Mortgage Rate Trends: Weekly Market Trends & Forecast

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Keith Gumbinger    HSH.com Find archives here.

Rates Still Sliding; Should the Fed Sell?

January 16, 2015 -- Wobbly world markets and concerns of deflation continue to drive money into the relative safety and security U.S.-based or backed instruments, pushing yields down, and dragging mortgage rates right along with them. This isn't news, per se, but we seem to be in a process of accumulating new players and problems into this process, intensifying the effect on our markets.

To the existing and ongoing troubles of slowing growth in China, barely any growth in Japan, the unsettled Euro currency union situation, the as-yet unknown repercussions of the collapse in oil prices and prospects for deflation, and a European Central Bank expected to move into untested QE territory, we added this week an unexpected unpegging of the Swiss Franc from the Euro which alarmed investors further, and this all comes amid some new concerns about the ability of the U.S. economy to power past all this.

Well, at least there's the benefit of cheap mortgage money from it all -- refinance activity kicked to its highest level in about six years last week. The boomlet is probably unsustainable, given how many loans have already been refinanced in recent years, and the spike probably is the result of some pent-up demand from the holiday season, but there should be some strength in activity for at least a little while yet.

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 declined by another five basis points this week (0.05%) to land to 3.80 percent, the lowest average seen here since the week ending May 17, 2013. The FRMI's 15-year companion managed another eight basis point decrease, presenting homeowners looking to refinance with an even more attractive average of 3.16 percent. Fully-insured FHA-backed 30-year FRMs remain well below even their conforming counterpart and eased by another eight basis points (0.08%) to drift to 3.55 percent. The move for the overall 5/1 Hybrid ARM was more considerable, as the most popular ARM fell by thirteen basis points, landing at 2.96 percent for the week, its first foray below three percent since June 2013.

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

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The Federal Reserve's latest review of regional economic conditions (the "Beige Book") reported that 11 of 12 Fed districts reported "modest" or "moderate" growth in the six week period ending January 5, with only Kansas City reporting that not much was happening in their region. Business contacts in the KC region as well as in several other districts expect a faster pace of growth in coming months. The summary report noted that real estate markets across the country were a flat to mixed bag, improving in some regions but not so much in others, a familiar story.

An improving economy and some forward guidance has put the Fed on a path to start to raise short-term interest rates later this year. How much they will raise them and how often will continue to be a matter of speculation as we move forward, but given the recent shifts in the market, we wonder if the Fed might consider prudently selling some of their holdings of bonds and MBS to try to at least help reduce volatility in the markets, as the effects of such a move on the economy might be more negligible now than later.

The story is much the same as the argument your elected representative are making with regards to increasing the taxes on gasoline; that is, with yields not only lower than was expected by the Fed but falling, they could start to reduce their holdings of bonds with minimal effect on long-term interest rates.

A small part of the reason long-term rates are falling is that the Fed continues to reinvest proceeds from maturing instruments into new purchases (note: the surge of mortgage refinancing will increase this). Greater influence has come from a combination of reduced supply as an improving economy has narrowed the U.S. budget deficit to levels last seen in 2007, so issuance of new debt has been shrinking. This has occurred at a time of increased demand from global investors trying to get money out of harm's way (or at least into something with a bit of yield).

The Fed has of course stated that its intentions are to hold onto these assets and let them mature or be terminated over time, and they expect to continue to recycle assets until the first change to interest rates. Given the present market, it stands to reason that they may re-examine this policy and could make a change to it at the next meeting. However, they probably will continue to stay on the present path, but this may be a unique chance for them to start to move away from unconventional monetary policy and lessen their bloated balance sheet with little undue effect.

If inflation continues to diminish, increasing its distance from the Fed's 2 percent goal for prices, it will make it increasingly difficult for the Fed to justify making a change to short-term rates, no matter how much they want to start to move back toward normal. The latest figures on prices all are flashing the same deflation story, with energy and oil costs pulling things down almost everywhere. Import prices are of course among them, and the 2.5 percent decline in inbound costs in December was not only greater than the 1.8 percent dip in November but was the largest in a now six-month string of declines. Led by oil, prices for goods coming into the U.S. cost 5.5 percent less than a year ago; exclude them, and costs are unchanged. Export costs are falling, too, although not as fast or for as long. December's 1.2 percent decline was the largest of the string of five consecutive declines, but even with that the net decline over the last year is "only" 3.2 percent.

