Mortgage Rate Trends: Weekly Market Trends & Forecast
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Housing Pulled In Two Directions
July 25, 2014 -- Falling mortgage rates have helped support sales of homes this spring and summer, with the virtual plateau in rates over the last couple of months no doubt attractive to many. A low and stable rate environment can promote a degree of confidence in homebuyers in that the costs they expect to be able to handle at the outset of the process are the ones they will actually face at the conclusion.
That sustaining environment was thought to have been nourishing both ends of the housing market, supporting sales of both new and existing homes alike. However, the latest data suggests this isn't the case at all, or at least hasn't been so far, and if the trend continues, economic growth as we move into the third quarter of 2014 may not see much of a boost from housing.
Of course, housing and the decision to buy a home comprises much more than mortgage interest rates, which remain favorable and at levels pretty substantially below those seen last year at this time.
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 four basis points (0.04%) to 4.18%, matching 2014 lows. The FRMI's 15-year companion held steady at an average rate of 3.43%. Popular FHA-backed 30-year FRMs managed a two basis point decline, easing down to 3.92%, 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 three basis points, closing HSH's survey week at 3.09%
See this week's Statistical Release and Mortgage Trends Graphs.
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A homebuying transaction has a lot of moving parts, all which must mesh perfectly in order to make a purchase happen. These include of course having the wherewithal to manage a downpayment, the needed income, debt loads and credit strength to be able to cover a mortgage large enough to be able to even consider a purchase. Interest rates do play a role here, as the interest rate is a determining factor in the amount of mortgage a borrower can actually obtain. If all things are good in this regard, the borrower now needs to decide where he or she can afford to live, and having identified a suitable location, they're now eligible to participate in the market. Now, all they need is to actually find a home at a price point and with features that they can live with, get a bid in and accepted, and the whole process can move forward.
Unless something isn't quite aligned. Certain misalignments, like low credit scores or downpayments can cause a kicker in the interest rate... which drives down the amount or mortgage a borrower can obtain. High debt loads have no effect on interest rate but also suppress the amount of the mortgage. A lack of acceptable inventory in a desirable market makes it of course impossible to buy anything, even as it serves to raise prices, damaging affordability and moving these now-more marginal borrowers back to the fences.
Credit scores, low asset strength and high debt loads can take time to cure, individually or collectively, slowing participation in the market. Waiting for inventory to arrive can, too. This also leaves out the wariness of ownership which pervades psyches of potential homeowners, who watched friends and families struggle (many still are) from the housing crash and recession. In addition, plus there are myriad other factors keeping housing from breaking out, including a lack of access to credit at all for at least a portion of the potential audience.
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So housing is more than just mortgage rates. To move forward, we need better alignment among these items, and it would appear that at least some improvement in alignment is starting to be seen in the market for existing homes. Although still below last year's levels, sales of existing homes popped up to a 5.04 million annualized rate in June, a third consecutive monthly rise and the strongest rate since last October. In the last few months, more supply has come onto the market, with the 5.5 months available in June just a little below levels considered normal. Price increases also continue to mellow, with a year-over-year rise of 4.3 percent in June, less that half the rate seen as recently as January and about one-third that seen last year at this time.
Existing home sales do of course produce some economic stimulation, but not nearly as much as sales of new homes. The process of building new units engages a wide range of industries and processes, producing value up and down the economic ladder. In this regard, it is a little worrisome that sales of new homes have so little traction; just a month ago, there was some fanfare that sales of new homes touched a 504,000 annualized pace in May, the best in six years. This week's release not only showed a slump back to 403,000 units, but the downward revision to May sales to 442,000 left them not even at a six-month high, let alone a six year high. The 8.1 percent decline left a retreat to the soft numbers of March and April, each closer to record lows than to anything considered historically normal, let alone robust. Inventory levels or new homes bumped up to 5.8 months, but even as prices are down 1.1 percent from a month ago they remain about 20% higher than the median cost for an existing home. While not unusual to see new buildings at a high cost than older, given the alignment issues above, it may be that attaining those loftier price levels remains too difficult for too many borrowers, especially the trade-up buyers who often energize this market.
That being the case, it may take time -- and a growing economy creating rising incomes -- before we see reliable traction here. Hopefully, we'll still be in a favorable interest rate environment when that occurs, otherwise misalignment may persist or worsen (absent a countervailing force in the name of falling home prices, which no one really wants to see). It is a fair bet that mortgage rates will remain favorable for a while, at least in a historical context, but we've already witnessed the damage even a one percent rise in fixed mortgage rates can do to the market, so even historically normal rates would be unwelcome at this point and probably for a good bit of time yet.
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While it is a fair bet that rates will remain favorable, that could change; this is particularly true if inflation should flare higher. While price pressures still remain moderate, they have been firmer of late, and the latest report for the Consumer Price Index maintained this recent pattern. The 0.3 percent lift in headline costs kept the annual price gain over 2 percent for a second month; we remained at a 2.1 percent annual clip. "Core" inflation saw a more subdued rise of just 0.1 percent for the month, but isn't all that far behind on a year-over-year basis, as it is running at a 1.9 percent rate. Although the Fed prefers a different measure of prices, those too have been creeping higher, but so far remain below the Fed's speed limit of 2 percent.
The economy continued to grow at an above-par rate in June, according to the National Activity Indicator from the Chicago Federal Reserve. The NAI posted a value of 0.12 in June, down just a little from the 0.16 mark attained in May, and points to an economy which appears to be expanding at perhaps a 2.6% GDP (or slightly better) pace. That's good news, and we could certainly use a rebound after the first quarter's contraction in growth. Our first look at second quarter GDP comes mid next week so we won't have to wait long to see where we are at.
A couple of looks are regional manufacturing activity pointed to continued expansion. Reports from the Kansas City and Richmond Federal Reserve Banks saw their tracking gauges both move higher, with Richmond's adding four points to rise to seven in July (a fourth positive reading in a row) while the Kansas City Fed's barometer added three points during the month, rising to a value of 9, and managing to hold positive territory in each month of 2014. Buttressing these solid readings came a 0.7 percent rise in orders placed for durable goods in June, and the factory sector collectively seems to be generally humming along at a fair pace. The next Institute for Supply Management data comes out next Friday, so we'll get a broad and fresh look at manufacturing activity just ahead as well.
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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.
Always hotly anticipated is the monthly employment report. July's is due up next Friday, and if the latest report covering initial unemployment claims is any indiction, it would appear that the labor market continues to strengthen. In the week ending July 19, a six-year low figure of just 284,000 new claims were filed at state windows; however, this figure may be being distorted by auto-maker retooling patterns, which can cause erratic adjustments in the data. Regardless, the recent pattern here has been low at just over the 300,000 mark, among the best levels of the recovery and suggestive of a firming job market.
It seems hard to believe, but the Federal Reserve meets again next week (already!) to discuss how best to address all these economic elements in the context of available monetary policy tools. No policy changes are expected, sans another trim in the pace of QE, but the statement which accompanies the close of the meeting will probably acknowledge improvements in growth and labor markets, a still-messy housing market, and that popular price measures have turned upward a bit. We'll need to wait for the release of the minutes (a three week wait) to get any real insight into what the central bank is thinking.
Not much movement for rates again next week, continuing a low-and-slow pattern. If anything, solid economic news might bump them up a few basis points at most.
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.
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 greater than the value of your home.
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Daily FRMI ratesare available at HSH.com Check out our weekly Statistical Release here (and archives here).