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Mortgage Rate Trends: Weekly Market Trends & Forecast

HSH Market Trends
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Mortgage Rates A Little Lower; 97 LTV Returns, More On HAMP

December 12, 2014 -- Mortgage rates mostly continued a slow drift in the direction of least resistance this week amid a light slate of new economic data. To be fair, rates have been mostly moving in a sideways pattern for weeks, with just the barest of down trends in place despite signs that the economy is picking up strength.

Rates are mostly anchored in place by a number of factors, including slow growth (if any) in Europe and Asia, and lately, by intensifying deflationary forces from a plummet in oil prices. Falling energy and materials costs are countering the Fed's and other central bank efforts to produce a desired level of inflation; however, the sharp and ongoing slump in gasoline prices is producing an unexpected (and welcome) windfall for consumers which should buttress economic growth now and in the weeks and months ahead. For many folks, it is the pay raise (or tax cut, if you prefer) they have been waiting for, even if it may complicate monetary policy for the Federal Reserve. If the economy is growing but inflation is waning, the Fed can afford to keep rates lower for longer, but they have already expressed a desire to start to lift rates pretty soon.

The Fed meets next week to discuss such things, and changes to their message (if not to policy itself) could change the direction for mortgage rates to some degree.

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 another two basis points this week (0.02%) to ease to 4.03 percent. The FRMI's 15-year companion actually increased by three basis points, ticking upward to average interest rate of 3.37 percent. Fully-insured FHA-backed 30-year FRMs slipped backward by two basis points this week and now average 3.74 percent, while the overall 5/1 Hybrid ARM moved the most, adding six basis points to climb to 3.15 percent for the week. Thirty-year FRMs are now at new lows for 2014 by a single basis point, and have returned to levels last seen in May 2013. Averages for other popular products are very close to 2014 bottoms or more.

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

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Typically, a growing economy should produce higher price pressures as demand for goods, services and credit all increase. That's not much been the case for this recovery, as global events have served to mostly temper inflation. With GDP running at a fairly solid rate and signs that growth is likely to continue, the Fed would like to start preparing the market for an eventual rise in short-term rates sometime next year. It is expected that the Fed will make some changes to its message at the close of its two-day get-together next week, probably dropping or modifying the outlook that short-term rates would remain unchanged for a "considerable time" now that QE is essentially in runoff mode.

With rates at near-zero, the Fed would only have unconventional tools such as QE to use if meager inflation should become deflation; they would much prefer to have more conventional tools, such as adjusting the Federal Funds rate, to combat slow growth at their disposal. The problem is that interest rates can't go below zero, leaving the Fed no leeway from present levels; worse, falling inflation makes it harder for the Fed to raise rates, as higher rates would tend to temper growth, which in turn would tend to lower inflation. It's fair to say that low and falling inflation is a problem the Fed would prefer not to have right now.

And prices are declining at least some levels. The Produce Price Index declined by 0.2 percent in November, wiping out October's 0.2 percent rise. PPI has now declined in three of the last four months, and the headline figure is already running at a subdued 1.4 percent annual rate. "Core" PPI, a measure which excludes volatile elements like food and energy costs, also declined, falling 0.1 percent during the month, contributing to a muted 1.5 percent increase in core PPI over the last 12 months.

The costs of goods coming onto U.S. shores are falling, too. Import prices slumped by 1.5 percent in November, fast on the heels of a 1.2 percent decline in October and a fifth consecutive decline. Costs of inbound goods are 2.3 percent lower over the past year, and still falling. This decline of course would be enhanced by falling prices of petroleum products, but even leaving them out of the equation still saw a 0.3 percent decline in costs, a declining pattern which has persisted for the last four months. Our stronger dollar has been putting downward pressure on import costs, but in turn makes our goods more expensive to foreign buyers, making it harder for exporters to compete and trimming their margins. Export costs declined by a full 1 percent in November, have been falling in four of the last five months, and are 1.9 percent lower this year than last.

What's the new enhancement to HAMP worth to a troubled homeowner? Read our new analysis
The Value of HAMP Enhancement.

Of course, falling prices for goods and fuel are to the benefit of consumers, especially as the economy is firming and wages are edging higher. Retail sales rose by a solid 0.7 percent in November, besting forecasts of a 0.4 percent gain, and the increases were both widespread and strong. Even excluding the effects of pricey autos and falling gas prices still left a 0.6 percent gain, and retailers may have a very solid holiday season when all is said and done.

The broadest measure of inventory levels throughout the economy's supply chains rose by 0.2 percent in October. Manufacturers, probably concerned about export demand, added just 0.08 percent to their holdings, while wholesalers added 0.4 percent to their stockpiles, and retailers just 0.18 percent. For the most part, sales are keeping an even pace with inventories, and the aggregate measure of goods on hand relative to sales remained at 1.3 months. With retail sales flaring higher, it's a good bet that more orders will be placed at wholesalers and manufacturers as a result, further contributing to the economic expansion. The replenishment of inventories was an important component of the recovery in its earlier stages, but has cooled over the past year.

