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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Uptrend For Rates Persists

New Two-Month Rate Forecast at HSH.com

November 25, 2016 -- The uptrend in mortgage rates carried into this week, but certainly with less velocity than we've seen since the election was decided two weeks ago. Where rates will go from here depends on a host of factors, not the least of which is incoming economic data and how this will affect any policy decisions by the Federal Reserve.

Minutes from the November 2 central bank get-together were released this week. The discussions and details firmed up the suspicion that a rate hike is coming shortly, as the minutes noted that "Most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon..." and went on to say that "Some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term and or argued that... such an increase should occur at the next meeting. A few participants advocated an increase at this meeting...". With this as a backdrop, the collective opinions of "most", "some" and "a few" all point to a change in policy come December. There was no mention of any concern about any effects of the then-imminent presidential election, so it isn't clear if they might view the unexpected outcome as disruptive to their policy plans or not.

The recent rise in mortgage rates shouldn't do much damage to the housing market. Rates are only about at levels we began 2016 at, and not much of a deterrent to the desire to buy a home. That said, it will likely be a few months before we see if there are effects, but at least as far as available data goes, the market is doing fairly well. For example, sales of existing homes rose by 2 percent in October when compared against September, and are up by 5.5 percent compared to year-ago levels. Sales reached an annualized rate of 5.60 million during the month; however, sales of used home are reported in the month where the title actually changes hands, and so is reflective of demand conditions anywhere from 45-60 days before. In this way, October's sales are reflective of demand in August and September, all prior to the November rise in mortgage rates.

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Regardless of the higher price of mortgage money, sales of existing homes may have trouble rising much, anyway, as already-tight inventories of homes available to buy tightened a bit more in October, leaving just a 4.3 month supply of stock, a figure well below the six months which is considered optimal. As well, in addition to higher mortgage rates, prices keep marching higher, too, and are running some 6 percent above year ago levels at the moment.

An additional consideration is that home sales are back to about normal, or at least at levels typically seen back before the over-expansion of mortgage credit availability blew the top off the market (2004-2006). Sales are currently running at about 10-year highs, but those comparable figures were attained as the markets were in the process of collapsing and were in a strong downturn. Prior to that, the present pace is more akin to levels seen back in 2003, when "low mortgage rates" meant something rather above the 5 percent level.

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Tallied in the month when contracts are actually signed, sales of new homes can be more reflective of current conditions. Even then, the latest available report covering October covers a period before the spike in rates, but rates were of course already firming just a bit at that time. Sales of new homes rang in at a 563,000 annual rate during the month, off by 1.9 percent when compared to September. The slight easing in sales amid only steady demand meant that inventory levels improved a bi, rising to 5.2 months of supply, with an actual 246,000 units built and ready for sale, a figure among the highest of the recover and expansion. A bit more supply amid level demand allowed prices to rise by just 1.9 percent on a month-to-month basis, but prices of new homes tend to be more erratic than those for existing homes.

After a rough August, economic growth is trending higher, according the Federal Reserve Bank of Chicago's National Activity Index. The NAI reported a sharp economic stumble in August, posting a value of -0.58; this improved a bit in September, climbing to -0.23, and has gained further in October, standing now at a just-below-par value of -0.08 for the month. This indicator -- an amalgam of some 85 economic indicators -- seeks to show if the economy is growing above or below it's natural potential to grow (thought to be a GDP rate of about 2.6 percent or so). Positive values indicate growth above that natural rate; negative values, below it. As such, the NAI suggests that the economy was running at a pretty fair clip to start the fourth quarter of 2016. At last blush, GDP was running at 2.9 percent rate for the third quarter, and we'll get an update on the figure after the Thanksgiving holiday has passed.

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Manufacturing activity gained in the region served by the Federal Reserve Bank of Richmond. Their local barometer of activity sported a value of 4 for November, its first positive value since July. Measures of new orders also turned positive, as did employment measures. Along with other regional data, it seems as though manufacturing has more solidly turned the corner after a rough patch. However, the recent jump in the value of the U.S. dollar will again make U.S. exports less competitive, and that may be a tempering force for factories as we wander along. A national review of manufacturing conditions comes next Thursday.

Orders for durable goods might bring a bit of cheer to manufacturers, though. The 4.8 percent jump in orders in October was easily the best of 2016 and was driven higher by transportation-related items. However, removing those and defense spending components did still leave a 0.4 percent gain in so-called "core" durable goods orders, a rebound from a September decline. Overall orders have now gained for four months in a row, an unusual string, as a backing-and-filling pattern is more commonly seen here. Even with the usual waxing and waning, orders are running 1.3 percent above year ago levels, so the news here is pretty good.

As the headlines will tell you, stock markets have had a pretty strong rally in November. It might be said that consumer moods have also rallied since the election. According to the final review of Consumer Sentiment from the University of Michigan, moods have elevated a fair bit in recent weeks. The sentiment index gained 6.6 point for the month, erasing an October decline and then some. In fact, it is the highest such value for this indicator since May, and was driven by a solid bump in assessments of current conditions, but moreso by expectations for the future. The ending of the contentious election cycle has undoubtedly improved moods, even as perhaps half the voting populace was disappointed by the outcome.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Nov 18 Oct 21 Nov 20
6-Mo. TCM 0.62% 0.47% 0.32%
1-Yr. TCM 0.77% 0.66% 0.49%
3-Yr. TCM 1.30% 0.97% 1.20%
5-Yr. TCM 1.71% 1.25% 1.68%
FHFA NMCR 3.61% 3.58% 3.99%
FHLB 11th District COF 0.703% 0.693% 0.643%
Freddie Mac 30-yr FRM 4.03% 3.47% 3.95%

Claims for new unemployment benefits moved upward in the week ending November 19, returning closer to trend after visiting 43-year lows. The 251,000 new applications for assistance is still a very low number and suggestive of a job market that is still producing gains. Next Friday's employment report for November will tell the complete tale, and forecasts are calling for another solid month of hiring. In turn, this should give the Fed some additional confidence that a small increase in short-term interest rates won't derail the economy.

Markets are closed for the Thanksgiving holiday on Thursday, and Friday is certain to be a thin day in financial markets, even as the retailer's Black Friday bonanza (and the poorly-named "cyber Monday") give us a sense of how the consumer is feeling about spending money. After that, the usual first week of the month slew of data is due out. As other interest rates edge higher still, mortgage rates are also firming a little bit, but the selloff looks a little tired at this point. We'll likely see another 5 basis point or so rise in Freddie's conforming 30-year FRM by the time next week comes to a close.

Happy Thanksgiving to you and yours.

For a longer-range outlook for mortgage rates and the economy, one which will run through late January, 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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