Mortgage Rate Trends: Weekly Market Trends & Forecast

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Keith Gumbinger    HSH.com Find archives here.

Mortgage Rates Easing Back Again

February 27, 2015 -- Although not significant in terms of cumulative up or down moves, it's fair to say that mortgage markets and rates have become more volatile of late. January's rate declines trended into early February, were virtually erased over a couple of week span, and now that upward blip is in the process of being at least partially erased at the moment.

All of this has occurred in perhaps a quarter-percentage point range for interest rates, and is fair warning about the kind of market climate we're like to see in the period before the Fed actually does begin the process of "liftoff". At some point, arguably somewhat closer to the time when a Fed move seems more imminent, rates will show some more reliable traction and head up from recent ranges. When that will be is still not clear, is it appears the Fed remains noncommittal at the moment.

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 declined by four basis points this week (0.04%) slipping to 3.92 percent, breaking a two-week increase. The FRMI's 15-year companion eased by three-hundredths of one percent, sending the weekly average back down to 3.25 percent. Popular with first-time homebuyers, perhaps more so now that the annual MIP has been lowered, rates on fully-insured FHA-backed 30-year FRMs remain well below their conforming counterparts but shed only a single basis point from last week's average, ticking downward to land at 3.74 percent this week. More erratic than its fixed-rate counterparts of late, the overall 5/1 Hybrid ARM decreased by six basis points (0.06%), drifting back down to 3.08 percent for the week.

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

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Fed Chair Janet Yellen certainly didn't provide much by way of clarity in regards to the Fed's thinking. In fact, she may have further muddied the waters with regards to the potential timing of a move by noting that even changes in the Fed's "forward guidance" (language they use to describe the potential for future policy) doesn't necessarily mean an imminent move in Fed policy. Ms. Yellen noted that "it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings." In essence, the Fed seems ready to drop use of the word "patience" in describing how long it will wait to begin raising rates, but doing so doesn't mean that it will start that process anytime soon. Unfortunately, the less clear the forward guidance is, the more likely of an unwanted surprise change in rates for the financial markets, should the markets and the Fed be seeing economic conditions in different ways.

With this in mind, we'll be watching to see if a pattern develops -- relatively stable rates in the valley between meetings, with more volatility both before and after them. The next Fed meeting occurs on March 17 and 18, so we'll know soon enough.

Much of the recent economic data suggest the Fed is more likely to be patient for longer, whether expressed in words or not. After running near a 5 percent clip in the third quarter of 2014, Gross Domestic Product slumped back to less than half that rate in the fourth quarter. The latest estimate put GDP growth at just 2.2 percent, down from an preliminary estimate of 2.6 percent, with the entirety of the year now sporting just a 2.4 percent growth rate. The deceleration in the fourth quarter leave us with considerably less forward momentum for the first three months of 2015, and there remain plenty of offshore headwinds to temper any uptrend in growth.

Not that any upsurge seem imminent. Although orders for durable goods did stage a rebound in January, rising 2.8 percent, four of the reports leading up to January were negative, including a 3.7 percent slump in December, so the upturn has merely recovered some of that softness. Still, an upturn is an upturn, and the component of the report covering spending by businesses was positive for the first time since August.

The Chicago Federal Reserve's National Activity Indicator returned to positive territory in January after a December dip. The 0.13 value for the amalgam of some 85 economic indicators suggests a mild pickup in activity to begin the year, but even with the rise it was still the second lowest value of the last year, so there's been no significant burst of acceleration in growth to be seen. If anything, the slightly above-trend reading says that GDP growth has moved closer to its potential of perhaps 2.6 percent annualized rather than somewhat below that as it closed last year.

Housing could drive the economy higher in the months ahead, but traction remains tough to come by. Sales of newly-constructed homes declined by 0.2 percent to start the year, easing to an annual pace of 481,000 for the month. Sales of new homes remain in an overall uptrend, even as they struggle to attain levels perhaps half of the peak of the last decade. Sales were mostly solid in all but the northeast, where a 51 percent decline was no doubt the result of the wicked winter weather the region has endured. As such, some pent-up demand should be expressed when the snowpack and arctic temps subside. The supply of new homes for sale remains on the lean side, with just 5.4 months of stock available. Actual inventory keeps creeping higher as 3,000 units ready for sale were added to last month's pile, which now totals 218,000 units.

