Mortgage Rate Trends: Weekly Market Trends & Forecast
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Balancing Act For Mortgage Rates
August 29, 2014 -- Summer comes to an unofficial end on Monday, closing a spring and summer "housing season" which has been mixed at best. You can't blame the present modest levels of home sales on mortgage rates, though, as they've remained virtually unchanged since before Memorial Day. As has been the pattern, decent-to-solid economic news here in the U.S. suggests that interest rates may be poised to firm somewhat, but economic and political troubles around the globe keep fresh funds pouring into U.S. debt, tethering interest rates at these levels.
In the next few weeks, a quickened pace of activity typically replaces the summer doldrums, and mortgage rates may start the process of moving out of current ranges. For the moment, rates remain almost perfectly balanced between recent low and high points -- the fulcrum point of a seesaw.
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 decreased by a single basis point (0.01%) sliding back to 4.17 percent and managing to hit a new 2014 low. The FRMI's 15-year companion failed to move at all for a third consecutive week, again holding steady at an average rate of 3.43 percent. FHA-backed 30-year FRMs remained unchanged as well, producing a second steady week at an average of 3.91 percent, as these fully-insured offerings remain the best-priced long-term mortgage product in the market. Finally, the overall 5/1 Hybrid ARM was the lone program to sport an increase, rising by four basis points to bounce back up to an average rate of 3.11 percent for the period.
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Mortgage rates have been holding very near a perfect balancing point. In HSH's FRMI series, a May 2013 low of 3.49 percent gave way to a September 2013 peak of 4.76 percent; although we came close at the end of 2013 and the beginning of 2014, we have remained below that high-water mark. This 115 basis point range for rates, if split in half, leaves us at about 4.19 percent, approximately today's level, where we have been holding now for nearly four months. The argument for higher rates generated by a growing economy is nearly as weak as the argument for lower rates from a troubled and slow-growth world is strong. Neither force seems to be in a hurry to change, and if anything, these counterbalances may even be intensifying somewhat.
For its part, weak growth and very low inflation in the Eurozone may prompt the European Central Bank into action before long, and they would be expected to follow the Fed's path of a bond-buying program in hopes of supporting growth and lifting prices. This belief is already pressing down overseas yields, and an actual program would probably enhance this move. Low yields over there make U.S. Treasuries look attractive, and so demand for the our debt is ramped up as investors snap up chances to get relatively high rates of return. This demand raises the prices of bonds, which in turns trims yields, helping mortgage rates to fall.
Political troubles in the middle east, Russia and Ukraine's rumblings and other hot spots also give investors the willies; in such a situation, better to be safe than sorry, so money that might be in harm's way is often relocated into in Treasuries, too, with this additional demand also serving to press rates lower.
Among other influences, such as a lack of inflation and a still-soft job market, this collective additional demand is the reason why interest rates can fall even as the Fed continues to trim its purchases of Treasuries and MBS. There is more than sufficient demand to meet available supply, and with a sliding budget deficit and weak mortgage origination market, there is rather less supply available. Treasury offerings are on a pace for about $600 billion this year, down from about $1.1 trillion just two years ago; Mortgage-Backed Securities from Fannie, Freddie and Ginnie Mae (FHA) might not even make it to a trillion dollars this year, and even if they do, it would be more than a third less than 2013.
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So the conditions to keep rates low or even potentially lower them somewhat more are in place on their end of the seesaw. On the other end, the growing U.S. economy is doing what it can to keep expanding, too, and the latest data suggest that we will continue on an upward path, if in a less-than-straight upward trajectory.
Things are looking up, though. The latest reading of the Chicago Federal Reserve Bank's National Activity Index showed a strengthening economy in July, with the barometer moving to 0.39 during the month, up from 0.21 in June and the highest value since March. The NAI -- an amalgam of some 85 economic indicators -- shows whether the economy is growing above or below its national potential to grow, thought to be a GDP rate of perhaps 2.6 percent or so at a neutral reading of zero. As such, we appear to be rather above that at the moment.
Gross Domestic Product rose at a 4.2 percent clip in the second quarter, an upward revision from the advance estimate released at the end of last month. As a point of reference, the NAI reported readings of 0.55, 0.12 and 0.21 for that period, and at least with one month in the books here, it would appear that third-quarter growth is running at a lower level than was the second. However, the early indication is that it too will come in pretty solid when all is said and done.
