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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Rates: Firmer, But More Volatility To Come?

October 13, 2017 -- Mortgage rates legged a bit higher this week, as expected, but even at ten-week highs for the average conforming 30-year fixed rate mortgage we're still holding south of the 4 percent mark. While it looks at the moment that the two-week small bump in rates will give way to leveling next week, we could be entering a period a bit more bumpy than that to which we've become accustomed.

Aside from the usual interest-rate movers of growth and inflation -- signals of which are solid-to-moderate and steady-to-firming respectively at present -- we have three considerable unknowns that will soon be added into the mix. The first is any additional fiscal stimulus in the form of tax reform or tax cuts; you may recall that in the weeks post-election last year that mortgage rates leapt higher as expectations for a goosing of economic growth was in the offing. Since then, a lack of success on other fronts has led to a tempering of expectations about the ability of the Trump administration to effect stated changes, but there is a chance that some form of tax reform or cuts will make it through the process. Another item, and as previously announced, the Federal Reserve has or will soon begin reinvesting fewer inbound proceeds from its mortgage and treasury bond investments, which may tend to firm mortgage rates to a degree, and we may soon have a decision on whether or not we will have a new Chair of the Federal Reserve.

Gradual increases in rates from the unwinding of large-scale asset purchase programs should present no specific addition of volatility, but it's hard to actually know how markets may react, since such a program has never been executed by any central bank anywhere. Currently, other major central banks are still operating their stimulus programs and so it is not as though the market will be suddenly flooded with bonds of all stripes, but there may be some additional agency debt and MBS offers that need to be mopped up from time to time. Any supply of these in excess of demand would tend to depress prices of these instruments, in turn lifting yields and market interest rates for mortgages in kind.

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As the economy continues to grow at a mostly moderate pace, as it has now for a good number of years, inflation hasn't been able to garner a reliable foothold, confusing markets and confounding model expectations. For reasons not completely clear, whether from differing transient factors that seem to come with regularity or whether something more structural is taking place, price pressures seem more likely to inch higher than bounce there, but a growing global economy may see prices edge higher in unison as major economies regain strength. There are signals that inflation in the U.S. has leveled, and given the above, we could see some firming in the months just ahead.

The Wall Street Journal noted on Friday that the Trump administration is considering four (or perhaps more) candidates to take over the Fed at the end of Chairwoman Yellen's tenure. She is among the candidates being considered and would of course have the least effect on market volatility, as might potential candidate Jerome Powell. However, two candidates with very different monetary philosophies could upset the applecart to a real degree, as they would likely move the Fed in a very different direction that it has been for a good stretch of years now. potential candidates John Taylor and Kevin Warsh both are said to favor tighter monetary policy; Mr. Taylor and Mr Warsh have been critics of Fed efforts to stimulate economic growth, and Mr. Taylor prefers a rules-based method of policy rather than the ad-hoc method now in place.

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Should it come, how financial markets might react to a change is unclear, but this could inject some additional volatility into the mortgage market. Does this all argue for higher mortgage rates? No, not specifically, but a growing economy, with perhaps a touch more inflation and somewhat more bonds needing to be absorbed at times does indicate a bit more firmness ahead... and a material change to the Fed could exacerbate this to an unknown degree.

As well, and for December at least, it does appear that the Federal Reserve will again lift the federal funds rate. The minutes of the September FOMC meeting suggested as much, as did the summary of economic projection from Fed members released at the end of the meeting. Futures markets presently place an 82 percent chance of a change in December, and while there is no direct relationship between the fed funds and long term mortgage rates there would likely still be some effect on rates, moreso if the Fed indicates at the time of the change that more might be in the offing soon.

Somewhat higher rates may be inevitable, but even modest increases that don't even see rates break above 2017 highs of 4.3 percent for conforming 30-year FRMs would not be welcomed by a housing market that can't seem to get any traction. Refinance activity is already quite slow and home sales are suffering from a lack of inventory and challenging affordability in many places. Should they come, higher interest rates would tend to quell demand for a time; lower demand could loosen up inventories of homes for sale a little bit and cool price gains, factors that might ultimately benefit the market, but probably not by much and certainly not in any immediate or pronounced manner.

