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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Fed Spooks Markets, Rates Edge Higher

New Two-Month Rate Forecast at HSH.com

May 20, 2016 -- Recently, we've found ourselves in the middle of a lukewarm economic period and at a time when inflation, if firming, isn't much to talk about, and financial markets have been fairly quiet. In turn, this has allowed interest rates to bump along recent bottoms, but into this quiet came a bit of a surprise for the markets this week in the form of a central bank that seems likely to actually lift short term rates before too much more time has passed.

To be fair, this shouldn't have been all that surprising, but the minutes of the April meeting contained what seems to be a more "hawkish" tone than that which was presented in the statement which closed last month's meeting. Although offered with plenty of caveats, the minutes noted:

"Most participants judged that if incoming data [on growth, inflation and labor markets] were consistent with economic growth picking up in the second quarter [...] then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June." This was by no means a unanimous stance -- there were plenty of "if" and "whether" concerns about these items from FOMC members -- but "most" likely means a majority is leaning in this direction.

The Fed also rightly worried that "market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond"; In recent days, several Fed speakers and regional bank presidents have made it clear that June is "on the table". Given the reaction on Wednesday and Thursday, it's clear that markets weren't prepared for this kind of message, let alone a rate hike. As such, mortgage and other interest rates initially bumped higher, but have since settled back a bit.

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 rose by two basis points (.02 percent), returning to an average rate of 3.70 percent. The FRMI's 15-year companion managed a three basis point increase, rising to an average rate of 3.06 percent for the period. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain considerably below their Fannie and Freddie counterparts and increased just a touch with a single basis point rise to lift the average interest rate back to 3.53 percent, good enough to tie the year's low. Meanwhile, the overall 5/1 Hybrid ARM, more sensitive to any Fed move, rose by six one-hundredths of one percent to increase to 2.94 percent for the week, it's highest value in about seven weeks.

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

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The question now facing the markets and Fed as it pertains to the incoming data is "how strong is strong enough?" The Fed last moved rates in December, at a time when growth was cooling, and core PCE inflation was a couple of ticks lower then now. Since that time, about 750 thousand more folks have found jobs, economic growth has faltered but seems to be warming and inflation is a touch firmer. In the fourth quarter of 2015 GDP was in the process of falling to 1.4 percent, and perhaps this is the key -- if signals indicate it is now warming to 1.4 percent or above, this might be enough for the Fed to make a June move. Perhaps.

Much of the data this week (and recently) has been mixed to somewhat warmer. The Chicago Federal Reserve Bank release its National Activity Indicator for April this week, and this amalgam of some 85 economic indicators improved to its best level since January, managing to climb to a positive 0.10 for the month. With a neutral level of zero, The NAI seeks to show whether the economy is growing above or below its so-called "potential", or natural rate of growth, believed to be consistent with about a 2.6 percent GDP rate. As such, and for the month of April at least, growth appears to have improved a bit, even as the trend remains quite soft with just three positive readings achieved in the last year (two of them have come in the last four months, though).

Housing stars remain largely rangebound at a moderate pace. In April, an annualized 1.172 million starts were tallied; this was a 6.6 percent gain over March, and improvements in both single family (+3.3 percent) and multifamily (+13.9 percent) contributing to the month-over-month gain. Permits for future activity also bumped higher, rising by 3.6 percent to a 1.116 million (annualized) rate. Despite the gains, we've trod this ground before -- housing starts have held between about 1.22 million and 1.07 million annualized for a years' time now and there little indication of any break to the upside or downside to be seen.

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Good, steady activity is sufficient to keep homebuilders happy. The National Association of Home Builders index of member sentiment for May held at a steady 58 for a fourth consecutive month, certainly solid enough if down from the best levels of the expansion to date. The measure of single-family sales held at a very good 63 for the month, traffic at sales offices and model homes remained at an ok level of 44, while expectations of activity over the next six months moved higher. We'll see how sales of new homes fared in April next week, but given the above, odds favor that a moderate pace of sales will have occurred.

Sales of existing homes have been rather more erratic when compared against sales of new homes. In April, a 1.7 percent gain was reported by the National Association of Realtors, climbing to a 5.45 million annual rate of sale, the fastest annualized pace since January. Perhaps as important as the gain in sales is that inventory levels improved a bit, rising to a still-lean 4.7 months but improved compared against figures recorded from December though March. Depending upon what becomes available for sale and actually sells, more inventory may help to lower the trajectory of home prices, which in some markets are becoming unaffordable. However, overall median home prices in April were some 6.3 percent higher than a year ago, so any softening is not yet evident.

