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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Rates Moving Higher, Fed Expects More

September 22, 2017 -- The pattern shift in mortgage rates kicked in this week. After two months of nearly steady (if slow) declines that chopped a full quarter percentage point off of the average 30-year fixed rate, rates have begun a move in the other direction.

After hitting an average 4.03 percent in July -- the only time rates were above the 4 percent mark since mid-May -- we've mostly seen a flat-to-fading pattern. With this week's five basis point increase and the promise of an additional increase to come next week, that trend has been broken. Of course, with still 20 basis point to even get to the summer's high water mark -- let alone almost a half percentage point gap yet to cover to get to 2017 highs -- we are likely to see higher rates than we have, but not "high" rates by any stretch of the imagination.

As expected, the Federal Reserve this week announced that the process of tapering off reinvestment of inbound proceeds from its massive balance sheet will begin starting next month. This process will start slowly at first but the amount will increase each quarter for a good long while, and is expected to perhaps halve the Fed's holdings when all is said and done, leaving the central bank with a portfolio of around $2 Trillion dollars, and one largely comprised of Treasury obligations.

The process of disinvestment is expected to be minimally disruptive to markets, and the effect on long-term interest rates muted. That said, markets can be fickle animals, and the Fed's actions are unprecedented, so there's no way to know that the process will begin or run over its course without issue. Fortunately, even if there is some disruption, most interest rates will at least begin the process closer to historic lows than not and would remain favorable even with an unwanted bump.

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In the days and weeks that led up to this week's meeting, investors seemed on the fence as to whether the Fed would or wouldn't still try to life rates again this year. Economic growth had powered higher in recent quarters, and labor markets have been reliably solid, but inflation has curiously remained below target, even fading in recent months. This led some to expect that the Fed would wait until 2018 for the next move, but the summary of economic projections (the "dot plot") released at the end of the meeting saw 11 of 16 Fed members expecting another increase before the end of the year. Already firming a bit, interest rates moved a bit higher as the week progressed and investor positions expecting a stay were unwound.

It may be that the Fed wants to get policy a little closer to normal before any change in leadership happens. Janet Yellen's term as Fed Chair expires at the end of January, and its not known if she will be asked to return (or wants to return if asked).

Based on the Fed's own long-term projections, another move in the federal funds rate would likely put the key indicator about halfway to what is expected to be the peak for this cycle. The "long run" expectation for the federal funds (years beyond 2020) was pulled lower again, and now stands at an expected "terminal rate" of perhaps 2.8 percent -- more than a full point lower than history would suggest. This may limit the Fed's ability to fight the next recession with a large cut in rates; with this economic expansion now the third longest on record, a recession will come calling again at some point, and the Fed may find itself again looking to unconventional monetary policy to kickstart growth. However, that's tomorrow's (and likely some other Fed Chair's) problem.

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So interest rates are moving higher and will probably move a little higher still, but as the third quarter comes to a close there is a good possibility that we have already seen the peak for rates this year, even if they do firm up a bit more.

It might be said that liquefied markets and rock-bottom rates have done all they can to goose the economy anyway. Years of mortgage refinancing have materially improved household balance sheets, and high-ticket finance items such as auto sales boomed. Solid job markets, gradually improving incomes and low interest rates continue to drive demand for housing, but one thing that low rates cannot do is easily create supply. High demand and low supply tend to pressure prices higher even as sales falter, and this is the situation we have been seeing in the existing home market for a while now.

In August, sales of existing homes put in a third consecutive month of declines, falling 1.7 percent to land at a 5.35 million annualized rate of sale. This is the lowest figure since last August, and while some effect from Hurricane Harvey may have played a role in the decline, it's important to remember that existing homes sales are tallied in the month the title changes hands, and so is reflective of sales conditions as much as 60 days before this time. Regardless, supplies of unsold homes remained at a very tight 4.2 months for a fourth consecutive month; home prices, albeit a little cooler than has been the case this year, still managed a year-over-year increase of 5.6 percent. As such, not only are there few homes to buy but the ones that are available are pricier. This combination is surely affecting sales growth.

  Find these only at HSH.com!
  