Retail sales are no doubt enhanced by folks having jobs, or at least retaining them. The outsized employment report for November told of a sharp pickup in hiring, while weekly unemployment claims point to a diminishment in layoffs. In the week ending December 6, some 294,000 new applications for unemployment benefits were filed, down 3,000 from the prior week. Excepting a one-week spike, claims have been below the 300,000 level for months, indicative of a solidifying job market.

Falling gas prices and perhaps a dash of holiday cheer have lifted spirits in early December, according to the latest University of Michigan Survey of Consumer Sentiment. The preliminary reading for December was a value 93.8, a rise of 4.3 points from November's final report and near an eight-year high. Assessments of present conditions moved a few points higher and improved on last month's gain, while hopes for the future rose a fat 6.2 points, so the longer-term outlook is becoming rosier, too.

Mortgage availability is gradually improving in a number of ways. This week, FHFA announced the details of how Fannie Mae and Freddie Mac will again start to purchase loans with as little as 3 percent down. At least one industry website called it a "game changer", but the reality is probably not. Although Freddie stopped backing 97 percent loans a number of years ago, Fannie was doing them up until November 2013, arguably with limited effect. The new availability of these products should be in the market as early as next week, but we don't expect any huge rush or surge of business for them.

These will compete effectively against FHA-backed loans, and their primary appeal will be a lower cost for mortgage insurance, which unlike FHA-basked loans, will also be cancelable at some point in time. Starting with only 3 percent down, that point will of course be well off into the future, especially if home price increases remain modest. This reintroduction of the My Community Mortgage (MCM) program is aimed squarely at first time homebuyers, and borrowers will need to endure a credit counseling program in order to be eligible; Freddie's program will have income limits, too. One deterrent to lenders jumping on this bandwagon is that the lender must make available post-purchase early delinquency counseling, should the borrower fall behind in making payments, and for a period of seven years.

Although news reports said Fannie and Freddie will back these loans from borrowers with FICO scores as low as 620, Fannie Mae documentation for the MCM suggests FICO 660 or FICO 680 may be the minimum. It also bears noting that the attraction of these loans may be tempered somewhat by market-based differences in pricing; in the current interest rate environment, even factoring for reduced risk-based Loan Level Pricing Adjustments, MCM mortgages will carry an interest rate of perhaps a half percentage point higher than that available for a comparable FHA-backed loan. We'd need to run though the math to see how that would play out for a borrower over time; please let us know if you might like to see this comparison.

See fresh mortgage rates every day at HSH.com Follow us on Twitter for even more need-to-know news!
Does mortgage history repeat? Usually. Find out what happened last week/month/year with MarketTrends archives!

HSH's Statistical Release features charts and graphs for eleven mortgage products, including Hybrid ARMs.
Our state-by-state statistics are now here.
Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Dec 05 Nov 07 Dec 06
6-Mo. TCM 0.08% 0.06% 0.10%
1-Yr. TCM 0.15% 0.12% 0.13%
3-Yr. TCM 0.98% 0.97% 0.60%
5-Yr. TCM 1.60% 1.63% 1.46%
FHFA NMCR 4.11% 4.06% 4.38%
SAIF 11th District COF 0.671% 0.663% 0.957%
HSH Nat'l Avg. Offer Rate 4.05% 4.11% 4.49%

And speaking of math, last week we outlined here the enhancements to the HAMP program, which included a new $5,000 principal reduction after the sixth year and a re-amortizing of the loan. This is a pretty powerful enhancement, and we thought it worth running through the numbers to see how much this might mean to a given homeowner. The results are considerable; in one simple example, a HAMP borrower will get a $20,000 windfall compared to a non-HARP counterpart. You can review the analysis in our piece entitled The Value of HAMP Enhancement.

Back around to mortgage rates, there's simply not much to push them around at the moment. The Fed meeting next will will stir markets somewhat, as it usually does, and the Fed will likely point to the strengthening of the economy as it changes its choice of words describing how long it will be before rates will start to move. With regards to inflation, the Fed is likely to acknowledge both the stimulative effect of lower gas prices even as they present what are probably transient deflationary pressures.

Aside from the Fed meeting, we'll get a glance at some housing numbers from November, the Consumer Price Index, Industrial Production, Leading Economic Indicators, and more. It's a fair bet that all these will be varying shades of green, and that the path of least resistance for mortgage rates will remain downward for the moment. We'll figure on a downshift of a few basis points for next week, even as we start to contemplate the next Two-Month Forecast and put the finishing touches on our annual outlook for 2015.

For a longer-range outlook for rates and the economy, one which will take you up until mid December, take a look at our new Two-Month Forecast. To learn where we think the Federal Reserve will move interest rates in the years ahead, 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 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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