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Mortgage Rate Trends: Weekly Market Trends & Forecast

HSH Market Trends
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Rates Slip, Will Be Bumped Up By Jobs Report

July 3, 2014 -- As it has for much of the spring, the economy seems to be maintaining an upward path. Coupled with a forgiving Federal Reserve slowing removing policy accommodation, this has resulted in record highs for major stock market indices, while the global investor search for yield and to keep funds out of harm's way has helped U.S. interest rates to remain low.

We find ourselves in a very interesting position as the recovery seems to finally be coming into its own. With only about $35 billion left to trim, the Federal Reserve will complete its exit from QE in just three more meetings, with an expected late October closure of the program. After that, Fed officials and official forecasts suggest it may be six months before the Fed begins to adapt interest rate policies to the new economic reality.

If present growth trends persist between now and the end of the program we will probably get something shorter than a six-month period in which to prepare, especially if inflation tracks upward during this time. Even if the Fed chooses to do nothing during this window, markets will certainly have made adjustments in preparation, lifting rates, and the Fed will probably be acting reactively at that point rather than proactively.

For now, and likely through the summer, we may see data-driven bumps and dips in rates. Although we managed a slight dip presently, a bump is in order before long.

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%), easing back to 4.19% and very close to 2014 lows. Meanwhile, the FRMI's 15-year companion slid by just one basis point to drift to 3.42%. Popular FHA-backed 30-year FRMs backed off by four basis points, drifting down to 3.91%, as these fully-insured offerings continue to beat conforming 30-year FRMs by almost a quarter percentage point. Finally, the overall 5/1 Hybrid ARM declined by another three basis points, landing at 3.06% for the first week of the third quarter.

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

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The financial markets are heavily focused on jobs, and the latest reports all show favorable trends. Announced layoffs abated in June, falling to 31,434 for the month, according to the outplacement firm Challenger, Gray and Christmas. This is a 2014 low and among the lowest figures of the recovery so far.

Weekly claims for unemployment benefits held pretty steady at 315,000 in the week ending June 28, with the last five weeks holding almost still, indicating a firming in the labor market over that time. Claims have touched recovery lows a number of times during the spring, even dipping below 300,000 at one point, and remain near levels prior to the start of the recession.

Pointing to growing strength, too, was the employment report for June. Some 288,000 new hires occurred during the month, and May and June's tallies were revised upward as well. The pace of job creation in June was fully twice that seen in January, and average job growth for the last three months is now closer to 300,000 per month than 200,000 and suggesting that more resilient economic growth is to be expected. The nation's rate of unemployment ticked down by 0.2 percent to 6.1 percent, the lowest figure Since September 2008, and declining even as the labor force participation rate remained at a weak 62.8 percent for a third consecutive month; essentially, somewhat fewer people entered the workforce during the month but were absorbed easily. Regardless, more people with jobs should help to lift the economy in the coming months to a greater degree than is the present case.

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That stronger economy shows itself in a number of ways, with one of the clearest being the number of new cars and trucks hitting the street. In June, sales of new vehicles rose to a 17 million annualized pace, the highest figure since 2006, as consumers and businesses continue to replace an aging fleet of cars and trucks. Like homebuilding, automaking engages a wide range of supply chains and businesses, providing a lift to everything from small parts manufacturers to transportation concerns, and also includes the banking side of things. Unlike mortgages, private lending and securitization markets have recovered after the recession, and credit is again available to virtually all who want to borrow. If the housing market is to ever full heal, this process needs to occur in the mortgage space, which is presently choked by regulations, lawsuits, political concerns and risk fears.

The Institute for Supply Management tracks activity in both the manufacturing and service-related sectors of the economy. According to the latest reports covering June, both are doing fairly well. The ISM report covering manufacturing slid by 0.1 in June, holding almost steady at a pretty solid 55.3 for the month. While current production eased a bit, new orders popped higher, while employment figures were steady.

Over on the larger, service-business side of the economy, the story was much the same. The headline indicator for non-manufacturing businesses eased a bit, slipping 0.3 points to land at 56 for June but remaining at a solid level. The measure of new orders for services rose for a second month and employment conditions also rose.

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The nation's imbalance of trade suggests that not only is the U.S. growing but that the economies of some of our trading partners are improving, too. The difference between outgoing and inbound goods and services narrowed in May, falling back by $2.6 billion during the month. Imports slipped slightly, easing by about $0.7 billion, while exports rose by just about $2 billion. Rising exports suggest that the battered global economy may be getting just a bit more traction, and that would be good news all around, even if it might eventually lead to higher interest rates here.

Factory orders faded in May, slipping by 0.5 percent during the month. This overall measure of orders to factories had put in three pretty solid months in February, March and April so this is more likely a breather rather than the beginning of any downward trend. With the ISM manufacturing orders rising in June, the downward blip noted here may have already largely passed.

Construction spending gained by a meager 0.1 percent in May. It would seem that after being the primary driver during the recovery, spending for residential projects has become less reliable since the turn of the year. Fortunately, there's still work to be done, with increases in outlays for private non-residential projects rising 1.1 percent for the month. That gain was joined by increased spending for public works on things like roads, bridges and schools. These expenditures were battered along with government finances during the downturn (and only erratically contributing to the total since then) but have now put in a fourth consecutive positive month, rising a full percent in May.

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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
  Jun 20 May 23 Jun 21
6-Mo. TCM 0.06% 0.05% 0.08%
1-Yr. TCM 0.10% 0.09% 0.13%
3-Yr. TCM 0.95% 0.79% 0.57%
5-Yr. TCM 1.72% 1.55% 1.22%
FHFA NMCR 4.18% 4.24% 3.56%
SAIF 11th District COF 0.682% 0.701% 0.967%
HSH Nat'l Avg. Offer Rate 4.25% 4.20% 4.19%

Just as bad economic news presages declines in interest rates, good economic news generally presages increases in them. How much increase or decrease occurs usually depends on the context of the information, whether it reveals a change in direction or further confirms a trend, and of course how well markets are positioned relative to the individual item (or collection of items). The biggest changes tend to occur when the market is surprised one way or the other, which is why a "blockbuster" report (or extraordinarily weak one) can drag rates one way or the other. Of course, this is also influenced by the individual or collective outlook of the investor or the market, which must position not only for today, but for months and sometimes years ahead.

At the moment, markets seem to expect that incoming economic data will be fair, or better. Last week, forecasts were for perhaps a June employment report of 200,000; those forecasts were ratcheted upward (and investor positions re-hedged somewhat) after the ADP report showed a spurt in private hiring. By the time the Bureau of Labor Statistics reported on Thursday morning, all that was left for influential underlying rates to move was a little bump of a few basis points, but the cumulative change in positions during the week suggests that mortgage rates will rise perhaps five or six basis points next week.

Should the data continue bear out the market's stance of expecting somewhat better news as the summer progresses, we might start to expect gradually firming mortgage rates, but the market's muted reaction to incoming data so far suggests this will be a measured process at best.

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.

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Daily FRMI rates are available on HSH.com. Check out our weekly Statistical Release here (and archives here).


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