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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Rates Still Edging Higher, But No Concern

October 21, 2016 -- It's always interesting to see headlines about mortgage rates at popular media outlets. This week, we saw more than a few with the factual (if alarmist) "Mortgage rates at 4-month highs," and "highest since Brexit"-type copy.

Certainly, this is true, but all this means is that the average 30-year fixed rate mortgage tracked by Freddie Mac moved up by an as-expected handful of basis points (five, actually), landing at just 3.52 percent. Between the four-month ago level and this week's average, the low water mark during that time was just 11 basis points below this week's figure, a difference that translates to just $12.24 per month on a $200,000 loan. This isn't enough to change the decision to buy a home, and the change in rate and corresponding payment from last week's figure barely moves the needle. No wonder "rising rates don't scare buyers", to cite a part of a headline from CNBC.com.

It also bears noting that rates still remain nearly a half-percentage point below where we began 2016. Our and plenty of other forecasts expected that we'd be about 180 degrees in the other direction by this time in the year, which certainly appears unlikely to happen with only about 10 weeks remaining.

To even see rates get back to where we began 2016 remains possible, certainly, but this will require a combination of factors to come to pass, including more robust economic data here and elsewhere, signs of firming inflation and a Federal Reserve not only lifting interest rates but also signaling that more would be coming, perhaps soon. We've not seen such an alignment of planets in a good, long while now, as there always seems to be some rogue element that keeps rates tethered.

We might also point out that while it is true that the Fed did raise rates last December that it is also a fact that interest rates went down in the weeks after the move and slid gently until July. It is not out of the realm of consideration that even if conditions do warrant a move by the Fed in December that the same situation might then occur... rates rising into the meeting, then trending lower again as we go. Just food for thought.

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There was little in the latest economic data to suggest any upsurge in growth or inflation. The Fed's regional survey of economic conditions (aka the "Beige Book") noted that most of the 12 Federal Reserve districts reported "modest" or "moderate" growth, a song we've heard many times throughout the recovery and expansion. Three districts that were perhaps most affected by the strong dollar and oil-price collapse (St. Louis, Kansas City, Dallas) noted that activity picked up in the six-week period ending October 7, while activity in the New York region was essentially flat.

Part of the flatness in New York was no doubt related to a soft factory sector. The Federal Reserve Bank of New York's review of manufacturing in the Empire State put in a third consecutive month of decline, with this indicator sporting a -6.8 value in October. Sub-measures of orders backed down, as did employment metrics, and it looks like there is little traction to move the region's factories forward as we wander deeper into the fourth quarter.

The situation was nearly reversed just a short drive down the New Jersey Turnpike to the Philadelphia Fed's district. Unlike the NY counterpart, their companion gauge for factory activity held in positive territory for a third consecutive month with a value of 9.7, where orders were much stronger. However, factories in the region must be doing more with fewer employees, as the measure of employment was negative again last month and has been sub-par for the entire year to date. It may be that productivity gains are rising in the region, a facet of a healthy economy the Federal Reserve has been hoping to see.

Industrial production rebounded a bit in September after a sputter in August. The 0.2 percent rise in overall output was pushed upward by improvements in both manufacturing (+0.4 percent) and mining (+0.4 percent) but held back a bit by a decline in utility output, probably due to the onset of milder weather as summer came to a close. Capacity utilization remained subdued at 75.4 percent in active use, a figure well below both its long-run average and a level that might engender stronger inflation.

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Inflation isn't much of a concern at this point, though; although firm, there's no uptrend to be seen. The Consumer Price Index did rise by 0.3 percent in September, it's biggest bump April, but that's only enough to help the CPI run an annual rate of 1.5 percent. All of the rise came from a lift in energy prices, and these can be highly variable from month to month. In fact, this is why they (and food) prices are pulled from the so-called "core" measure of the CPI; core CPI rose a scant 0.1 percent in September, a deceleration from August, and has been virtually flat at this level for close to a year now. The Federal Reserve prefers to follow a different measure of inflation, the core Personal Consumption Expenditures index, which is holding fairly steady, albeit at a lower annual rate.

