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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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No "Balance" For Fed, Japan Goes Negative

January 29, 2016 -- More signals that all is not right in the economic world were revealed this week, and interest rates legged down a bit again. That the U.S. economy lost steam in the fourth quarter of 2015 was a given, and the deceleration from a 2 percent rate of growth in gross domestic product in the third quarter to one of just 0.7 percent in the fourth wasn't unexpected.

The Federal Reserve made no change to interest rate policy this week, either; none was expected. However, ever without a rate move, the central bank managed to help roil markets anyway, as they removed from their meeting-closing statement any assessment of the current balance of risks for economic growth and inflation. Sharp-eyed analysts picked up on this immediately, and coupled with other language in the release, took it to mean that the Fed has serious concerns about the effects that current global trends will have on U.S. growth and inflation. A concerned Fed is less likely to raise rates, and this helped lend some cheer to battered stock markets and helped interest rates to fall.

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 a single basis point, easing back to an average of 3.87 percent, returning to levels seen last October. The FRMI's 15-year companion also shed just a lone basis point points from last week's total to slip to an average rate of 3.27 percent. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain considerably below their Fannie and Freddie counterparts and saw two basis points erased off of last week's tally, causing the average rate to ease to 3.70 percent. Meanwhile, with short-term rates more sensitive to Fed policy than long ones, the overall 5/1 Hybrid ARM bucked the downtrend, rising by three one-hundredths of a percent this week to increase to 3.05 percent. With the strongest portion of the downdraft in rates appearing at the end of the week, rates are poised for a more considerable decline at the calendar turns to February next week.

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

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Much of the downward pressure for rates came on Friday, when the Bank of Japan joined several other nation's central banks by making banks actually pay them interest to park excess cash reserves with them. This move is intended to have banks not hold onto this cash, but instead push it out into the markets and making more loans to consumers and businesses in hopes of stimulating growth and inflation. However, at least the initial reaction would seem to be that excess funds from everywhere got plowed into bonds instead, driving yields on Japan's sovereign bonds to record lows; German Bunds also got a significant wash of cash, and their 10-year yield dropped sharply as well. U.S. and other bonds caught a strong rally, too.

The GDP report also noted that inflation seems to be heading in the direction opposite of what the Fed is hoping. The so-called "core" Personal Consumption Expenditure measure the Fed prefers to track fell to an annual 1.2 percent rate in the fourth quarter, down from 1.4 percent in the third. More recent declines in oil and other prices are of course not included yet, but these plus the strengthening dollar make it harder for prices to get a reliable foothold. The GDP report also showed the drag on growth from the slow shedding of inventories and a difficult export climate; both subtracted from growth, even as consumer spending propped it up at a pretty healthy clip. Overall, and though certain to be revised, economic growth in 2015 was 2.4 percent -- the same as for 2014.

Although the Fed did not rule out a move at their March meeting, the practical reality is that it's increasingly unlikely to happen. Given the present state of affairs it would take a huge surge of positive economic data or a measurable uptick in inflation for the Fed to pull the trigger on a rate hike, and that doesn't seem in the offing. More likely is June, if things settle and begin to go better, but the prospects of 4 rate hikes this year (Fed's hoped-for forecast) is being replaced by market realities that suggest two or perhaps three at most. That said, it's way too early to tell.

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The Employment Cost Indicator for the fourth quarter of 2015 revealed a 0.6 percent rise in total employee compensation, the same as the third quarter. Wages rose by 0.6 percent during the period, down a tenth percent from the previous period. Benefit costs edged higher, but overall, the pattern is mild on both accounts, with wages up 2.1 percent on a year-over-year basis, while benefit costs are rising at just a 1.8 percent rate. At least at the moment, there's no sign of the kind of an upward wage trend that would help to infuse stronger inflation.

In a low interest rate environment, and after many years of gradual economic improvement, home sales have become fairly reliably firm, if still at levels well below the peaks of the last housing boom, now nearly 10 years ago. Sales of new homes rose by a solid 10.8 percent in December, climbing to a 544,000 annualized rate; if unrevised, this would be good enough for the second best pace of 2015, the best monthly showing since February, and a nice close to the year. While the gains in sales are welcome, there is a long way yet to go to get back to anything close to normal; something averaging in the mid 700,000s for sales would likely be about right. The supply of available homes ticked up to 237,000 units available, the highest figure of the expansion to date, but the gain in the pace of sales means this is just a 5.2 month supply. Homebuilders will likely be kept busy as we move into the spring homebuying (homebuilding?) season just ahead.