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   Resources: Housing & Salary Study ARM Index Data Home Value Estimator

Retail sales in September rebounded smartly after an August dip, rising by 1.6 percent. Of course, a big contributor to the whole were sales at gasoline stations as a mass exodus from Florida took place during the month, and right on the heels of Harvey's effects in Texas and other southern states. However, leaving out gas and sales of autos (also improved strongly as storm-damage vehicle replacement kicked in) still left a nice 0.5 percent gain, good enough for the second strongest seen in the last 8 months. Gains in sales were fairly spread out among the spectrum of retailers polled, as well, so it was a broad-based improvement. Consumer spending powers the economy, and the rebound here should help lift GDP growth for the third quarter when the results are tallied. While the official initial GDP report comes at the end of this month, a current estimate by the Atlanta Fed suggests about a 2.5 percent rate for the quarter, certainly a solid pace.

As has been the case for a long stretch of time, inflation isn't currently much of a concern. That said, there have been some recent signals that a bit of an uptrend is quietly happening. By way of new examples, the latest measure of Producer Prices for September was released this week, where a 0.4 percent rise in prices upstream of the consumer was both expected and received. Energy prices spiked last month, contributing to the headline figure, which moved to a current annual rate of 2.5 percent. While still fairly mild, it was the highest annualized level seen since April. So-called "core PPI", a measure that excludes energy and other volatile components also moved higher, rising 0.3 percent for the month (and to a 2.2 percent annual rate, highest since May). Inflation as measured here is moving a bit higher after summer declines.

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Much the same tale was told in the latest report covering consumer prices. The headline CPI rose by a stout 0.5 percent for the month, driven by fast-to-rise, slow-to-decline gasoline prices. Food costs remained at a subdued 0.1 percent change for the month, and the "core" measure of consumer prices also only rose by 0.1 percent. Top-line CPI is now running a a 2.2 percent clip due to the energy-cost spike and will probably slip a but next month, but core CPI has held at a stead 1.7 annual percent in each of the last five months. True, prices are running rather below the Fed's hoped-for level and remain soft, but it's also true that they stopped declining months ago, and may be poised to start to firm again, as they were leading up into 2017. We'll see.

Inventory holdings up and down the supply chain collectively expanded by 0.7 percent in August, as did the aggregate measure of sales. Manufacturers increased holdings by 0.45 percent; wholesalers by 0.95 percent and retailers by 0.73 percent. With sales rising as fast as stockpiles, balance in incoming and outgoing supply remained a 1.38 months of supply on hand relative to sales, and such a balance favors additional ordering to factories, helping to support economic activity in the manufacturing sector, which has been doing quite well of late.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Oct 06 Sep 08 Oct 07
6-Mo. TCM 1.19% 1.15% 0.47%
1-Yr. TCM 1.31% 1.23% 0.65%
3-Yr. TCM 1.59% 1.40% 0.97%
5-Yr. TCM 1.89% 1.65% 1.24%
FHFA NMCR 4.05% 3.99% 3.62%
FHLB 11th District COF 0.732% 0.707% 0.693%
Freddie Mac 30-yr FRM 3.85% 3.78% 3.42%

Storm-effects fading into the rear-view mirror now means that a high-frequency labor market signals may again be useful. After a number of elevated weeks, initial claims for unemployment benefits dropped back to something closer to the previous trend with 243,000 new applications for benefits filed in the week ending October 7. Labor signals have been messy since the storms and totally distorted the September employment report. Pre-storm figures told of a very solid labor markets, and while this underlying trend probably continued, it would be useful to be able to actually see evidence rather than try to reckon it.

Plain and clear was a sizeable bounce in Consumer Sentiment. The initial report for October from the University of Michigan sported a 6-point rise to a 101.1 level, the highest monthly figure since January 2004 (should it hold for the entire month). Assessments of present conditions and expectations for the future both rose soundly, adding 4.7 points and 6.9 points, respectively. though the relationship is tenuous, happier consumers are believed to be likely to open their wallets to a greater degree and "stimulate the economy"; to the extent that this is and continues to be the case, we could be coming into a very robust holiday shopping season before too much more time passes.

Despite significant disruptions and many challenges, most, if not all, economic signals are pointing to a very solid period of growth with little inflation. This has firmed interest rates and mortgage rates just a little; current signs don't suggest that any sizable upward move is nigh. Interest rates at the end of the week were actually a little bit lower than they were earlier in the period, but probably not so much as to pull rates down as we turn into next week. We think that we'll see no change in conforming 30-year fixed rate when Freddie Mac reports next week, but we could see a decline of a basis point. We should enjoy the stable and low-rate environment while it lasts; although rates will likely continue to be quite low, it may get a little less calm before long.

For a forecast for mortgage rates that carries almost to the end of the year, have a look at our Two-Month Forecast. Although the clock is ticking on 2017, you might also have a glance at our recent mid-year update to our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing.


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 Calculator to learn exactly when you will no longer have a mortgage balance greater than the value of your home.

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