Mortgage Rate Trends: Weekly Market Trends & Forecast

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Lowest Mortgage Rates of 2014 Return To Market

New Two-Month Rate Forecast at HSH.com

April 18, 2014 -- Thirty year fixed mortgage rates managed to return to 2014 lows this week, but there are sufficient signs around to suggest that this won't be the case for long.

Interest rates have been nudged downward in recent weeks by mixed economic data, a gyrating stock market, political trouble and economic softness overseas and soothing words from the Federal Reserve about the prospects for changes in monetary policy. At various points, all have served as reasons for investors to move into the relative safety of Treasury bonds, pushing yields and mortgage rates to the bottom of a six-month-long range.

Will that change? Well, the overall range seems in no danger of being seriously broken one way or the other, but if we continue to see an accumulation of positive economic data, rates will be moving up before long.

HSH.com's broad-market mortgage tracker -- our weekly Fixed-Rate Mortgage Indicator (FRMI) -- found the overall average rate for 30-year fixed-rate mortgages dipped by five basis points (0.05%) to drop back to 4.38%, matching a previous 2014 low set in the week ending February 7. The FRMI's 15-year companion eased by four basis points, falling to 3.53% for the week and close to 2014 bottoms. Popular FHA-backed 30-year FRMs shed three basis points on average to slip to 4.07% for the period, as these fully-insured loans continue to have the lowest prices in the market by a fair margin. Finally, the overall 5/1 Hybrid ARM also declined by five hundredths of a percentage point (0.05%), ending the week at an average 3.07 percent.

See this week's Statistical Release and Mortgage Trends Graphs.

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While the Fed's latest survey of regional economic conditions -- called the "beige book" for the color of its cover -- again reported "modest-to-moderate" economic growth, it bears remembering that this is data accumulated in the six-week period ending before April 7, so it would have included some opinions and facts which from the overall weaker period of late February and early March. To us, economic skies have brightened since then, and we would expect that we are more in the "moderate" than "modest" camp at the moment.

One example of this might be seen in Retail Sales, which have continued to rebound after a rough late 2013 and early 2014. The March report noted a 1.1 percent rise in sales, the strongest pop in over a year, and February's initially weak reading was bumped up to a gain of 0.7 percent. Strong results remained even when volatile items like big-ticket new cars and gasoline were excluded, and the rebound in sales was fairly widespread. If the consumer is starting to re-engage the economy, we can expect GDP to be on the upswing.

Fewer consumers losing jobs will help that to a real degree. During the week ending April 12, just 304,000 new applications for benefits were filed at unemployment offices around the country. It was the second week of a figure just above 300,000 new claims, leaving us at levels last seen in 2007, before the "great recession" began. A decline in firings isn't exactly the same thing as an improvement in hiring, but businesses retaining workers is a signal that business activity is picking up.

Industrial Production kicked higher in March, too. IP rose by 0.7 percent overall, driven upward by a 0.5 percent lift in manufacturing (a second month of gains after a January slump), a 1.5 percent pop in mining output (the strongest gain since last September), and joined as well by a 1 percent rise in utility output. The percentage of production floors in active use continues to creep higher, too, and now stands at a recovery-high of 79.2 percent overall and 76.7 percent for manufacturing. Both are still below long-run averages, but edging closer to them as time goes along.

A few weeks ago, we wondered "What's holding back housing?". A lack of inventory to buy is noted one of those factors. So what's holding back inventory from hitting the market? It occurred to us that one considerable issue might be Congress' inaction on reauthorizing the Debt Forgiveness Act of 2007. This Act allowed that there would be no undue tax consequence from a short-sale of a property; since it expired, someone who is willing to go though the arduous process of getting a lender to accept a less-than-mortgage amount price for a home may also now get slapped with a tax bill for the difference later on. It may very well be that, even with property price recoveries around the country, this potential liability is enough to deter sellers of homes bought in the 2004-2010 time period, who face the greatest exposure to the short-sale tax-hit issue.

We also noted that high debt loads might be a factor in keeping sales down, as homebuyers with high debts may have trouble qualifying, damping demand. However, it may be that this is also keeping sellers from listing homes, given that an accumulation of debt for things like new cars and even for education or job retraining may leave them unable to afford a house even equivalent to the place they already own. In short, these borrowers literally can't afford to move, even if they want to, so their potential inventory remains off the market.

It would stand to reason that with no real inventory constraints that builders of new homes would benefit from limited inventories of available existing homes. Housing starts moved up by 2.8 percent in March, rising to an annualized 946,000 units underway. Single-family starts rose from 599,000 in February to 635,000 in March, while multi-family construction slipped back. Permits for future activity also backed down by 2.4 percent, slipping to a 990,000 level during the month.

The fair level of building does seem at odds with the moods of builders, at least those measured in the National Association of Home Builders Index. Expected to move back into positive territory for April, the indicator will spend a third consecutive month at a below-par level of 47, up just a single tick from March and February levels. The measure of sales of single-family homes remained at a tepid 51 for a third consecutive month, and traffic levels at showrooms and open houses remained a weak 32. For reasons unknown, optimism about the six month period ahead rose by four points to a relatively solid 57, so perhaps there even though the traffic is slow, perhaps those who are in the market are more serious about buying in the near future.

An uneven level of growth among manufacturers was seen in two reports from local Federal Reserve districts. In New York, the Empire State index was forecast to have risen in April, but instead declined for a second straight month to hold just a slight gain with a reading of 1.3 for the month. Just down the New Jersey Turnpike, the Philadelphia Federal Reserve's local index not only bested expectations but did so by a wide margin, posting a 7.6 point rise to a reading of 16.6 for April, its best showing since last October. Overall, it looks as though manufacturing is adding a little more to GDP of late than it did in the first quarter of this year or the final quarter of 2013.

Inflation might be another item which helps rates to firm, but there still are few signs of any kind of acceleration for prices, even if the CPI did rise by a little more than expected in March. The 0.2 percent rise in headline costs pushed the overall figure to an annualized rate of 1.5 percent, still comfortably below the Fed's two percent "speed limit" for cost increases. "Core" inflation rose by a like amount during the month, but also shows only a 1.6 percent bump in the last 12-month period. We will need a protracted period of price hikes and some higher wage inputs before most measures of inflation get to worrisome levels.

Each bit of new evidence that points to an economy picking up speed makes it more likely that rates will move higher. Although not reflected in this week's figure, the strong Philly Fed report fostered a selloff in Treasuries on Thursday, producing a corresponding lift in yields of about ten basis points. With markets in holiday mode for Good Friday, we'll not see the effect of that bump until early next week, which should be sufficient to stop the fall in rates, if nothing else.

If joined by other solid news -- anything that shows upward movement as we move away from the winter effect -- it can be expected that rates will be firming. We'll get a fair bit of fresh news next week, too, including the Chicago Fed's NAI, sales of both new and existing homes, durable goods orders and the final April reading for Consumer Sentiment. Excepting the home sales numbers, where March reports seem more likely to be sideways than not, we think that the overall tenor will be a warmer one, and that mortgage rates will lift a few basis points off this week's 2014 bottoms by the time next Friday rolls around.

For a longer-range outlook for rates and the economy, one which will take you up until late June, have a look at our new Two-Month Forecast.

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Daily FRMI rates are available on HSH.com. Check out our weekly Statistical Release here (and archives here).

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For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President

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