Mortgage Rate Trends: Weekly Market Trends & Forecast

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Keith Gumbinger    HSH.com Find archives here.

Economy Moderate, But Yellen's Words A Warning?

July 18, 2014 -- The Federal Reserve's latest review of regional economic conditions, called the "Beige Book" for the color of its cover, reported that the economy continues to grow at a modest to moderate pace in the six weeks which ended July 7. Four Federal Reserve districts characterized growth as moderate, down from seven in the previous report.

For the most part, the pace of the recovery has been one of fits and starts. Of late, however, it would appear the the economy is running at or close to its "potential," or natural ability to grow without producing much by way of inflation, and official Fed forecasts continue to expect a strengthening pace as we move forward. If it occurs, this would do so in the context of at least a less-accommodative Federal Reserve, and possibly an environment where interest rates are rising somewhat more quickly than is the current expectation. Mortgage rates would tend to rise right along with them.

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 two basis points (0.02%) to 4.22%. The FRMI's 15-year companion fell by just one basis point to tick down to 3.43%. Popular FHA-backed 30-year FRMs did not move from last week's figure of 3.94%, 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 also held steady at 3.12%.

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

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Federal Reserve Chair Janet Yellen testified before Congress last week in her semi-annual Monetary Policy Report to the Congress. While reiterating the need for low interest rates to support an economy which remains subpar, she also acknowledged that labor markets are improving more quickly than expected. In this way, Ms. Yellen was as clear as any Fed Chair can possibly be about the future of interest rates, saying, "If the labor market continues to improve more quickly than anticipated by the Committee [...] then increases in the federal funds rate target likely would occur sooner and be more rapid than is currently envisioned."

In plain English: If hiring continues at the present pace or accelerates, and if the unemployment rate continues to decline, the Fed will begin raising short term rates well before mid-2015. There are two more FOMC meetings before QE comes to an end at the end of October, and three more employment reports due before that time; if these reports are strong, changes to the Fed's interest rate policies could start before the year comes to an end (the Fed's last meeting of 2014 comes on December 16 and 17). With a renewed emphasis on labor market conditions by the Fed, it's reasonable to expect more volatility in interest rates in the days leading up to and after the monthly employment report.

Another factor which could add some volatility and lift interest rates (Fed policy change or not) is a reemergence of inflation. Price pressures have firmed a little bit lately, at least relative to the trends of last year, but still remain below the Fed's official targets. Prices of goods coming onto U.S. shores rose by just 0.1 percent in June, down from May's 0.3 lift, while goods headed elsewhere from here were actually cheaper, as export prices dipped by 0.4 percent for the month. Even with just a mild rise in import costs for the latest month, though, it is worth noting that the trend has changed from one of falling import prices (Sept 13 to April 14) to a rising one, with import costs increasing at a 1.2 percent annual clip (exports have risen just 0.2 percent over that time).

Rising prices of imported goods won't necessarily spark broad increases in costs; it would take rising wage gains for that to occur, and wages are still weak. However, these inbound cost kickers may be passed along and start to be reflected in the Producer (and possibly Consumer) Price Indexes. The Producer Price Index rose by 0.4 percent in June, with the headline rise the second highest seen in the last year. "Core" PPI, which removes volatile components like food and energy, rose a more subdued 0.1 percent, but annual inflation here is running at a 1.9 percent clip, still moderate, if at a much higher rate than seen over much of the last year.

The Fed's low-rate policies have certainly supported housing, and the slide in mortgage rates this spring no doubt is behind the improvement in the sentiment of the nation's home builders. The latest Housing Market Index from the National Association of Home Builders rose by four points to a value of 53 in July, indicating that more respondents are seeing improving conditions than not; it was only the second foray over the breakeven level of 50 this year. Sub-indexes of single-family sales moved higher (to 57 from 53), as did expectations for activity in the next six months (from 58 to 64), and even measures of traffic in model homes and showrooms rose a little, if still remaining at a less-than-stellar reading of 39 during the month. With inventories low and prices firm, builders will probably have plenty of work to do for some time, even if interest rates do begin to rise at some point.

