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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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World Concerns Lower Mortgage Rates

April 21, 2017 -- Just as they have at times over the last six or seven years, a range of geopolitical (and some economic) concerns has seen investors begin to favor more defensive investment positions, with money moving from riskier assets into the safety and security of bonds. As mortgage shoppers may know, such moves tend to drive down yields on investments such as U.S. Treasury securities, which in turn influence the rates on mortgages, pulling them downward to varying degrees.

There are certainly plenty of issues to add to a sense of unease. Forthcoming elections in France, escalating tensions between the U.S. and North Korea, the ongoing mess in Syria, Brexit back in the headlines and more. All these are coming at a time when there seems to be a creeping suspicion that major tax and regulatory reform from the Trump administration isn't exactly an imminent threat, and all in the context of a U.S. economy that remains at a moderate (if plodding) pace, and one where a spate of post-election enthusiasm seems to be waning.

As a result, mortgage rates have mostly retreated back to abut where they were in the week after the elections took place, and so the mortgage-rate "Trump bump" has all but been obliterated.

That said, it doesn't seem to us that rates are likely to continue on a downward path. The economy isn't faltering, even if it seems to be again exhibiting the "first quarter stall" that happened in each of the last few years. The Federal Reserve remains committed to not only lifting rates as the year progresses but also to start what will be a protracted process of winding down its massive balance sheet of bond holdings. Of course, we would never say "never" in terms of the possibility of lower rates, but the prospects for significantly lower rates seems slight.

This is especially true if the economic pattern in recent years holds; after paltry growth in the first quarter of each of the past few years, growth has generally been improved over the next couple of quarters, and these spurts of activity are part of the reason the that Fed had confidence to raise rates in late 2015, late 2016 and March of this year.

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Patterns aside, the latest review of regional economic conditions from the Fed's latest "Beige Book" survey said that the 12 Federal Reserve districts were equally split between modest and moderate growth in the six weeks leading up to April 10. This was essentially the same description given in the report just prior to this one, so there doesn't seem to have been and considerable economic weakening in the first quarter, at least as far as so-called "soft data" goes. In the report, the overall assessment of labor market and wage growth noted conditions as "tight", that "wage increases broadened" and also that "A larger number of firms mentioned higher turnover rates and more difficulty retaining workers." Tight labor markets and rising wages can help to firm inflation, and the confluence of these over time will usually see the Fed react by raising short-term rates.

The latest index of Leading Economic Indicators from the Conference Board told of a deceleration in March after three strong months in a row. Although still a very positive 0.4 percent rise, the indicator was a little softer than in previous months, but still strong enough to suggest that there is reasonable economic momentum to carry us into at least the early part of the second quarter. That said, and rather than a precise forecasting tool, the LEI may better reflect activity the month in which its components were gathered; even so, the measurement here was certainly solid enough to close a very good quarter.

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Low and falling mortgage rates of late are a bit of a two-edged sword. On the one side, they reward potential homebuyers in the market and ready to transact a chance at a slightly lower monthly payment than they otherwise would have... or at least this would be the case if slightly lower mortgage rates weren't being offset by higher home prices. On the other side of the blade, headlines of "sub 4 percent" mortgage rates will only serve to drive more demand into a market featuring very thin inventories of available homes and lots of competition, which in turn exacerbates the home price increase situation.

Even though they reflect transactions that were initiated as long ago as mid-January, when rates were a bit higher, sales of existing homes in March rose by 4.4 percent to an annualized 5.71 million rate. If unrevised, this will be about the fastest rate of sale of the recovery and expansion to date, but further gains will be hard to come by without some more homes coming into the market. New supply exactly met demand in March, again leaving just 3.8 months worth of inventory for potential homebuyers to consider. Compared to a year ago, the median price of a home sold this March was 6.8 percent higher than last year, so a small decline in mortgage rates isn't sufficient to offset all the increase, crimping affordability a little bit more.

Low inventories of existing homes are certain enough to put smiles on the faces of America's homebuilders, who continue to benefit from spillover demand coming their way from folks who can afford the step-up to a new house. We'll see how sales of new homes are faring next week, but in the meanwhile, construction starts of new homes eased by 6.8 percent in March after a weather-spurred February leap, falling to 1.215 million (annualized) rate of initiation. Single-family starts rang in at 821,000 units, a sixth month over the 800K mark, while multifamily starts cooled by 7.9 percent to slide to 394,000 annual units started. The hiccup should be temporary, though, as permits for future construction rose by 3.6 percent to 1.260 million annualized, so construction should remain mostly on track as we go.