Of course, at least some of these declines in prices are passed along though our supply chains. The producer price index slipped by 0.3 percent in December, and there have been modest declines in the headline PPI calculation in four of the last five months. "Core" PPI, excluding items like fuel and other volatile components, actually increased in December, rising by 0.2 percent, a lift after two months of twin 0.1 percent declines. At the producer level, headline inflation is up by a scant 1.1 percent over the past year (and on a declining path), and core PPI has increased by 1.3 percent, but is drifting lower too, if more slowly.

Consumers like muted price gains, as it helps their spending dollars to go further. the Consumer Price Index dipped by 0.4 percent in December, the headline figure's third decline in the past year, with energy costs now in a six-month slide. It's too bad folks can't eat energy, as the savings there are being consumed by rising food prices, up 0.3 percent for the month. Excluding these two components from the total, "core" CPI was unchanged for the month. Over the past year, the story here is much the same as for PPI; the 0.7 percent year-over-year change in headline CPI is much cooler than even November's figure, and still waning; "core" is a little stronger with a 1.6 percent rise. Energy costs are almost 11 percent lower now than in December of last year; food costs are up by 3.4 percent, and rising.

The windfall to consumers from lower gasoline prices was supposed to translate into robust retail sales, but that's not yet been the case. Although the National Retail Federation said its members reported their best holiday selling season in three years, retail sales actually declined by 0.9 percent in December amid widespread weakness, and prior months were revised downward as well. The decline was lessened (but still -0.3 percent) when auto and gas station sales are removed. It may be that for the moment the windfall may be being used to pay down credit card balances, with more spending to come at a later point. We'll see.

A couple of looks at regional manufacturing activity were a mixed bag. The New York Federal Reserve noted a rebound in activity, as their Empire State Manufacturing Index moved from a value of negative 1.2 to one of a flat 10.0 in January, so there was improvement to be seen here. Down Route 95 to Philadelphia, the Federal Reserve Bank here showed a considerable cooling in activity, with their gauge slumping from a reading of 24.3 in December to just 6.3 in January. To be fair, Philly reported a string of very strong reports for about the last six months, and some cooling was inevitable, but it does reinforce the idea of a period of more muted activity.

That was also the message from the latest report covering Industrial Production for December. The 0.1 percent decline in output was the result of slower manufacturing (a rise of 0.3 percent, down from 1.3 percent in November), a slump in mining production (-2.2 percent) and a significant drop in utility output, which fell by 7.3 percent. With the collective easing, the percentage of industrial floors in active use slipped by 0.3 percent to 79.7 percent for the month, a small step a little further away from levels that have been known to product inflationary bottlenecks in production.

Initial unemployment claims flared squarely over the 300,000 mark in the week ending January 10, but it's too soon to worry, as this is the first non-holiday week in a while and the rise could simply a combination of some catch-up in claims and some seasonal adjustments. Still, in a week where data had a generally softer tone this simply reinforced the notion of the forming of a slower growth pattern.

Consumers were more optimistic in early January than at any time in the last eleven years, according to the University of Michigan Survey of Consumer Sentiment. The 92.2 preliminary value for the month was no doubt pushed there by plummeting gasoline prices, which are adding dollars to pocketbooks (or at least subtracting less), even if it has not translated into spending as yet.

It may be the the present firestorm which has trimmed interest rates is over for the moment, but there are plenty of jittery investors across the world, and as we learned this week, plenty of unforeseen issues that could press rates further down. For the moment, at least, we remain above what we reckoned to be about 60 year lows for rates set in December 2012 and almost caught in May 2013. That said, we're a lot closer to them than we thought we'd be by now, and any fresh spate of turmoil could see us revisiting them at some point.

A lighter bit of data is on tap next week, as U.S. markets will take a Monday holiday. As has been the case, issues beyond these shores are largely dictating mortgage rate movements and continue to be beyond reasonable prediction. Still, we'll wing it, based on nothing more than Friday's market, and expect that the week's long rate decline will largely halt next week, a combination of calmer markets and an upsurge in the demand for mortgage credit.

For a longer-range outlook for rates and the economy, one which will take you up until late February, have a look at our new Two-Month Forecast -- and for the year as a whole, check out our 2015 Outlook for mortgage, real estate markets and more. If you're into really long-range reviews, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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

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

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