The nation's homebuilders continue to be an optimistic lot. The National Association of Home Builders index of member's moods slipped by two points in October, edging down to a still-robust 63, a value good enough to be the second highest of the year. Although current sales of single-family homes dipped by two point, that left this measure at a very strong 69 for the month. Optimism about future sales in the next six months rose, adding a point to climb to 72, even as current traffic levels at sales offices and model homes waned a bit during the month.

October's optimism seems a bit unfounded until you start to dig into the housing starts report for September. The headline of the report said that housing starts declined by a full 9 percent to 1.047 million (annualized) units starts in September when compared against August. However, this weakness was concentrated in the more volatile multifamily segment of the market, where a 38 percent decline in construction initiation occurred, slumping to just a 264,000 annual pace. However, adding a considerable bit of cheer was the 8 percent rise in single-family activity, which jumped to a 783,000 annual rate. As single-family homes are the "bread and butter" for builders, it's little wonder that they were more enthusiastic when asked. As far as any downturn in starts goes, this would appear to be just a blip, as permits for future activity climbed 6.3 percent to a 1.225 million (annualized) pace during the month.

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   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 Latest ARM Indexes Home Value Estimator

While supplies and sales of new homes can be more "elastic" -- that is, more can be built to meet rising demand -- existing home sales are certainly less so, as potential buyers can only buy what's on the market when they search. In this way, a tight supply of unsold homes is arguably curtailing a faster rate of sales; in turn, tight supplies also keep upward pressure on prices.

Inventories of available homes to buy have remained thin for a long while, and September saw just 4.5 months of homes available to buy at the present rate of sale. According to the National Association of Realtors, a 6-month supply is optimal, but the last time we saw that level was July 2014, and this lasted for just a month; You'll need to go back to October 2011 to find the next such instance, and that was the tail end of the housing crash, ending a string of above 6-month supply levels that began all the way back in February 2006, at the crash's very beginning.

Regardless, sales ticked 3.2 percent higher in September, recovering a bit after two slower months, and arguably what could be considered a more or less normal pace. As noted above, inventories are tight, and prices continue to rise (they are currently 5.6 percent above September 2015 levels) and it will continue to be a challenge for homebuyers to find properties they love that they can also afford to buy.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Oct 14 Sep 16 Oct 16
6-Mo. TCM 0.47% 0.52% 0.08%
1-Yr. TCM 0.67% 0.61% 0.23%
3-Yr. TCM 1.01% 0.91% 0.89%
5-Yr. TCM 1.29% 1.22% 1.34%
FHFA NMCR 3.58% 3.62% 4.02%
FHLB 11th District COF 0.703% 0.693% 0.643%
Freddie Mac 30-yr FRM 3.52% 3.48% 3.79%

Relative to August, economic activity seems to have picked up in September, at least according to the Conference Board's index of Leading Economic Indicators. The 0.2 percent rise in this barometer reversed a 0.2 percent decline in the prior month, suggesting that the moderate pace of the economy is likely to persist. We'll get the first estimate of GDP growth for the third quarter at the end of next week, and while it's a good bet that it will be rather above the 1.4 percent rate we achieved in the second, how much more is a matter of speculation. A running estimate of growth produced by the Federal Reserve Bank of Atlanta has settled appreciably in recent weeks, and is presently suggesting that growth during the quarter might be about 2 percent or perhaps a touch higher. Somehow, that feels about right.

Perhaps affected by hurricane Matthew or some religious holidays over the last few weeks, claims for new unemployment benefits popped higher in the week ending October 15, rising to 260,000 new applications filed across the country, the highest such figure in about 5 weeks. The distortions could explain why claims had dipped below 250K to start this month, but if they were one-time distortions, we'll likely see a dip in claims come this time next week.

It looks to us as though the mild rise in mortgage rates over the last couple of weeks has petered out. Underlying and influential interest rates have leveled, and there's little indication that a continued upward move is in the offing. In fact, odds are good for a little retrenchment next week, as a mostly lighter spate of data is due out. If asked to call it, we think that the 30-year fixed rate as tracked by Freddie Mac will hold almost steady, but perhaps shed a basis point or two when the report comes next Thursday.

For a longer-range outlook for mortgage rates and the economy, one which will run through late November, 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 Calculator to learn exactly when you will no longer have a mortgage balance greater than the value of your home.

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