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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Diminished Inflation Helping Rates Ease Again

August 11, 2017 -- Partly due to increasingly bellicose saber-rattling between the U.S. and North Korea, but also more than partly due to inflation that simply can't find a reliable toe hold, mortgage and other interest rates found new reasons to decline this week. With this as the backdrop, it seems likely that we'll set new 2017 lows for mortgage rates in the days ahead, possibly beating previous lows by a few basis points. This is remarkable, given that the Fed has raised the federal funds rate three times in the last eight months.

To be fair, the fed funds rate and mortgage rates don't have a whole lot to do with one another, but a central bank tightening policy is usually done to try to attenuate above-trend growth or inflation. In this instance, neither has been the case, so it has been just a not-so-routine removal of excess accommodation, a process of removing emergency-level supports that the economy simply doesn't need, with these moves having very little overall effect on economic or labor market growth to date.

Odds favor that we will see a different kind of excess accommodation removal beginning in a few weeks with what is expected to be the onset of the Fed starting the protracted process of trimming its balance sheet. Analysts have come to expect that this will come at the expense of another lift in the federal funds rate, and odds of a lift in the fed funds rate in September are currently reckoned at about zero. The process of the Fed recycling fewer funds into mortgages and Treasuries will slowly increase in impact over time, but there currently are few expectations that this will disturb financial markets (or raise rates) very much, at least at the onset.

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That said, the Fed has been expected to kick the next rate hike down the road to December's meeting, but there have been no demonstrably durable acceleration in economic growth yet, and already-limited inflation pressures have faded over the last few months. Couple this with expectations for near-term fiscal policy changes to goose growth all but absent from the market, odds makers in the futures markets put the chance of a December move by the Fed at only about one-in-three.

With plenty of political trouble, only moderate domestic (and global) growth to be seen and no imminent inflation threat, interest rates simply have little reason to rise.

Available inflation data out this week served to reinforce what has been a months-long trend of weakness. The Producer Price Index, a measure of costs taken above the consumer level saw a 0.1 percent decline in July, a mirror image of forecasts of a 0.1 percent rise. The unexpected decline was matched by a fall in the so-called "core PPI", which sported a 0.1 percent fall of its own last month, it's first outright decline since November 2015. Over the last year, producer prices have expanded by a mild 2 percent, and this annual level is now a full half percent below those seen as recently as April. Core PPI has exhibited a similar trend, falling back to a 2 percent level from a higher rate just a few months ago.

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Prices at the consumer level are telling almost the same story. Overall prices as measure here did rise in July, by only by 0.1 percent, part of a subdued trend that has taken hold of late. Over the last year, headline CPI is running at a 1.7 percent clip, a fairly pronounced deceleration when you consider it was running at a 2.8 percent pace in February of this year. Core CPI also rose just 0.1 percent and remained at an annual rate of 1.7 percent for a third consecutive month.

The Fed has stated more than once that it believes that this softness in pricing power is transitory. That may be, but what isn't clear as to when any upward transition may begin to show. If it doesn't come fairly soon, the Fed will be much less likely to raise rates come December, and we might not see another until perhaps March (or even later), depending upon what happens as we near the end of Fed Chair Janet Yellen's term come January. There's plenty of time between then and now and many changes will certainly come before that point, but for now, the Fed's best-laid rate-raising plans seem less likely to pan out.

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

The accumulation of new debt by consumers continues at a low simmer, according to the latest report. Consumer credit balances expanded by some $12.4 billion in June, with both revolving and non-revolving segments contributing. That said, non-revolving installment credit isn't rising as much as it had been, contributing just $8.3 billion to the tally, the least amount in a years' time. Used for things like auto financing and student loans, this segment has been a driver of new debt in this expansion, as revolving credit usage has been spotty and often minor. By this measure, it would seem that consumers are either expressing a little caution about their borrowing of late, or it may be more reflective of tighter auto lending conditions and a job market that is seeing somewhat fewer people head off for schooling.