Industrial Production popped higher in April, rising by 0.7 percent, its best monthly showing in the past year, and nice rebound from a 0.9 percent decline in March. Manufacturing rose by 0.3 percent, erasing a like-sized March decline, utility output surged by 5.8 percent, but mining (oil, gas, etc.) continued a long string of declines, sliding by another 2.3 percent last month. The overall improvement was sufficient to lift the amount of production floors in active use to 75.4 percent, but this remains well below normal of about 80 percent usage. Still, improvement is improvement.

If the economic data is somewhat warmer, so too are price pressures. The Consumer Price Index for April rose by 0.4 percent, strong enough to be the biggest one-month rise since early 2013. Over the last month, so-called "core" CPI (a measure that excludes food and energy due to their volatile nature) rose by 0.2 percent. The increases were not alarming, especially since that even with April's bounce, CPI is running at just a 1.1 percent annual rate. However, "core" CPI isn't as quiescent; at 2.1 percent for the month, and even though the Fed prefers a different measure, core CPI has now run above the Fed's 2 percent speed limit for the last six months.

  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

A couple of local measures of factory activity both had hopeful months in April, only to falter again in May. The New York Federal Reserve's measure of manufacturing activity in the Empire state saw an 18.6 point drop, slumping from a positive 9.6 in April to a negative 9.0 in May. New orders and declining inventories pulled the top-line figure down, but employment metrics managed to hold meager gains.

The story was much the same down the New Jersey Turnpike in the Philadelphia Federal Reserve district. The Philly Fed's indicator didn't plummet (that happened a month ago), but remained at a mild negative of -1.8 in May, with declines in new orders, stockpiles of goods and employment all recorded. We'll see a couple more local Fed reports before the calendar turns and we get an update ISM reading, but it would appear that the contribution to growth from manufacturing will remain tempered for the moment.

Claims for new unemployment benefits had a short-lived spike in the week ending May 7 which was largely erased last week. In the week ending May 14, initial claims dropped by 16,000 to 278,000, a figure closer to trend than not. The last three week have seen claims running rather above levels tallied in much of March and April and it could be that job gains are slowing a bit. We'll need to see more evidence in the coming weeks to make that assessment, though.

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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
  May 13 Apr 15 May 15
6-Mo. TCM 0.37% 0.36% 0.09%
1-Yr. TCM 0.53% 0.54% 0.24%
3-Yr. TCM 0.89% 0.89% 0.96%
5-Yr. TCM 1.21% 1.22% 1.54%
FHFA NMCR 3.73% 3.88% 3.77%
SAIF 11th District COF 0.678% 0.670% 0.700%
HSH Nat'l Avg. Offer Rate 3.68% 3.67% 4.00%

A rosier economic picture can be seen though the latest review of Leading Economic Indicators. The Conference Board's forward-looking tool rose by 0.6 percent in April, the strongest figure since last June and an indication that the second quarter of 2016 got off on a much better foot than did the first. The LEI purports to foretell what economic activity will come in the months ahead, but probably better reflects the climate in which its components are gathered. If nothing else, perhaps May will see a little momentum, even if we cannot be certain what the future will bring.

Markets got a little spooked by the fairly candid and direct message in the Fed's April minutes this week, as they largely contrasted with the statement that closed that meeting. No one should be surprised that the Fed is champing at the bit to raise rates; it has made its intentions as clear as it can for a good while now, but the data simply hasn't been such as to support a move.

Conditions are changing, though, and we may soon approach a place where the Fed feels comfortable in making a move. Could that be June? Possibly. There is quite a bit more data that will become available before the next Fed meeting on June 14 and 15, but even if they do give that date a pass, it won't take much to see a July move looming in the windshield.

We have some time before that comes, though, and even though mortgage rates have firmed a touch this week and will probably do so again next week, rates aren't even as high as they were in March (and won't be next week), let alone challenging 2016 "highs" of just above 4 percent.

There's some more data out to chew on next week, including new home sales, durable goods orders, an update to first quarter GDP and final May consumer sentiment reports. A mild uptick in rates is expected, something in the neighborhood of 4-5 basis points in HSH FRMI.

For a longer-range outlook for mortgage rates and the economy, one which will run through mid-July, have a look at our new Two-Month Forecast. If you're wondering where we'll go after that, you might have a look at our 2016 outlook.

For a really long-range outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".


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).

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