Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Keith Gumbinger    HSH.com Check archives.

Fed Skips Chance, Will Return Later

September 23, 2016 -- The vote to keep short-term interest rates unchanged by the Federal Reserve Open Market Committee was closer than it had been in about five years, but in the end, there was no change to monetary policy. The vote to hold the line was 7 to 3, with three for raising interest rates now rather than waiting.

The statement that closed the two-day meeting did contain an explicit warning about the future for short-term interest rates: "The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives." In humanspeak, this means that should the incoming economic data and data on inflation continue apace, markets should expect that a December policy move is coming. Currently, fed funds futures markets put the probability of a move at about 60 percent.

The Fed also released updates to its collective member projections for growth, inflation and the pace of changes to the federal funds rate over time. The group again marked down its expectations for the trajectory of these items, and perhaps most notably, the long-run rate of economic growth was pegged at a pretty anemic 1.8 percent level, and there were no expectations for growth to run a full annual rate above 2 percent in the next three and a half years.

As well, expectations for where the federal funds rate will be over the next few years was pulled down by a half-percentage point for 2018 and 2019 from projections as recently as June. Overall, it means that the Fed expects rates to be lower for longer... again.

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

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If the outlook provided by the Fed suggests that only a 1.8 to 2 percent rate of growth is to be expected over time, this might be considered the new benchmark. If this is the case, then we can expect the Fed to act as it sees fit when growth or inflation exceeds this figure. It also bears consideration that we are perhaps flirting with these levels at the moment, so no wonder the Fed cannot decide if it should make a move or not.

Meanwhile, having had only modest success with traditional and untraditional monetary policy, the central bank of Japan decided this week to use its tools to target a price range for 10-year government bonds. The price target is about zero percent, but given that Japan has had some highly negative short-term rates, this appears to be an attempt to keep the country's banks from at least losing money when parking it in the safety of sovereign bonds. All these actions are in hopes of breaking Japan's multi-decade deflation and slow growth problems, but whether they will have the desired effect remains to be seen. No matter how unique, monetary policy can only to so much to stimulate an economy.

The latest bouts of economic data continue to point out that August was a mixed month at best. A good overall measure comes from the Chicago Federal Reserve bank in the form of their National Activity Indicator. This amalgam of some 85 economic indicators produced a value of -0.55 for August, a deceleration from July and one that pegs economic growth for the period well below the economy's 'potential" or natural rate of grow over time, which has typically been a GDP in the mid-2 percent range, but may be closer to 2 percent now. Regardless of the specific level, suffice it to say that the economy downshifted in August after a pretty good July.

Some news headlines pointed out the 5.8 percent drop in housing starts in August as a concern; in reality, starts have been rangebound for many months, and month-to-month decline notwithstanding, the 1.142 million (annualized) rate for home starts is just about dead in the middle of that range, and a pretty fair pace as well. Single-family starts eased to 722,000 from 768,000 and multi-family dipped to 420,000 from 444,000 during the month, and permits for future building edged down by just 0.4 percent to a 1.139 million annual rate.

If the slipping in housing starts was an actual concern, who better to express it than the National Association of Home Builders? To the contrary, the NAHB's index of member sentiment powered higher in September, rising 6 points to 65, its highest level since almost a year ago. Single-family sales rose to a robust 71, as did expectations for the coming six-month period, and traffic levels at model homes and showrooms rose to 48, it's highest reading in a good long while.

Sales of existing homes eased by 0.9 percent in August, but word is that the difficulty in increasing sales is not from a lack of demand, but rather tight supplies of desirable homes to buy. That said, the 5.33 million (annual) pace of sales attained in August is certainly solid enough and compares favorably with the best levels of the recovery and expansion. The supply of homes available to buy tightened again, falling to 4.6 months of supply, and tight supplies amid steady demand means prices continue to climb. The median home price in August was some 5.1 percent above the same period a year ago, crimping affordability to a somewhat greater degree.

The Conference Board's index of Leading Economic Indicators documented a stumble in August, dropping from a +0.5 percent level in July to a -0.2 one for August. There have been a couple of like-sized swings in recent months, all underscoring the uneven nature of economic growth this year. If nothing else, the indicator suggests that the economy had little by way of momentum as it entered the final month of the third quarter.

Mix-and-match economic data have been the case of late, but one constant despite this has been the labor market. Initial claims for new unemployment assistance have been mostly steady at very low levels for months. Back in July, we saw a three-week period where claims held near 40+ year lows, then they edged higher for a time. That "edged higher: has faded this month, and the 252,000 new applications for help in the week ending September 17 were equivalent to July lows. July's hiring gain was a strong 275,000; August downshifted to 151,000. If the recent trend for initial claims is any indication, we may be headed for a hiring report somewhere in between those to figures for September.

Manufacturing activity in at least one portion of the country picked up in September. The Federal Reserve Bank of Kansas City's local barometer rebounded from a -4 reading in August to a +6 one for September, with a pick in new orders and an improvement in employment patterns.

The interest rate increase in place in the days before the Fed meeting has now been bled back out of the market. As we've noted at times, mortgage and interest-rate watchers should get used to seeing this kind of pattern, where rates edge higher into the meeting, and fall back again once it has concluded. If this year's patterns should hold, we may see a little "sweet spot" for mortgage and other interest rates in the weeks ahead, especially if the economic news shows little sign of acceleration. Expect mortgage rates to keep meandering in the coming week.

For a longer-range outlook for mortgage rates and the economy, one which will run through late September, have a look at our new Two-Month Forecast.

It's not too late to still have a look at the update to our 2016 outlook. This half-year review saw us update and discuss how our predictions are working out... some good, some not so good. Have a look!

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

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