There's not much good news to be seen in the manufacturing side of the economy, though. Orders for durable goods slumped hard in December, dropping 5.1 percent for the month. Although orders are often erratic -- slumping one month and rebounding the next -- this was the deepest monthly drop since the midst of the last recession. Given still bloated inventory levels downstream of manufacturers, it's hard to expect much by way of improvement here very quickly. This situation of course has been exacerbated by the strong dollar, which makes it harder for our manufacturers to compete in global markets.

  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 Website Tools and Widgets
  

A couple of regional looks at manufacturing reflect the difficult climate. In January, the Kansas City Federal Reserve Bank's local gauge of activity posted a negative 9 for the second consecutive month, with contractions in orders and employment noted. Over in the Richmond Fed's district, things were a little better, as a positive value of 2 was notched, but this too was a deceleration from a reading of 6 in December, so even where there is a little glimmer of light it is a weak glow.

Labor markets continue to comfort the Fed that things are going at least OK. Claims for new unemployment benefits have been mostly heading higher over the last couple of months in a sawtooth pattern, but we did see a slight change in the week ending January 23; new applications for benefits dropped to 278,000 and this was the first time in a while where this move down was deeper than those in previous portions of the recent "saw" pattern. We'll get a big-picture look at employment metrics next Friday, which may see us closer to trend growth of 200,000 or less rather than another near 300,000 blowout level.

Consumer moods were a mixed bag in January. The University of Michigan's final tally of Consumer Sentiment for January edged lower, shedding 0.6 points to land at a flat 92.0 for the month. Assessments of present conditions were downgraded a bit (-1.7 points) and expectations for the future remained unchanged on a month-to-month basis. That said, and as measured by the Conference Board, Consumer Confidence rose by 1.8 points to land at 98.1 for the month, about in the middle of the range seen over the last year. Unlike the Sentiment index, assessments of current conditions held steady, so all the movement in the indicator came from expected future improvement. Buying plans for autos and homes both moved higher, but expectations for future inflation moved lower again. Consumer psychology in terms of expected inflation plays into the Fed's thinking about where prices are likely to go in the future... and less expected inflation can turn into less actual inflation, and vice versa. It's a fair bet that along with the PCE figures in the GDP report that the Fed is carefully watching this trend, too.

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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
  Jan 22 Dec 25 Jan 23
6-Mo. TCM 0.38% 0.49% 0.08%
1-Yr. TCM 0.46% 0.65% 0.17%
3-Yr. TCM 1.09% 1.31% 0.87%
5-Yr. TCM 1.47% 1.71% 1.35%
FHFA NMCR 3.97% 3.85% 4.00%
SAIF 11th District COF 0.644% 0.649% 0.671%
HSH Nat'l Avg. Offer Rate 3.88% 4.04% 3.81%

So a wobbly and unstable economic world continues, at least for now leaving the U.S. perhaps the most reliable place to park money. As long as this continues to be the case, we'll continue to attract funds, excessive or otherwise, which in turn will continue to temper and tether interest rates. In some ways, this might even be considered an echo to the "conundrum" described by former Fed Chairman Greenspan back in the mid-part of the last decade; the Fed was raising short-term rates steadily at the time in the midst of 17 consecutive increases, but despite the Fed's moves, long-term rates refused to budge. Now, as then, there was likely plenty of money washing around the world after a long bout of stimulus (though considerably smaller than that seen today) looking for a place to go, and any return on capital (even if puny after currency exchanges and taxes) is still better than no return or a loss.

Forecasting rates in this kind of environment is more than humbling, and we'll need a reversal in trend to rescue our current two-month forecast, to be sure. At the very least, we will begin next week with interest rates stepping down, but there is plenty of fresh important data that may sway the markets, too. For the last couple of years, a weak start to the year has been followed by a strong uptick in growth by the time the second quarter rolls around. Given that the current weakness started earlier (4th quarter) it remains possible that we could see an earlier improvement, too. That said, January's data is just starting to show, and probably won't be much better than December's, if at all.

Rates are likely to end the next week down a bit from here, probably 6-8 basis points or so for our FRMI. Will the groundhog signal six more weeks of economic winter or an early warming trend? We'll have to wait to see.

For a longer-range outlook for mortgage rates and the economy, one which will take us almost to Daylight Savings Time in March, 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 new 2016 outlook.

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

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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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