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Mortgage Rate Trends: Weekly Market Trends & Forecast

HSH Market Trends
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Rates Continue Rise As Fed Outlines Future Plans

New at HSH.com: Federal Reserve Policy and Mortgage Rate Cycles

September 19, 2014 -- Anyone who follows the economic tides should have been expecting this week's small upward pop in mortgage rates. After all, we've had pretty solid figures regarding growth for several months now, all with nearly no effect on interest rates. We generally had more of the same this week, but also got some clarity from the Federal Reserve regarding how (if not when) it will "normalize" interest rate policy in the years to come.

In the meanwhile, we'll need to contend with the end of Quantitative Easing (QE) and the uncertainty of a "considerable time" before the Fed begins to make policy changes. Uncertainty in markets usually translates to volatility, and after a several month stretch of tranquillity, we will likely need to become more accustomed to moves in rates such as the one this week.

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 moved up by another six basis points (.06%) to rise to an average rate of 4.29 percent, the highest average since early May. The FRMI's 15-year companion also rose by six basis points to edge up to an average rate of 3.54 percent, also an early May level. Fully-insured FHA-backed 30-year FRMs added eight basis points to last week's total, as these lowest-priced fixed rate mortgages returned to a flat 4 percent level this week. Finally, the overall 5/1 Hybrid ARM did move higher, but only half the amount seen in the FRMI, with a three basis point increase leaving this average at 3.21 percent, very close to a 2014 high.

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

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The two-week bump in mortgage rates has totaled about one eighth of one percentage point for HSH's FRMI, good enough to put to put a near perfect bookend on the summer valley for rates by returning us to May's levels. Despite the rise in rates, they remain well below where they began the year.

Aside from chopping another $10 billion off of QE purchases of MBS and Treasury bonds at the end of its meeting this week, the Fed provided a blueprint for how it will conduct policy as they hold onto a bloated balance sheet. The Fed intends to set a target for the Federal Funds rate -- the interest rate banks charge one another for overnight loans -- and use the interest it pays banks for holding onto excess reserves (IOER) as a means to help enforce that level. At the same time, it will employ a reverse-repo arrangement with non-bank entities (a process where the Fed takes cash from these firms and replaces it temporarily with securities) in order to help control the amount of cash sloshing around the economy. In all, it will set a policy rate and then employ a means by which to manage both the low and high ends of it. This will be in place at least until the Fed's balance sheet is back to normal, which could be until 2024, if not longer.

The Fed also noted that after QE ends, it will continue to recycle funds from maturing mortgages and Treasuries back into more purchases of the same, but once short-term rates begin to be lifted, this will cease. Presently, the Fed expressed no desire to sell of any of its holdings (and probably wouldn't say that it has any long-range plans to do so, at least at this point) but we wouldn't rule this out forever, especially if supply of certain MBS or Treasuries becomes limited as time passes. After all, strong demand for these would tend to push rates down, and if that isn't the Fed's intention at the time, releasing some of these holdings would tend to lift them back up again.

We've written a new analysis piece on where we think the Fed will go with rates and how long it'll take them to get there. Thankfully, the Fed's latest projections seem to concur with our analysis, and if you have an interest in what may happen to mortgage rates of a longer horizon, you should read "Federal Reserve Policy and Mortgage Rate Cycles".

If HSH's weekly MarketTrends newsletter is the only way you know HSH, you need to come back and check out HSH.com from time to time. You'll find new and changing content on a regular basis, unique calculators, useful insight, articles and mortgage resources unlike anywhere else on the web.

In the meantime, we still have some pretty solid economic news to drive rates. While the economy is performing pretty solidly at the moment, it bears noting that the Fed's latest projections for the economy marked down economic growth for 2015 somewhat, with June expectations of perhaps a 3.1 percent rate for 2015 GDP now reduced to about 2.8 percent.

The housing market continues its slow recovery, but to hear the homebuilders tell it, things are looking pretty rosy right now. Although housing starts declined by 14.4 percent from an outsized July, much of that decline came from the ever-volatile multifamily sector, which cratered by about 32 percent. Single-family starts slipped by just 2.4 percent, and overall, starts during the month simply fell back to about average for 2014. Permits for future activity slipped by 5.6 percent, too, but all measures at the moment are above 2013.

Perhaps that's why the homebuilders are so happy. In September, the National Association of Homebuilders index of member sentiment rose to a nine-year high reading of 59, with measurable improvements in single-family sales, open house and showroom traffic as well as expectations for the next six months. The August report on sales of new homes comes next week, but there's been nothing in the recent pattern to suggest a reason for such ebullience. Perhaps August was a very good month; we'll see.

