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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Virtually Motionless Mortgage Rates

August 26, 2016 -- Mortgage rates look to end the summer at virtually the same levels they've held for the last two months. Modest and moderate economic data seem unable to push them up (or down) and even musings from Federal Reserve bankers about potential rate hikes seem to have little effect.

Perhaps this messaging is falling on "summer deaf" ears, and that the conditions that would awaken markets are simple building at the moment. Perhaps markets are treating these Fed messages as saber-rattling and unlikely to come to pass. Fed Vice Chairman Stanley Fischer commented on Friday that Fed Chair Janet Yellen's speech at a central banker's symposium in Jackson Hole, WY was "consistent" with up to two possible rate hikes this year.

Although markets waited all week for it, the speech, "Designing Resilient Monetary Policy Frameworks for the Future" didn't specifically provide any additional clarity about the Fed's intentions for making a policy change at its next meeting in mid-late September. However, more than one Federal Reserve Bank president has openly spoke in recent days that at least one rate hike is on its way. The question, of course, is when.

With this as a backdrop, and as the dust settled, underlying interest rates did tick a little higher on Friday. That's too late to make much of an impact this week, but this will likely show to a degree next week.

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 increase by one basis points (0.01 percent) edge back up to 3.56 percent. The FRMI's 15-year companion barely moved as well but rose by two basis points, edging back upward to an average 2.97 percent. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain a little below their Fannie and Freddie counterparts and also featured a minor fall, rose a touch more, climbing by three basis points but remaining at a compelling 3.40 percent. Lastly, the overall 5/1 Hybrid ARM also rose just a bit, with the average adding back the two basis points it shed last week to move back to 2.89 percent on average.

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

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The incoming data will have much to say about whether the Fed considers making a move in September or beyond. At the moment, a September move is still unlikely, but we'll see if market expectations change when the August employment report comes out at the end of next week. If there continue to be solid gains in hiring and/or if wages growth has started moving higher, this could be enough to increase market wariness as get closer to the September Fed meeting.

We are nearly two thirds of the way though the third quarter of 2016 at this point. However, the latest data covering Gross Domestic Product that is available covers the period ended in June, and the latest estimate didn't show much by way of a strengthening economy. In fact, the update for the period trimmed a tenth percentage point of growth off of the initial review; the 1.1 percent rise that remained is a pretty soft number, and has remained quite subdued now for the last three quarters. Indications are that growth has picked up considerably since that time; the "GDP Now" model produced by the Federal Reserve Bank of Atlanta has had about a 3.5 percent run rate for a number of weeks now, but this seems a bit optimistic to us. Suffice it to say that growth has improved relative to the second quarter, probably to something closer to its natural potential to grow.

That "natural potential" is thought to be a GDP rate of perhaps 2.6 percent or so. At the very least, growth seems to have run a little bit above that in July, at least by the reckoning from the Chicago Federal Reserve's National Activity Index. An amalgam of some 85 economic inputs, the NAI sported a value of 0.27 in July, up from 0.06 in June, and its best showing since last July. Two positive readings in a row have been a rarity of late; we've not seen such a thing since November and December of 2014. The NAI uses zero as a basis to suggest that growth is happing at a pace above or below "potential" and it would appear that July's activity certainly flared above it. Here's hoping the positive trend lasts.

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Sales of new homes jumped by 12.4 percent in July when compared against June, rising to a 654,000 annualized rate of sale, the fastest pace since November 2007. If the gains are not subsequently revised away (which has been known to happen) this would be a very good sign for both the housing market and the economy in general, as the construction of new homes has wide-ranging beneficial effects -- everything from timber to transpiration is affected -- so this would also provide some economic lift for the third quarter, too. Supplies of unsold inventory actually were drawn down, too, slipping to 233,000 units ready to go, just a 4.3 month supply. "Normal" levels of inventory are perhaps six months' worth of stock, so there seems plenty of space for builders to continue to build. Although not quite there yet, sales of new homes are approaching typical levels, at least if the distorting effects of the boom and bust of the last decade are not discounted.

