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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Mortgage Rates Fade Anew

July 21, 2017 -- If central banks around the world can't seem to locate any reliable inflation pressure, it's a good bet that mortgage and other interest rates will also have no pressure to rise. Of late, it's been hard to find inflation signals that aren't moving away from central bank targets, but the Federal Reserve's official stance is that the current slump in inflation is due to transient factors. That may be, but transient over what period of time, and how this influences the outlook for Federal Reserve and other central bank policy remains to be seen.

A few weeks ago, European Central Bank head Mario Draghi rattled markets into a mini-global "taper tantrum", with comments that ECB may at some point pare back its quantitative easing program fostering a spike in bond yields that hasn't yet gone away. This week, a less aggressive stance was presented to investors and bond traders, as the ECB did not only not make a change to interest rate policy, but kicked even any discussion of potentially changing their bond-buying program until later in the year sometime. This was likely partly to sooth market jitters, but also to acknowledge that hoped-for inflation has been slow to materialize, even with the eurozone experiencing 17 consecutive quarters of economic expansion.

Perhaps inflation will start to come on more strongly later this year or in 2018, as the Fed expects. However, the Bank of Japan just moved its expectation of reaching a 2 percent inflation target ahead by another year to early 2020, the sixth such occurrence since 2013. If both current and expected inflation in major economies can't get much traction if will continue to be difficult for inflation to firm and remain so in the U.S.

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That's not to say that the Federal Reserve will be much swayed, and for the moment seems likely to try to continue its course of gradually raising the federal funds rate. That said, it could be that a planned pace of perhaps three rate hikes per year for the next couple of years may be dialed back somewhat. We'll see how this all rolls out over time, but for the moment, all indications are that interest rates won't find much reliable traction, either.

One fresh price element that became available this week was the June report covering import prices. The aggregate cost of imported goods coming onto U.S. shores declined by 0.2 percent for the month, with the headline figure now sporting declines in three of the last four months. Falling oil costs pulled the headline down, but there's not much inflation to be seen even without them, where a rise of just 0.1 percent was tallied for the period. There has been a pronounced deceleration in import costs recently, as these have cooled to just a 1.5 percent annual rate of increase, down from a warm 4.7 percent rate as recently as February. The U.S. also exported somewhat lower costs last month, with export prices easing by 0.2 percent, a second consecutive monthly decline and good enough to trim the current annual rate to an increase of just 0.6 percent. It was running a 3.4 percent clip in March, so lower costs all around have suddenly appeared without much warning.

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Low interest rates are of course good for the housing market, but even so, things haven't exactly been moving at a brisk pace, what with only limited inventory of continually more expensive homes for purchasers to buy. In a bit of good new, construction of new homes picked up smartly in June after declining for three consecutive months. An 8.3 percent rebound in housing starts put the annualized rate of construction at 1.215 million, the highest figure since February. Starts of single-family homes leapt by 6.3 percent to 849,000 units, a figure good enough to be third highest since Oct-Nov 2007, and even multifamily starts kicked back in with a 13.3 percent gain to 366,000 units underway. Future activity should also be more solid, too as permits for building later on rose by 7.4 percent to 1.254 million (annualized). More inventory coming on line may help boost home sales later this year or early next, but for now, picking remain slim in many markets around the country.

A surge in building usually cheers up the members of the National Association of Home Builders; while still very sanguine about the current and future climate for their businesses, members seem a bit more cautious of late. The NAHB's index of member sentiment eased by three points in July, slipping to a still-robust value of 67, even as this was more than a six-month low. Measures covering single-family activity shed two points to land at 70 (also comparable to November 2016 levels), and expectations for the coming six-month period also dropped two points to land at 73 for the month. Traffic at showrooms and model homes spent a second month at a below-par level, losing a point to ease to 48 for July. Perhaps would-be shoppers are waiting for new inventory to come on line before they start to venture out in search of a new home.

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A couple of regional measures of manufacturing activity came in below expectations but were fair enough to start the third quarter. The Empire State Manufacturing Index from the Federal Reserve Bank of New York revealed a downshift, with the headline figure sliding from 19.8 in June to 9.8 in July. The measure covering new orders was lower, losing 4.3 points to edge down to a still-solid 13.8, while the employment metric was positive but lackluster with a 3.8 point dip to 3.9 for the month.

The report from the Federal Reserve Bank of Philadelphia was much the same. An 8.1 point decline in the overall index left it at a very solid 19.5 for the month, but even so, this was the softest value seen since December. The measure of new orders slumped hard, falling from a robust 25.9 to just 2.1 for the month, with employment still a solid 10.9 despite a 5.2-point decline for the period. Manufacturing seems okay but it may be that a more erratic national pattern is coming, if these reports are representative of the whole.

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Claims for new unemployment benefits dropped to just 233,000 in the week ending July 15, the smallest number of new applications in a month's time. However, trends in claims can get a little unreliable this time of year, what with annual auto retooling and other seasonal variations and adjustments to the totals. The labor market remains in great shape and is likely the only reason at the moment that the Federal Reserve continues to expect to lift rates again at some point this year, most probably December.

If the index of Leading Economic Indicators from the Conference Board is correct, the economy should be expanding a little faster by that point. The LEI for June rose by 0.6 percent, the strongest gain since a like-sized bump in January and closing the second quarter on a high note. The LEI purports to forecast economic activity up to as much as six months into the future, but probably better reflects conditions that existed in the month when its components were gathered. Whatever the case, the LEI suggests that the economy is improving and that momentum should carry for a while, anyway.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Jul 14 Jun 16 Jul 15
6-Mo. TCM 1.13% 1.12% 0.41%
1-Yr. TCM 1.22% 1.21% 0.52%
3-Yr. TCM 1.56% 1.49% 0.81%
5-Yr. TCM 1.90% 1.76% 1.09%
FHFA NMCR 3.87% 3.97% 3.75%
FHLB 11th District COF 0.648% 0.645% 0.690%
Freddie Mac 30-yr FRM 4.03% 3.90% 3.41%

Economic momentum is always welcome. Although we won't get a look at the initial report for second quarter Gross Domestic Product growth (and new inputs on the quarterly price data the Fed prefers), the final review before the actual report from the Federal Reserve Bank of Atlanta's GDPNow model suggests there will be a 2.5 percent gain for the second quarter, up from a 1.4 percent rate seen in the first. The rebound will certainly be welcomed, as it would continue a pattern established a few years ago weak readings in the first quarter giving way to a rebound in the second. Of course, at 2.5 percent value for the second, coupled with a 1.4 for the first will give us an annualized 2 percent run rate for the economy over the first half of the year -- more "modest to moderate" than anything, and a level that has been a hallmark of the now nine-year economic recovery and expansion.

Mortgage rates don't have much place to go and are in no hurry to get there. Central bank angst aside, markets and investors haven't had much to get excited about for many weeks, what with the plodding pace of a global recovery amid no inflation. The beat seems likely to go on again next week, with the potential for another decline in mortgage rates of a couple-three basis points the most likely outcome when Freddie Mac reports next Thursday.

For a forecast for mortgage rates that will carry you deeper into the summer (at least until early August), have a look at our Two-Month Forecast. We've also just released an 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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