Mortgage Rate Trends: Weekly Market Commentary & Forecast
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Velocity Of Rate Rise Slows
December 2, 2016 -- Mortgage and other interest rates are still in a firming pattern, but the speed of the increases has slowed of late. Given all the concerns about the modestly higher rate environment as we close 2016, that's a good thing.
The considerable rise in mortgage rates may not yet have come to an end, given the improving economic situation. To the extent that the bump has been fostered by hopes for a more business-friendly administration, with perhaps more favorable tax and trade policies, these investor hopes may yet be dashed, given the political process yet to come. However, we won't know this until time wends its way forward, but for the moment at least, investor positioning for both a faster growth environment and to try to get ahead of possible regulatory changes is well underway.
With a Fed meeting coming up and the holiday season getting into full swing, we don't expect to see much change firm trend for rates at the moment, but a leveling off does seem most likely in the weeks ahead.
Those weeks will include a Fed meeting on the 13th and 14th, where it is now a virtual certainty that the central bank will lift the federal funds rate by a quarter percentage point. This will be the first change in a years' time, and the second of what is likely to be a protracted process of normalizing interest rates, a process that is expected to take years yet. The Fed last expressed that it was waiting for "some" additional signs of firming economic growth, and there certainly have been sufficient signals of late that would meet that goal.
Perhaps the most important figure is November's employment report, the last look as the labor market before the policy meeting. Although a bit of mixed bag, the economy produced 178,000 new jobs in November, up a bit from a downwardly-revised 142,000 hires in October, but certainly solid enough at this stage of the economic expansion. October's subtraction of 19,000 jobs was offset by the addition of another 17,000 to the September total. Average hourly earnings faltered a bit, sliding by 0.1 percent for the month but are almost 2.5 percent above a year ago. The unemployment rate slumped by 0.3 percent to land as 4.6 percent, a cyclical low, but that was more than partly the result of a second consecutive decline in the labor force, and the participation rate dropped back to 62.7 percent, the lowest since June.
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Employment gains in the fourth quarter are running rather cooler than those seen in the third, where a broad aggregate measure of growth was nudged upward. The preliminary reading for Gross Domestic Product in the third quarter was raised to a 3.2 percent annual rate, the fastest pace in two years. During the period, a 1.8 percent rise consumer spending pushed the top-line figure up even as this contribution to growth was actually lower in the third quarter than in the second. An increase in exports and inventories contributed the remainder of the increase, but it's not yet clear if this trend has continued in the fourth quarter.
As far as price pressures go, they chilled a little in the period, with the "core" Personal Consumption Expenditure index ticking down to 1.7 percent from 1.8 percent. The Fed wants to see the core PCE at a 2 percent level (or even perhaps a little higher) but inflation continues to have insufficient traction to make it to that level. The Fed has stated that it does not need to see inflation actually at this level to consider making a change to rates, only that it wants to be reasonably certain that progress toward its goal over time is likely.
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In contrast to the higher GDP estimate, economic growth seems to be still running at a lumbering page. At least that's the conclusion that can be reached from the Fed's latest summary of regional economic conditions, called the Beige Book. The report that covers the six-week period up through November 18 noted that 3 of 12 Fed districts reported "moderate" aggregate growth during the period; 4 others reported "modest" growth, and 3 reported "slight" expansion in activity. The two remaining areas noted "mixed" or "flat" activity, and collectively, there was nothing in the report to suggest any acceleration in growth; employment continued to expand, wage growth was characterized as modest and overall inflation pressure was said to be slight. Looking back to the same report from a year ago, when the Fed last made a change to rates, the general tenor of the report was much the same, so there's nothing to be seen here to give the Fed pause this month.
Manufacturing activity is edging higher, too. The Institute for Supply Management reported that its manufacturing barometer moved 1.3 points higher in November, landing at a fair value of 53.2 for the month, the strongest reading since June. Measures of current production and new orders edged higher and a recent firming in employment remained in place for a second consecutive month, the first such string this year. That said, should it prove durable, the recent strong rise in the dollar may put a crimp in exports, perhaps sapping some of the recent manufacturing gains. Domestic conditions may be improving a bit more though, what with a more stable energy sector and consumers who are likely to continue to spend.