   Mortgage data: Today's Rates Historical Mortgage Rates Mortgage Trend Graphs
   Calculators: Downpayment Decisioner Tri-Refinance Calculator PMI Cost Calculator
   Resources: Housing & Salary Study ARM Index Data Home Value Estimator
  

The new home market is more elastic; that is, more supply can theoretically be added as needed. On a practical basis, that's simply not happening in this housing cycle, at least so far. New construction has been muted, with reasons ranging from cautious builders and bank financing, shortage of readily buildable land, restrictive building codes, a lack of skilled construction labor and more. Whatever the reason, housing starts have been soft, and managed a 0.8 percent decline to 1.18 million (annual) units started in August. For this year, as last, the trend has been mostly sideways, so new inventory isn't coming on the market at a quickened pace. For the month, starts of single-family homes held a 851,000 annual run rate (up just a bit, and returning to June levels) while multifamily shed 6.5 percent to hit a 329,000 annual rate. There have been declines in single-family start in half of the eight months this year, but multi-family starts have featured declines in 75 percent of them. Permits for future activity were a little cheerier, though, sporting a 5.7 percent gain to a 1.30 million rate, so perhaps the future holds promise.

Certainly, members of the National Association of Home Builders remain ebullient, if a little less so of late. In September, the NAHB Housing Market Index of member sentiment shed four points, landing at a still-robust 64 for the month. While hardly worrisome, the value did tie for the lowest of 2017 to date. The sub-measure of single-family sales also shed 4 points, landing at 70; expectations for the next six months declined likewise, falling to 73. However, the measure of traffic at model homes and showrooms was a subpar 47, the fourth month where traffic was soft, and the lowest traffic reading here since February. It may be that fewer tire-kickers translates into softer sales growth at some point, and we'll get a look at that next week when the hew home sales report for August comes out.

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For much of this year, the Fed has maintained that soft and declining inflation was the result of "transient" effects. While theories abound, in reality, no one is certain exactly why prices haven't gained much traction. The Fed seems to have given up on characterizing inflation pressures (or lack thereof) and simply said in the statement that closed the meeting "inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term." Of late, there have been a few signals that price pressures are again firming, with both producer and consumer prices ticking higher after months of subdued readings. To those we can add a flare in import prices, which in August bumped 0.6 percent higher, the most sizable increase since January. With the bump, import costs are now moving upward at a 2.1 percent rate rather than the low-to-mid 1 percent range of the last few months. That said, we are exporting a bit more price pressures, too, as the aggregate cost of goods headed to other shores also rose by 0.6 percent, and now feature a 2.3 percent annual rate. With collective signals pointing to at least a little pickup in inflation of late, it's little wonder that Fed members think that another rate hike will be warranted before long. We'll see about that, though; a lot can happen in three months' time.

A local manufacturing barometer for the district covered by the Philadelphia Federal Reserve moved higher in September, continuing a year-long string of solid activity. The local gauge sported a reading of 23.8 for the month, the highest value of the last three, and a measure of new orders moved to its highest perch since March. Despite this, job growth slowed a bit, but its not clear whether current staffing is adequate or perhaps that some skilled labor jobs have become hard to fill, tempering the pattern in hiring. Still, the report was solid and the positive all-around trend here is continuing.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Sep 15 Aug 18 Sep 16
6-Mo. TCM 1.16% 1.13% 0.52%
1-Yr. TCM 1.27% 1.24% 0.61%
3-Yr. TCM 1.48% 1.48% 0.91%
5-Yr. TCM 1.77% 1.78% 1.22%
FHFA NMCR 3.99% 4.00% 3.69%
FHLB 11th District COF 0.707% 0.657% 0.690%
Freddie Mac 30-yr FRM 3.78% 3.86% 3.44%

Continuing too in August was the string of gains reported in the index of Leading Economic Indicators. The Conference Board's economic yardstick posted a 0.4 percent rise in August, better than forecasters expected, so it would appear that the economy added a little strength during the months and that economic momentum may carry forward for a while. The LEI purportedly foretells economic activity as much as six months into the future, but probably better reflects the climate in which its components are assembled. Still, positive values here are welcome, and suggest a fine pace of economic activity. GDP for the third quarter is currently reckoned at a 2.2 percent pace; the quarter comes to a close next week, but data for the last month of it will roll in throughout October before the initial pronouncement is made. If it holds, the 2.2 percent would be a bit of deceleration from the second quarter's 3 percent clip.

It's hard to reckon anything from the current unemployment claims data, distorted by hurricanes and such. Still, the 259,000 new applications for benefits in the week ending September 16 were lower than those seen over the prior two weeks, so perhaps the storm effect is starting to fade. If so, the impact of those events may shift from initial to continuing claims as we go.

So the pattern for interest rates has changed, if mildly so, and the pendulum has some space yet to swing in its new direction. It's fair to say that mortgage rates have run at levels well below many expectations this year, and even if we do find rates fully retracing the declines of the summer as fall wends along, we would still find them at perhaps a quarter percentage point below this year's highest peaks. We will move in the direction of retracement again next week, likely adding another 3-4 basis points to this week's average when Freddie Mac reports next Thursday.

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.

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