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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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HARP Extended As Low Rates Persist

August 18, 2017 -- A warmer tenor to fresh economic data and news that the Fed seems somewhat more undecided about how soon start to taper its holdings and further adjust monetary policy left mortgage rates about unchanged this week.

Civil unrest at home and a violent terrorist attack in Spain served to keep investors on edge, and on Friday, more turmoil in the Trump administration was seen as Stephen Bannon was ousted as the president's chief White House strategist. Overall, interest rates retained a downward bent as the week came to a close.

That low rates remain in place is generally a good thing for housing markets, even as it becomes increasingly difficult for wanna-be homebuyers to find a house they want to buy at a price they can afford. For homeowners with low equity or other troubles who still haven't refinanced, the Federal Housing Finance Authority announces this week that the Home Affordable Refinance Program (HARP) will be extended until December 31, 2018. The successful refinance program was slated to be replaced by a new program at the end of September, but some technical implementation issues related to mortgage securities apparently needs some time to be worked out. As the new Streamline Refinance program will still start on October 1, it would appear that the two program will run concurrently. There are some key differences between the programs; most notably, HARP was limited to borrowers with mortgages taken before June 2009, while the Streamline Refinance has no such date restriction. FHFA estimates that there are still 143,000 homeowners who might benefit from a HARP refinance, with some 3.4 million refis attributed to the program to date.

There's no way to know if the beneficial mortgage rate environment will last as long as the HARP program will, but for now, fixed mortgage rates are just a whisker above 2017 lows, so there are at least some opportunities for refinancing. With the economy on a solid pace at the moment but with inflation at a low simmer, favorable rates should persist for at least a time yet, but if the economy continues to warm and the Fed does start trimming its balance sheet in September (or shortly thereafter) we will see at least some firming of rates, as well.

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Now mid-August, we're starting to see an accumulation of new data from July and even some early observations for this month, and it appears that the economy has added a little strength after running a current 2.6 percent rate for GDP in the second quarter. The Atlanta Fed's tracker reckons a current rate of 3.8 percent for the quarter so far, a level that (should it hold) would see the Fed not only start paring down its balance sheet but also lifting rates again.

The available data this week were pretty solid. Retail sales rebounded smartly in July after a few weak months, rising by 0.6 percent, the largest gain seen here since last December. Even so-called "core" retail sales (a measure that excludes pricey auto and volatile gasoline sales) kicked 0.5 percent higher. As well, values for both June and May were revised upward, brightening the overall consumer spending picture to a greater degree. June was revised from a 0.2 percent decline to a 0.3 percent gain, and May was revised upward from a 0.1 percent decline to no change for the month.

Tight housing markets seem to be a homebuilder's best friend. Members of the National Association of Home Builders certainly were more ebullient in August, according to the Housing Market Index released by the trade group. The NAHB HMI rose by 4 points to a robust 68 for the month, while measures of sales of single family homes also powered ahead by four points to reach 74. Expectations for activity over the next six months added five points to reach 78, the third time this year such a lofty level has been attained. Oddly, though, this enthusiasm comes even as traffic at showrooms and open houses remained subpar for a third consecutive month, coming in at near breakeven value of 49. Perhaps those who do venture to these places are actually buying and not kicking tires, so the traffic that does come (if moderate) is productive.

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You would think that happy builders would be putting up homes are a quickened pace, demand being what it is. However, at least for now, that's not the case at all. For the 6th time in the last 8 months, housing starts have declined on a month-to-month basis. This time, is was a 4.8 percent easing between June and July, with construction initiated on an annualized 1.115 million housing units. Perhaps the only good news was that almost all of the decline occurred in the always-volatile multifamily segment (a 15.3 percent drop) while the more important single-family segment was essentially unchanged (0.5 percent decline). For nearly the last year, housing starts have remained rangebound, never getting any higher than an annualized 1.32 million units and not lower than 1.052 million, with all values since then running in-between, if often to the lower end of the scale at times.

Permits for future building activity also slipped, falling by 4.8 percent, but that from a 1.275 million pace in June to 1.223 million for July. With both of those figures above current construction levels, there is at least hope that construction will kick higher later this year or early next, which could help to ease the existing housing thin inventory situation by offering new alternatives to homeowners looking to trade up.

Minutes of the Fed's July 25-26 meeting were released this week. There was no change in policy at the meeting, but as the Fed indicated at that time that it they would begin the balance sheet reduction program "relatively soon" we hoped to see some additional clues as to the timing of the move. As it turns out, there doesn't seem to have been a consensus about when to let the markets know of the central bank plans. The minutes noted that "several participants were prepared to announce a starting date for the program at the current meeting" but the majority preferred to kick it down the road to a later meeting. With this ambiguity, it's less certain that the Fed will actually start the program in September; instead, they may simply release a date in the future when the program will start. Investors took this to be a somewhat softer stance to future policy, also helping interest rates to soften a bit this week. If the Fed delays implementation past September, it is thought that this might move the next change in the federal funds rate into 2018. Presently, futures markets place a 37 percent chance of a Fed move come December, but if the economy continues to perform well, that chance of a change will begin to rise. Program start or not, September's meeting will be important in that updated projections for growth, inflation and the expected path for short-term interest rates are due.