A couple of localized measures of manufacturing activity point to ongoing strength. The latest Empire State Manufacturing Index from the Federal Reserve Bank of New York rose to a value of 27.5 in September, well above expectations and a sizable improvement on August's 14.7 reading. In fact, it was the highest monthly level for the index in some five years. In the report, new orders moved higher but employment gains were still positive if more muted than in recent months. Down the New Jersey Turnpike to the Philadelphia Federal Reserve's territory, their barometer slipped back a little bit, landing at a very solid 22.5 for September, down from an outsized value of 28.0 in August. New orders remained strong and employment conditions moved sharply higher.

Industrial Production eased by 0.1 percent in August, pulled backward by slippage in manufacturing and mining. For only the third time this year, utility output increased, rising by 1 percent and keeping the headline figure from easing more. The percentage of production floors in active use also eased back from recovery highs, declining by 0.3 percent to 78.8 percent. The decline in manufacturing and in utilization may be due to a late automotive factory retooling cycle this year, and so is probably a temporary downward blip.

Mortgage and other interest rates would be moving higher if there was growing concern about price pressures. "Inflation has been running below the Committee's longer-run objective" the Fed noted in the release which closed their meeting, even as the price measure the Fed prefers has moved upward somewhat this year. Producer prices failed to move at all in August, falling short of a 0.1 percent expected increase. For the year, PPI is now running at a 1.8 percent rate. "Core" PPI (a measure that does not include the most volatile components) is now running at a 1.6 percent annual clip.

Downstream where any cost increases must be borne, the Consumer Price Index actually declined during August, with the headline figure dragged down by falling energy prices. That's good news, even as rising food prices continue to pressure household budgets. Core CPI was unchanged in August, and over the last 12 month period, both headline and core prices have climbed by 1.7 percent; over this time period, energy costs have increased by a scant 0.3 percent, but food costs are rising at a 2.7 percent clip. Still, inflation remaining below the Fed's 2 percent speed limit means they have leeway in keeping rates low, and tranquil inflation also keeps the bond market quiet, too.

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
  Sep 12 Aug 15 Sep 13
6-Mo. TCM 0.05% 0.05% 0.03%
1-Yr. TCM 0.11% 0.10% 0.13%
3-Yr. TCM 1.06% 0.89% 0.88%
5-Yr. TCM 1.78% 1.59% 1.73%
FHFA NMCR 4.09% 4.08% 3.55%
SAIF 11th District COF 0.676% 0.668% 0.954%
HSH Nat'l Avg. Offer Rate 4.23% 4.20% 4.76%

Claims for new unemployment benefits looked to find some post-holiday balance. In the week ending September 13, only 280,000 new applications for benefits were filed around the country, more than reclaiming the spike of just a week ago. Claims holding at or below 300,000 do point to a solidifying job market, and we've been holding around that level for the past two months, even if the last employment report was lackluster.

Future prospects for the economy continue to be bright, if a little less so, according the the Conference Board's index of Leading Economic Indicators. The LEI rose by 0.2 percent in August, a seventh consecutive positive reading (and 12 of the last 13) even as it eased down from a strong 1.1 percent gain in July. To the extent that it foretells economic activity, we should see continues growth, but the LEI may better reflect the conditions during the month in which its components were gathered. Regardless, we are and are likely to remain in a period of expanding activity.

A busy week of data and Fed, and the second meaningful uptick in mortgage rates in as many weeks. We'd need to see seven more increases just like this week's to get us back to the highest levels of the year, and while it's likely that rates will firm somewhat as we close the third quarter and begin the fourth, there's nothing presently in the cards that suggests any kind of regular or straight-up increases in interest rates. If anything, slowing growth in other parts of the world and attempts by central banks to address that will continue to make U.S.-based investments a fair bet, providing some counter to any interest rate increases produced by our solid economy.

Most likely, mortgage and other interest rates have simply moved up off bottoms, and may plateau around these levels for a while, rather than hugging the floor as they did for four months. From where we sit, the bulk of the rise, small though it was, is over for now, but we might have a residual couple of basis point rise at most yet to go. Next week, we'll get a look at new and existing home sales, a final update on second quarter GDP, a report from the Chicago Fed, durable goods orders and some other clues about the economy's performance. Figure on little change to rates, adding maybe two basis points to this week's FRMI, if anything.

For a longer-range outlook for rates and the economy, one which will take you up until mid October, take a look at our new Two-Month Forecast.

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Daily FRMI ratesare available at HSH.com Check out our weekly Statistical Release here (and archives here).


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