Despite being happier, builders worked a little less in June. Housing starts slumped by 9.3 percent during the month, slipping to an annualized 893,000 rate, about the same we saw in January. The dip in starts is most likely a breather of sorts, as the last three months have hung around the 1 million annualized mark. Despite the decline, starts are running at a clip 7.5 percent above a year ago, a pretty healthy pace by any measure.

With incomes weak and consumers wary of adding to credit card balances, retail sales motored along at a slower pace in June, rising by 0.2 percent. The headline figure was dragged down a little by lower spending on autos, and leaving out those high-ticket items left a "core" sales gain of 0.4 percent. Sales have generally been softening after fairly strong months in February and March, and with consumer spending making up perhaps three-fourths of the economy, we may see a cooler period of growth in the third quarter should the trend persist.

Industrial Production (IP) advanced modestly in June, rising by 0.2 percent. Manufacturing added 0.1 percent to the tally, mining concerns continued a strong string of increases rising by 0.8 percent, but as has been the case of late, utility output subtracted from the headline figure, as it declined by 0.3 percent. In fact, utility output has declined for five straight months. Are routine processes becoming more energy efficient, or are power needs falling due to less economic growth or just fair weather? Hard to say at this point, but it is a trend worth pondering. With the percentage of industrial production floors being actively used holding steady at 79.1 percent for the month, holding a little below historic norms, let alone inflation-fostering bottleneck levels.

We may see those IP and capacity utilization numbers move higher in the months ahead, if the experiences of manufacturers in the New York and Philadelphia Federal Reserve districts are repeated elsewhere. In July, the NY Fed's Empire State index moved up 6.3 points to a value of 25.6, a four-plus year high. Down the Jersey Turnpike to Philadelphia, the Philly Fed's gauge sported a 4.1 point lift to 23.9 for the month, its best showing since early 2011. In both regions, new orders and employment gains were noted.

Claims for new unemployment benefits declined in the week ending July 12, too. The 3,000 week-to-week decline may be being distorted by lagging effects of the Independence Day holiday and by typical July retooling by automakers for the new model years. If the last two weeks are a true reading, and if the next week or so continues the pattern, we might see a July employment report which is even stronger than the 288,000 gain in June... which would bring us back around to the potential for rate volatility discussed in paragraph five, above.

Consumer moods, at least those tracked by the University of Michigan, have mostly been holding steady for much of 2014. The UMich index of Consumer Sentiment has run in a range from a flat 80.0 in March to a reading of 82.5 last month, with the preliminary reading of sentiment for July a bit lower at 81.3, but still holding in that range. Present conditions continue to be assessed as more favorably than are future expectations, but with job gains solidifying of late, both current and future assessments seem likely to improve somewhat as we go.

The Conference Board's index of Leading Economic Indicator fell in June. The LEI has mostly been pointing in a moderate upward direction since a stumble last December and in January of this year, which turned out to be months in which the economy was heading into decline. Since then, we know that economic growth has picked up, and the LEI is reflecting this. To the extent that it forecasts the future, the recent gains in the LEI suggests that growth will continue for at least the next few months, but in that regard the LEI's crystal ball is usually cloudy and a bit unpredictable.

The ups and downs and fits and starts of the recovery continue. We know the Fed is on an exit path for QE, and we now have the warning shot that short-term rates will be rising in 12 months or less. For the moment, market participants remain sanguine about the prospects for both the timing and trajectory for rates, and we continue to wander about in a narrow range, and seem likely to for a bit longer yet. Summer doldrums are kicking in, with all the inertia that they bring to all things business, and there doesn't seem to be much that will push the market strongly one way or the other at the moment.

This week, we'll see if falling mortgage rates during the end of the spring sparked sales of new and existing homes (and to what degree), we'll get the latest from the Chicago Fed, orders for durable goods and a few other items to ponder. Mortgage rates are mostly holding in place, holding in a tight range which has persisted for better than two months. No reason to expect more than a wobble of a couple of basis points in average rates (in either direction) this week.

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.

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

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