Among the economic bright spots this year have been the reliable gains in new hiring and diminished levels of people seeking unemployment assistance. We'll get a look at hiring when the August employment report comes next Friday; something on the order of 200,000 new hires is expected to have occurred during the month. We may be a little above that, if the diminished level of new claims for unemployment benefits is any indication; in the week ending August 23, new claims held below the 300,000 level for the fourth time in the last six weeks, with three of those in August. More folks continuing to work or finding new jobs is key to increasing consumer spending, which in turn powers economic growth.
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Consumer spending did take a breather in July, though, as consumers probably paused to accumulate more funds to spend. Personal incomes grew by a soft 0.2 percent during the month, while outlays actually declined by 0.1 percent. In the aftermath of the "Great Recession" consumers have been reluctant to use credit cards to power new spending, as uncertainty about income gains and the future economy has seen them using cash to fuel purchases. The use of credit cards has been expanding more this year than in recent years, but growth remains very modest, at best. Slow consumer spending means slow growth for the economy as a whole. With the juxtaposition between income and outgo, the nation's rate of saving perked up to 5.7 percent, perhaps a precursor to more spending as the holiday season comes calling.
In some ways, the pattern of using cash today instead of adding to tomorrow's debt may be reflected in consumer moods, too. The final August reading of Consumer Sentiment from the University of Michigan showed a rise 0.7 points to 82.5 for the month, exactly where it was two months ago. All of the improvement came from assessments of current conditions, as expectations for the future continue a slow fade from already low levels. The Conference Board's measure of Consumer Confidence told much the same story; the indicator rose by 1.5 points to a seven-year high of 92.5 in August, but the gains were all about improvements today, as future expectations slipped by a point. The report also noted that plans to buy a home did tick up a little, but even with the increase, this sub-barometer remains rather below earlier 2014 values.
Sales of homes have been less-than-stellar this year, too. In July, sales of new homes declined by 2.4 percent, as sales eased to an annualized rate of 412,000 units. Although June sales were revised higher, all that served to accomplish was to create a smaller decline (now seven percent) from May. Sales of new homes have exhibited little reliable traction so far in 2014, as they remain just a few thousand units above this year's low, even as they are measurably improved from year-ago levels. With the slump in sales, the supply of unsold homes moved to a full six months, with 205,000 built and available units the highest since the recovery began.
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Orders for durable goods skyrocketed in July, leaping 22.6 percent for the month. This outsized gain was the result of a 318 percent increase in orders for new airplanes, but the report beneath the headlines wasn't nearly as encouraging. Leaving transportation out of the equation, a 0.8 percent decline in new orders was noted, and a measure of spending by businesses on goods intended to last three years or more notched a 0.5 percent fall. The increase in spending for durables is certainly welcome, but it would be better to see that spending spread over a wider range of industries, which would produce greater economic benefit.
A couple of regional measures of manufacturing activity suggested a more mixed picture, too. Indicators from the Richmond and Kansas City Federal Reserve Banks both remained in positive territory, if moving in different directions in August. The Richmond Fed's gauge added five points to land at 12 during the month, while the KC Fed's indicator shed six points to fall to three for the period. Our next "big picture" look at manufacturing comes Tuesday in the August Institute for Supply Management report.
Is balance, or even stasis for mortgage rates a bad thing? No, not hardly, and especially at the low levels for rates we're enjoying. That said, a lack of movement one way or the other can lull the market to sleep, as there is no compelling call for immediate action by borrowers to try to capture a fall (or preempt a rise) in rates. The flatness for rates can produce a beneficial level of confidence among folks trying to better align themselves with the realities of credit, income and debt standards of today, affording a little additional time to accumulate a slightly larger down payment, pay down some outstanding debt or improve a credit score to get a better, cheaper or more sustainable mortgage.
All of these things are beneficial in the long run, even as a lack of movement for rates removes a sense of urgency to act immediately from the market.
Summer comes to a unofficial soft end this week, with a three day weekend on tap for many. At the moment, all indications are that a drift lower in mortgage rates is likely in the week ahead, but any outsized gains in the first-week-of-month economic data would tend to temper any decline, keeping it to a decline of just a few basis points at best.
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.
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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