On the other hand, sales of existing homes stumbled in July, falling by 3.2 percent and sliding to an annualized 5.39 million annualized rate. It's not clear why this occurred, but there may be several factors to consider: Thin inventories of existing homes (now 4.7 months) to buy may have not featured enough desirable properties and so retarded sales for a time. As well, so some folks that might have purchased a used home may have opted to buy a new home instead; it may be that still-quickly rising prices for existing homes may have narrowed the cost gap with typically more expensive new homes to make a new home a viable option for some homebuyers in some markets. In July, that difference in median costs between existing and news was about $54,000 -- perhaps just a few hundred dollars more per month in carry cost. Of course, as existing sales represent deals initiated 30-60 days prior, it could be that this is a lagged effect from what was a very economically soft first (and early second) quarter. Regardless, monthly dip or not, home sales remain at pretty solid levels.

Contributing to the solid July data, orders for Durable Goods shot up by 4.4 percent. Considering that the prior two months were declines, this is a nice reversal of sorts. The pattern of orders tracked here is usually up one month than down the next, but has been a little different of in the last five months -- two up, then two down. Perhaps we're back into the "two up" portion of the program, which would be good news for a still-struggling manufacturing sector. Perhaps better still is that the measure of "core" orders (no distortion from pricey transportation-related orders) rose by 1.6 percent, so it would seem that business spending has perked up a bit.

  Find these only at HSH.com!
   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 Mortgage Rate Surveys Home Value Estimator

More recent and localized reports of manufacturing activity didn't find much to cheer about, though. The Richmond Federal Reserve Bank's barometer of local activity has been erratic in recent months, swinging up one month then down the next. The plummet of 21 points in the August reading left the indicator at -11 for the month and featured a slump in new orders even as employment metrics improved. Out in the heartlands, the Kansas City Fed's yardstick actually improved by two tick, but that was only good enough to move the needle to a -4 for the month, with new orders and employment both legging down. Before the employment report next Friday, we'll get the broader Institute for Supply Management survey, so we'll see if this is this is a more localized malaise or not.

In August, consumer moods seem as flat as mortgage rates have been. The final University of Michigan survey covering consumer sentiment saw a 0.2-point decline, with the figure slipping to 89.8 for the month. Although closer to recent lows than highs, sentiment remains mostly rangebound, in the middle of the best and worst readings of the past year. The headline value was trimmed a bit by somewhat darker assessments of current conditions, but expectations for the future brightened somewhat.

With the August employment report be a strong one? Available evidence suggests that hiring will probably be a touch slower than seen in June and July. Weekly claims for unemployment benefits have held this month at levels a little above last month, with the 261,000 new applications for benefits in the week ending August 20 about typical for the last few weeks. It seems likely that we'll see new hires closer to the 200,000 market or perhaps a little below rather than the 250-300,000 tallied in the last couple of months.

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HSH's Statistical Release features charts and graphs
for eleven mortgage products, including Hybrid ARMs.
Our legacy state-by-state statistics are now here.
Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Aug 19 Jul 22 Aug 21
6-Mo. TCM 0.45% 0.44% 0.23%
1-Yr. TCM 0.58% 0.55% 0.39%
3-Yr. TCM 0.85% 0.84% 1.01%
5-Yr. TCM 1.15% 1.13% 1.52%
FHFA NMCR 3.69% 3.70% 3.75%
SAIF 11th District COF 0.690% 0.691% 0.687%
HSH Nat'l Avg. Offer Rate 3.55% 3.59% 4.01%

For almost the entire summer (provided you use the official start and end dates, rather then the Memorial Day-Labor Day pairing) mortgage rates have had almost nowhere to go and haven't been in any hurry to get there. If the drumbeat of data about the economy continues to signal improvement, interest rates and mortgage will most certainly rise, but probably not by very much. With two thirds of the year gone by already and summer waning, we will need to see a considerable accumulation of solid economic data and possibly up to two hikes by the Fed just to move rates back to where they began 2016. At the moment, and with a financial market that appears to be largely unmovable, it seems a stretch that this will happen. However, markets are fickle things, prone to fits and starts once spooked, so there remains at all times a possibility that the languid period we've been enjoying could come to an abrupt end.

That's not likely to be next week, when mortgage rates as tracked by HSH's FRMI will probably firm up a few basis points. The ISM and employment report will have more to say about where we'll begin -- and trend -- as September unfolds.

For a longer-range outlook for mortgage rates and the economy, one which will run through late September, have a look at our new Two-Month Forecast.

We recently did a mid-year update to our 2016 outlook. This half-year review saw us update and discuss how our predictions are working out... some good, some not so good. Have a look!


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 balance greater than the value of your home.

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

For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President

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