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A couple of regional looks as manufacturing activity were both quite solid. The Empire State Manufacturing Index from the Federal Reserve Bank of New York rang in at a value of 25.2 for August, the indicator's highest value since October 2014. Measures of new orders powered higher, as did hiring, so it would seems that times are good for factories in New York. That was also much the case in the Philadelphia Fed's district; their equivalent barometer sported a 18.9 reading for August (down just a bit from July), but new orders leapt and employment metrics remains very solid. The pattern of activity in the 3rd Federal Reserve district has been quite solid and even robust at times for the last nine months. National measures of manufacturing have been doing well over that time, and with economies of some of our trading partners getting their feet back under them we could see a growing string of positive reports over time.

Industrial Production expanded by 0.2 percent in July, pushed upward by a fourth consecutive increase in mining activity, goosed a bit further by a bounce in utility output but tempered by a 0.1 percent decline in factory output. Overall IP has been positive for six months in a row, even as components have vacillated a bit over that stretch. The fair report also noted that the percentage of production floors in active use remained at 76.7 percent last month, with the trend here a gently upslope. Inflation-enhancing bottlenecks in production don't usually start until we pass the 80 percent utilization mark, but it's been a long, long time -- nearly 10 years now -- since we last approached that level.

New data on price pressures failed to find much, if any. The July measure of import prices saw just a 0.1 percent increase in overall costs for the month. This was a bit of a rebound from a 0.2 percent decline in June, but the current run rate for import prices over the last year is still just 1.5 percent. By contrast, the annual rate was running more than triple that as recently as February. Costs of goods leaving the U.S. were a bit pricier, as aggregate exports prices rose by 0.4 percent for the month. That said, the bump was only good enough to move the annualized rate up to 0.8 percent; it was four times this rate six months ago. There is little inflation threat to be seen from imports, and not much from wages, so the benign inflation picture continues.

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The fair economic climate should be expected to continue for at least a while, if the index of Leading Economic Indicators is correct. The LEI rose by 0.3 percent for July, continuing a string of positive values that has been unbroken since last August. The Conference Board's tool may be a better barometer of current conditions than it is a forecasting tool, but regardless, it indicates that there is underlying strength and momentum in the economy that seems as though it may continue for a spell yet.

Expectations of brighter tomorrows pushed the latest Consumer Sentiment survey higher. In its preliminary August reading, the University of Michigan poll result saw the headline figure for consumer sentiment lifted by 4.2 points from July's final tally to 97.6, a value good enough to be the second highest of 2017. With assessments of present conditions pulled down by 2.4 points to a more trendlike 111.0 for the month, it was a only 8.5 point leap in expectations for the future (from 80.5 to 89) that lifted the headline figure. We'll need to see if the difficult situation in Charlottesville will have an impact on consumer moods; the report noted that too few interviews were conducted after the events to determine any impact. We'll no doubt see more when the final August report comes in a couple weeks' time.

It was a bit of a tumultuous week for investors and financial markets, and the Friday episode at the White House may not have yet been fully realized. Late Friday it was reported that Carl Icahn dropped out as a special advisor on business deregulation to the Trump administration, and there may be some market reaction yet to be seen from this as well.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Aug 11 Jul 14 Aug 12
6-Mo. TCM 1.15% 1.13% 0.44%
1-Yr. TCM 1.22% 1.22% 0.56%
3-Yr. TCM 1.49% 1.56% 0.84%
5-Yr. TCM 1.80% 1.90% 1.12%
FHFA NMCR 4.00% 3.87% 3.70%
FHLB 11th District COF 0.657% 0.648% 0.691%
Freddie Mac 30-yr FRM 3.90% 3.96% 3.43%

Troubled times are and continue to be the ally of the mortgage shopper. Global saber-rattling, domestic unrest and an ever-changing political climate give investors more reasons to park cash in bonds or to continue to hold funds there. Should enough concerns emerge over a period, or should they persist or worsen, this in turn may color the Fed's (and other central banks) thinking about making policy changes, lest they disturb markets needlessly. All in all, and at the very least, it means in general that mortgage rates really cannot move higher, at least meaningfully, anytime soon; Conversely, it does suggest that they may have just a little space to fall, and a little space is all they will need to trigger "lowest rates of 2017"-type headlines.

It's a good bet we'll see those next week, even if the "breakthrough" is perhaps only a couple basis points. We think when Freddie Mac reports next Thursday that we'll be presented with a 3 basis point decline in the average conforming 30-year FRM, good enough to get us to "new 2017 lows!" A small move in rates, but good enough for a headline, we suppose.

Mortgage rates seem poised to slip again next week, but probably not by very much. That said, as this week's average conforming 30-year FRM as reported by Freddie Mac was only two basis points above 2017 lows, it's likely that we'll see "new lows for mortgage rates!" headlines when Freddie reports again next Thursday. We think a 2-4 basis point decline is what we're likely to see in that benchmark, little more than statistical noise but enough to generate a little mid-summer excitement.

For a forecast for mortgage rates that carries into early Autumn (October, anyway), have a look at our Two-Month Forecast. You might also have a glance at our recent mid-year review of 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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