Worker productivity continues in a long-run soft pattern, but did pick up a little bit of late. In the second quarter of 2017, the overall measure of output per worker expanded by 0.9 percent, rather better than the 0.1 percent rise in the first quarter of the year. Workers that produce more can be paid more without any undue effect on inflation costs, and even the modest rebound here could presage some future wage gains. With the bump higher, the measure of labor costs per units produced shrank from the first quarter's 5.4 percent to just 0.6, perhaps freeing up some funds for workers. As well, it may be that more reliable productivity gains may come as time goes along, as strong and regular hiring in recent years has put more workers into jobs they may still be learning.

If HSH's weekly MarketTrends newsletter is the only way you know HSH, you need to come back and check out HSH.com from time to time. You'll find new and changing content on a regular basis, unique calculators, useful insight, articles and mortgage resources unlike anywhere else on the web.

Inventories at the nation's wholesaling firms kicked 0.7 percent higher in June, a second month of buildup. Unlike May, though, June's increase in holdings was met with a like-sized gain in sales, so there was no corresponding increase in the ratio of goods on hand relative to sales. Last week's ISM report did note a slight tailing in factory activity in July, but it would appear that things are moving well enough downstream of manufacturers to allow for at least a modest level of new orders to continue to show.

The labor market appears to be continuing apace, with new claims for unemployment benefits at a near standstill over the last three weeks, with the 244,000 new claims filed in the week ending August 5 right in tune. Job growth started the third quarter with a stronger-than-expected 209,000 new hires in July, and if the current run rate for claims keeps up (and is any indication), we may see something akin to that level for August, too.

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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
  Aug 04 Jul 07 Aug 05
6-Mo. TCM 1.14% 1.14% 0.42%
1-Yr. TCM 1.23% 1.23% 0.52%
3-Yr. TCM 1.51% 1.60% 0.79%
5-Yr. TCM 1.81% 1.94% 1.07%
FHFA NMCR 4.00% 3.87% 3.70%
FHLB 11th District COF 0.648% 0.645% 0.690%
Freddie Mac 30-yr FRM 3.93% 4.03% 3.48%

Ten years after? We noted some financial market headlines this week about August 2007 being the quasi-start of the global financial crisis. For our part, we would have reckoned it somewhat earlier, perhaps mid-July. The July 20, 2007 MarketTrends featured a headline of "Mortgage Rates Rising: Subprime Spillover?" and we had been eyeballing and discussing cracks in the mortgage credit markets in the weeks (and months) prior to that. If you're inclined to visit the past, you'll finds some useful (and hopefully interesting) nuggets of those trouble times in our archives. Of course, we also chronicled each of the Fed's market-rescue efforts too, time wended its way forward. Ahhh, memories.

Although a lot of things have changed since those days, some things are still the same: There continues to be only a small market for private-label mortgage-backed securities (mostly jumbos, but some others are starting to creep in), there is no real "subprime" mortgage market to speak of (for better or worse, but certainly there is a segment of the market from whom housing credit remains scarce), Fannie and Freddie remain corporate zombies even as they dominate the mortgage markets, and housing finance reform to give us what comes after the Great Recession remains only a theoretical possibility in this political climate, as it did in the previous one. At some point, and with capital balances slated to be zero come next year, a decision by someone needs to be made to either allow the GSE's capital levels to build again to protect against losses or to again leave the taxpayer on the hook should mortgage and housing markets sour in the next recession (wherever it may come).

Mortgage rates seem poised to slip again next week, but probably not by very much. That said, as this week's average conforming 30-year FRM as reported by Freddie Mac was only two basis points above 2017 lows, it's likely that we'll see "new lows for mortgage rates!" headlines when Freddie reports again next Thursday. We think a 2-4 basis point decline is what we're likely to see in that benchmark, little more than statistical noise but enough to generate a little mid-summer excitement.

For a forecast for mortgage rates that carries into early Autumn (October, anyway), have a look at our Two-Month Forecast. You might also have a glance at our recent mid-year review of our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing.

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