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One of the items consumers are buying at a good clip are new cars and trucks. Confounding expectations of a slowdown, sales of new vehicles remain very elevated and posted a 17.9 million annualized rate of sale in November, according to AutoData. Sales have been on a more-or-less steady uptrend since the nadir of about 9 million vehicles back in 2009, but the near-record pace for sales cannot continue forever. At least some sales gains have come from making loans available to subprime borrowers; recent reports suggest that at least some of these folks are showing the reason why they are subprime credits in the first place -- they don't pay their bills or don't pay them on time. As such, delinquencies and loan failures from this sector are on the rise, and some lenders will probably curtail loan offers as we go along.
Consumer spending should continue to power the economy along, as long as incomes keep rising. According to the Bureau of Economic Analysis, personal incomes rose by 0.6 percent in October, a figure better than analysts expected. Wage growth was 0.5 percent for a second consecutive month, and a value seen in three of the last four months, as well. While steady, the trend in wages is a little softer than seen at points earlier this year and is some 4.5 percent above year-ago levels. About half of the 0.6 percent gain this month was spent by consumers; the other half was banked, and the nation's rate of savings rose back up to 6 percent, a figure that can be counted among the highest of the economic recovery and expansion.
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Spending for new construction projects rose by 0.5 percent in October. As has often been the case, and with housing markets running closer to normal, outlays for residential projects rose, climbing by 1.6 percent during the month. Spending for commercial projects went lagging for a second consecutive month, in this case declining by 2.1 percent. Spending on public works projects rose by 2.8 percent for the month; in fact, there have been gains here in four of the last five months, but October's 2.8 percent spike was rather an outlier. This burst in spending happened as we closed in on the elections, a situation that a cynic might note always seems to be the case.
A solidifying employment situation, rising wages and probably headlines of record-high stock prices are all likely catalysts for the surge in consumer moods. The Conference Board's latest measure of Consumer Confidence saw a 6.3 point spike November compared to October, pushing the indicator to 107.1 for the month, the highest since July 2007. Both assessments of present conditions (130.3, +7.2 points) and expectations for the future (91.7, +5.7 points) both powered the headline figure. Reflective of improving moods and incomes, plans for purchasing homes and new appliances moved higher while inflation forecasts tempered a little.
We're now entering the official hard-to-reckon trends portion of the year for initial unemployment claims. Seasonal issues and holidays make measurements less reliable than usual, and so the spike in new claims in the week ending November 26 needs to be taken with a gain of salt. Climbing by 17,000 to 268,000 during the week of Thanksgiving, the weekly figure will be the highest number of claims since June, even as it may or may not accurately reflect current conditions. We should get a somewhat clearer picture next week, and the one thereafter, but then things will become murky again until after the turn of the year.
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Mortgage rates are elevated from where they were, but are certainly not "high" by any measure. In a way, this should be a cause for cheer, as rates are firming based not only on improving economic fundamentals but also on growing optimism (or at least hope) for further improvements in the weeks and months ahead. What a contrast this is to the economic pessimism that has circled the globe a number of times since the early days of the financial crisis!
That rates are rising due to good news (and not solely due to inflation, as they have done historically at times) should actually be seen as good news. In some ways, to wish for lower rates is to again hope for more economic malaise or trouble either here or abroad, and no one should wish for that. A rising economic tide should hopefully lift all boats (albeit to greater or lesser degrees), a beneficial happenstance.
To the extent that rising borrowing rates does create a pinch for some folks, perhaps you might consider those who have been pinched, now for many years, by low-yielding investments -- deposits, CDs, bonds and the like. Somewhat better returns for savings will improve the lot for a number of people and the slowly-changing interest rate may finally turn more in their favor over time.
Last week, we reckoned that Freddie would report a 5 basis point lift in the average conforming 30-year FRM. That's what we got this week, putting mortgage rates at new 2016 highs. Based upon how markets moved this week, we think another 4 or 5 basis point move upward is in store for next week. It may be the last uptick of this run; we'll see.
For a longer-range outlook for mortgage rates and the economy, one which will run through late January, have 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 Calculator to learn exactly when you will no longer have a mortgage balance greater than the value of your home.
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