Unlike new homes, where more can be built, it's not as easy to expand the number of homes available for sale, which rely more on a range of factors and happenstances than a single decision to build. Very thin stockpiles of homes for sale seem to be a cause for limited growth in sales of existing homes, and this situation may come to vex the spring housing market this year. In January, sales of existing homes declined by 4.9 percent to a 4.82 million (annualized) rate; this was the slowest rate of sale since last May. Inventories of homes for sale did expand a little, rising to 4.7 months in January from 4.4 in December, but the truth is that for many potential buyers, there's simply nothing desirable to buy in their price range. Tight supplies do create well-supported prices, and even though there was a month-to-month dip, median home prices are still some 6.2 percent above the same period last year.

An improved job market, improving incomes, low mortgage rates and loosening underwriting criteria continue to be positives for the housing market, but all the demand created by these is for naught if there is nothing to buy. Here's hoping that more supply comes on line to meet demand before too much more time has passed, or it could be a very quiet spring for housing.

Aside from the economy sporting somewhat less traction of late, the other concern of the Federal Reserve is inflation. To that end, most measures show tepid price pressures, and the pronounced decline in energy costs is having the expected effect on at least "headline" prices. The Consumer Price Index is one report which shows this pretty clearly; the "headline" overall figure declined by 0.7 percent in January, a faster fall than was expected, and a third consecutive decline. However, "core" CPI, a measure which excludes the influence of food (no change for the month) and energy spending (-20 percent in January) moved upward by 0.2 percent and is holding a 1.6 percent rise over the past year, a pace only slightly lower that that seen in the latter stages of last year. Deflation in the headline, but firmer (if somewhat diminishing) price pressures underneath. With gasoline prices now firming off recent absolute bottoms we will probably see smaller or perhaps no changes in headline CPI as we wend our way forward.

Just as falling gasoline prices likely enhanced moods in December and January, the recent firming in prices may have trimmed enthusiasm somewhat. The Conference Board's measure of Consumer Confidence backed down in February by 7.4 points, landing at a reading of 96.4 for the month. Assessments of current conditions declined modestly, with expectations for the future slumping more appreciably.

Although Consumer Sentiment also eased in February, the decline was both smaller and more balanced. The University of Michigan's final report on sentiment for the month showed a 2.7 point decline, with the indicator easing to 95.4 for the month. The small backslide took the indicator down from January's 11-year high, so it's not as though there is any new outbreak of the blues occurring, but rather just a trim off the top of enthusiasm, as it were.

This diminishment in confidence and sentiment is likely also reflecting the less-certain nature of the job market. We know that new hiring did decelerate to start the year, at least relative to how 2015 ended, and we also know that initial claims for unemployment benefits have become more erratic to the upside since 2015 began. Since then, claims have vacillated above and below the 300,000 level with some regularity, exceeding that threshold five weeks of the eight so far this year. As we saw none of these upward forays from Labor Day though the end of 2014, this is obviously a bit of a change to the previous pattern.

In the week ending February 21, the wobble for initial claims was again back above, with some 313,000 new claims filed during the period, but due to the moving nature of the President's Day holiday there may be some adjustment error being injected into the total. We'll get a look at labor markets next week in the February employment report, but we may only do about as well as we did in January, with perhaps 220,000 new hires (possibly less) expected to have during the month.

Despite the pop in durable goods orders above, manufacturing has slowed and is struggling a bit, as a strong dollar and weak overseas growth tempers activity. Two regional Federal Reserve Banks chimed in this week with reports on manufacturing in their districts, and there wasn't much to get excited about. The Kansas City Fed's barometer of activity eased from a value of 3 to 1 in February, its lowest reading since December 2013, while the Richmond Federal Reserve's yardstick dropped from 6 in January to zero in February, the weakest reading seen here since last March. The broadest review of manufacturing comes next Monday from the Institute for Supply Management, but since activity as measured there has been on the decline for months, the best we might hope to see is stabilization.

With the Fed in non-committal mode and with the data suggesting patience can continue for at least a while longer, interest rates in general and mortgage rates in specific have found some space to fall again. Absent some new or unforeseen financial crisis, they probably don't have all that much space to fall, but they seem likely to drift back somewhat closer toward the middle of the recent range we've see this year.

The recent rise in rates came to an end this week with a four basis point decline. Underlying influences being what they are, it seems likely that we'll experience another 3-4 basis point decline next week, which would leave us squarely in the middle of the recent high and low water marks for 2015 (3.99 percent and 3.79 percent, respectively). That said, there is a lot of fresh market-moving data out next week, including the twin ISM reports, employment situation, auto sales, imbalance of trade and more, so there is still plenty of opportunity for volatility and corresponding margin for error in the forecast.

For a longer-range outlook for rates and the economy, one which will take you up until late April, have a look at our new Two-Month Forecast. For a really long-range outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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