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Despite the fall back to trend for housing starts, the National Association of Home Builders index of member sentiment eased back just a little in April, falling 2 points to a still-robust 68 for the month. Measures of sales of single-family homes dipped by 3 points to 74, and expectations for the coming six-month period also shed three points to slip to 75, but both remain at very high levels. Even the measure of traffic at showrooms and open houses remained in positive territory for a second consecutive month (and 4 of the last 5). The trend here has been a generally rising one (if in a sawtooth pattern) since last July, and looks as though it will likely plateau at these very high levels for a while.

Industrial Production kicked higher in March, driven higher for the first time in a while by a strong rise in utility output. Other components cooled measurably, though. The headline gain for IP was 0.5 percent for the month; utility output leapt 8.6 percent, only its second increase in the last six months. Manufacturing had been running consistent gains for over that period, but faltered in March, declining by 0.4 percent for the period. Mining activity, which has only recently gotten its feet under itself in recent months after a very rough period did manage a meager 0.1 percent gain, but that was a sharp deceleration from February and January's increases. As a result of utility's contributions, the overall measure of production floors in active use did rise to 76.1 percent, even as manufacturing's percentage slipped by 0.3 percent to 75.3, a rather lackluster figure.

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Two local reviews of manufacturing activity did show a bit of a slowing after several strong months. The Federal Reserve Bank of New York's Empire State Manufacturing Index declined by 11.2 points in April, falling back to a value of just 5.2 for the month after being more than triple this value in each of the last two months. While still positive, the measure of new orders dipped by about two thirds when compared with March. One positive note was that the employment measure moved considerably higher to 13.9, and so manufacturers in New York are adding workers. This is a nice contrast to where things stood at the turn of the year, when this barometer suggested that manufacturers were still actively shedding jobs.

The deceleration story also took place down the New Jersey Turnpike in the Philadelphia Fed's district. As March's figure was the highest since about 1983, it was a given that some retreat would be seen this month. The indicator here dropped from 32.8 in March to 22 in April, but this figure still easily ranks among the best of the expansion to date. Orders cooled by 11.2 points to a still-stout 27.4, and employment gains strengthened further by 2.4 points to 19.9 for the period. Taken together, the two reports suggest a slightly cooler environment for factories but one where conditions remain more favorable than not.

New claims for unemployment assistance totaled 244,000 in the week ending April 15, up by 10,000 from the prior week. Seasonal adjustments for the ever-moving Easter and Passover holidays tend to make numbers a little more erratic this time of year, but collective and trend indications are that we will likely see hiring in April to be rather above the 98,000 tallied in March. At the moment, it feels like something closer to the 150K range is likely, but we'll get a better sense of this over the next couple of weeks.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Apr 14 Mar 17 Apr 15
6-Mo. TCM 0.95% 0.90% 0.36%
1-Yr. TCM 1.05% 1.03% 0.54%
3-Yr. TCM 1.45% 1.64% 0.89%
5-Yr. TCM 1.83% 2.07% 1.22%
FHFA NMCR 4.22% 4.00% 3.97%
FHLB 11th District COF 0.591% 0.616% 0.664%
Freddie Mac 30-yr FRM 4.10% 4.30% 3.58%

Mortgage rates have managed to surprise us (and others) of late, declining rather more than expected. To be sure, there are plenty of pressures helping them down at the moment, but there remain a fair number of things that are helping to keep them more tethered than not. It bears keeping in mind that rates remain in a fairly narrow band, with a current low of this week's 3.97 percent, but a "high" of just 4.3 percent when a more optimistic global tenor held sway over markets. A one third of one percentage point range in the five months since the "Trump bump" for rates kicked in really isn't all that much of a change, but it's likely encouraging to potential borrowers that volatility for rates is working in both directions, rather that just upward.

Economically, we think that mortgage rates should stabilize at about current levels next week, possibly even adding a basis point or two. From a political standpoint, there's considerably less predictability. The outcome of the election in France on Sunday may move markets a little to start the week, but we'll be eyeballing new data from the Chicago Federal Reserve, reviewing sales of new homes, checking out consumer sentiment for April... and are keenly interested in the advance reading for GDP for the first quarter of 2017. How slow is growth at the moment, what's happening with inflation during the quarter, and how will this impact the Fed's thinking? It will be interesting to see and speculate.

For a interim forecast for mortgage rates and the economy, one which runs through early June, have a look at our Two-Month Forecast. For a year-long review of expectations, see our 2017 Outlook.

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