.

Despite hurricane-related issues in parts of the country, industrial production managed to expand by 0.3 percent in September. Contributions came from all segments, as manufacturing kicked in a 0.1 percent gain, mining concerns expanded by 0.4 percent and utility output popped 1.5 percent higher during the month. It's reasonable to think that output would have been higher except for hurricane curtailment, as well, so the broad message here is that it was a solid gain all around. As well, rising output pushed the percentage of available production capacity in active use back up to a flat 76 percent, edging back higher after an August dip.

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Housing markets continue to have challenges that are tempering a stronger contribution to economic growth. For the third consecutive month, new residential construction (housing starts) declined, slipping now to an annualized rate of 1.127 million, down 4.7 percent from August and slow enough to be the lowest in a year's time. Single-family starts dipped by 4.6 percent to an 829,000 annual pace and was surpassed by a 5.1 percent dip in multifamily construction, which slipped to a 396,000 annual rate. Although there was probably some effect from hurricanes Harvey and Irma reflected in the tally, the reality is that housing starts have been generally moving lower after hitting a recovery high last October. Permits for future building were also down, falling 4.5 percent to an annualized 1.215 million, so somewhat less construction seems in the offing going forward at the moment as well.

We already know that sales of new homes have been temperate at best, falling over the last couple of months (September's update is due next week). Slow sales and sliding construction make it a wonder how members of the National Association of Home Builders can remain so optimistic; perhaps there was a September blast of sales we'll learn of next week. In the meantime, happiness among builders seems pervasive; the NAHB's barometer of activity and sentiment moved up four points to a robust value of 68 for October, the highest since May. Measures of single-family sales rose five points to 75 and expectations for the next six months also powered up five points to 78, so things seem very bright and sunny for this group. This ebullience comes despite a fifth consecutive month of below-par traffic measures at model homes, showrooms and open houses. Perhaps the folks that do show are active buyers and not just tire-kickers.

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   Resources: Housing & Salary Study ARM Index Data Home Value Estimator

Sales of existing homes remain subdued, most notably from a lack of desirable, affordable inventory. The National Association of Realtors reported that September sales ran at a 5.39 million annualized rate, the first increase seen here since May, if a meager one of just 0.7 percent. As has been the case, inventory levels remain very tight, holding at 4.2 months of supply for a fifth consecutive month (marginally better than earlier in 2017), but median home prices were only by 4.2 percent higher this year than last year at this time, the coolest rate of increase since last December. Like new home sales, sales of existing homes have struggled to find traction this year despite low mortgage rates and (somewhat) loosening mortgage underwriting criteria.

Two regional looks as manufacturing activity suggest things are well. The Federal Reserve Bank of New York's local review of factory activity pointed to an overall uptick in October to a three-year high, with solid (if cooler) incoming new orders and expanding payrolls. Just down the New Jersey Turnpike, the Philadelphia Fed's survey of manufacturers told a similar tale, with an uptick in the headline report, bolstered by solid (if lesser) new orders but with a sizable uptick in the employment metric. We'll get a broad national look at manufacturing in a couple weeks' time, but signs are goods for another strong month all around.

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That said, hurricanes may have taken at least some wind out of the economic sales. At least, that the case when you consider a 0.2 percent September decline in the Conference Board's index of Leading Economic Indicators, it's first negative value since August 2016. The measure here was dragged down by a few components such as a shorter workweek, falling building permits and spiking unemployment claims (since diminishing). To the extent that hurricanes curtailed activity, the dip here may be a temporary one.

Claims for initial unemployment benefits have been messy for weeks as the effects continue to play havoc with totals. Even as things are likely settling in Texas and Florida there remain issues with recording and reporting in place like the Virgin Islands and Puerto Rico. As such, the values reported remain suspect, such as the 22,000 decline in the week ending October 14. The fall left initial claims at 222,000 -- a level last seen about 44 and a half years ago. Gauging the labor market has been difficult for about two months and that will probably still be the case when the next employment comes out for October on November 3.

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

Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Oct 13 Sep 15 Oct 14
6-Mo. TCM 1.26% 1.16% 0.47%
1-Yr. TCM 1.41% 1.27% 0.67%
3-Yr. TCM 1.65% 1.48% 1.01%
5-Yr. TCM 1.94% 1.77% 1.29%
FHFA NMCR 4.05% 3.99% 3.62%
FHLB 11th District COF 0.732% 0.707% 0.693%
Freddie Mac 30-yr FRM 3.91% 3.83% 3.42%

All told, the economy seems to be doing OK, with perhaps with a slight bit of acceleration noted in the Beige Book, but some things may yet be masked or distorted by the effects of August and September storms. The potentials for additional economic stimulus isn't a given, but the odds of it coming at some point have begun to improve. Inflation continues to show little signals and reflections here and there, and even if not increasing or increasing by much shows plenty of signs that it's no longer decreasing, either. In the midst of this, we could have a change at the Fed, or not.

Collectively, this combination suggests that interest rates will likely firm a little bit. Although we expected no change this week, the markets presented us with a small decline, instead. To be sure, the minor increase in rates that took place over a six week period wasn't seamless or linear, but rather more steppelike with a couple of plateaus thrown in. Next week, we're likely to see rates move upward again, and we expect a 4-5 basis point increase in the average conforming 30-year fixed-rate reported by Freddie Mac next Thursday. Call it another "steppe" higher in what may become a more commonplace pattern as we close the year.

For a forecast for mortgage rates that carries almost to the end of the year, have a look at our Two-Month Forecast. Although the clock is ticking on 2017, you might also have a glance at our recent mid-year update to our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing.


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