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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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It's All About Change

November 17, 2017 -- While thirty-year fixed-rate mortgage rates edged closer to the 4 percent mark than they have been in months, there's little immediate reason for alarm. The most popular mortgage will certain crack the 4 percent mark at some point, most likely in the coming weeks, as the Federal Reserve prepares to lift short-term interest rates once again.

Rates, of course, change all the time, sometimes in large increments, sometimes small, and this is to be expected in a market-based economy. That said, more pronounced changes can occur when the structures in which markets operate are changed or disturbed, and it is here where things will be getting more interesting as we go along.

We already know about the change at the top of the Federal Reserve, as we will segue from Janet Yellen to Jerome Powell come early February. We don't know, though, how Mr. Powell's stewardship of monetary policy or demeanor under pressure will differ from that to which we've become accustomed. We already know that the Fed has a largely pre-set policy for reducing its balance sheet over time, but we don't yet know how this will work in the context of a future economy and future monetary policy. We also do not know who will step in as a second in command at the Fed, but the name Mohammed El-Erian was floated in the media, and other changes to the Fed's board of governors will also be coming as there are other empty seats yet to be filled.

A new wrinkle to the regime of change we will be seeing is a new heard of the Consumer Financial Protection Bureau. Director Richard Cordray announced his resignation this week, effective at the end of November. Mr. Cordray has been a controversial figure leading a controversial agency created in the wake of the financial market meltdown nearly a decade ago, and his term was due to expire next July. In the current climate, and at odds with the Trump administration, there was little likelihood he would have been renominated after nearly 6 years on the job. Republicans recently overturned the CFPB rule that banned mandatory-arbitration clauses, which were seen by the agency as limiting consumer rights to legal redress; it may be that this was the impetus for Mr. Cordray to leave, as any future rulemaking would likely be subject to being overturned, too, for better or worse.

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We've also got change coming from the ECB as it will be making at least initial steps to rein in its quantitative easing programs. The current program of bond buying is running at $60 billion euros per month, but this will be halved come January and may only run for an additional nine months. Before long, investors will need to start to snap up bonds that central banks have been absorbing, and it's not clear if there will be sufficient demand to meet supply.

Perhaps as a counter to all this, the Treasury Department announced that it will be looking to issue more short-term debts to meet the government's borrowing needs and limit the amount of long-term bonds it makes available. This is a bit of a sea change, as the strategy for years has been to issue long-term debts at rock bottom interest rates to cover borrowing needs. With the Federal Reserve on a course that will likely see short-term rates rising over time it seems that borrowing costs to the government will rise, and we're more likely to see a flatter yield curve. This may cause some change in investor holdings and bond-buying habits, as it may be more valuable to buy a two-year note at, say 2 percent than to buy and hold a 10-year note at a yield only perhaps a half-point higher.

Changing, too, are the tax structures that may be underpinning certain aspects of homeownership. The House passed its version of tax reform, which contained provisions that limits the mortgage interest deduction on newly purchased homes to $500,000 and disallows the interest deduction for second homes. This is a reduction from the current $1,000,000 mortgage amount limit (which included any interest on second homes). As well, the ability to deduct property taxes would be capped at $10,000 a level which would certainly penalize borrowers in expensive homes in high-tax states. The tradeoff would be a doubling of the standard deduction to $24,400 for a married couple, but this amount will no doubt fall short for a wide swath of borrowers in high-cost areas. There would also be a lengthening of the capital gains holding period as it pertain to primary residences, too, but it's hard to reckon whether or not this will exacerbate the issue of low inventories of homes to sell or not at this point. The bill in the Senate differs greatly from the House version, so we'll need to see what comes of the compromises that lie just ahead.

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As such, we find ourselves in or coming into a period of change. The players are changing, the strategies, goals and long-dated incentives are changing, the regulations which govern markets seem likely to change, and monetary policies are also changing. In the midst of all this, we of course have a changing domestic and global economy, and it will most certainly be interesting to observe in the interactions of these and other moving parts as time wends forward. On a macro scale, it's hard to say exactly what these things (and other influences) will mean for mortgage rates, access to credit and financial markets, but we'll soon start to find out.

In the meantime, there's the immediacy of today and the here and now. As we noted to start, mortgage rates edged higher this week, likely due to investors trying to get a handle on all of these things. Certainly, there was a bit of economic data to chew on as well.

Inflation continues to be a top-of-mind topic, but there continues to be little evidence of a breakout from a muted pattern, even if it is one where a more or less steady upward creep in prices is happening after a spring and summer swoon. The Producer Price Index, a measure of costs upstream of the consumer, rose by 0.4 percent in October for a second consecutive month, and prices have been in a general firming pattern for about four months and are currently at a 2.7 percent annual rate (this figure was 1.8 percent as recently as June). Core PPI, a measure exclusive of highly-volatile components rose a bit less, rising 0.3 percent for the month, and is now sporting a 2.4 percent annual rate, the highest core PPI figure since April.

Meanwhile, the Consumer Price Index (PPI's downstream twin) rose by the barest possible amount in October with just a 0.1 percent increase. This headline figure was tempered by falling energy costs during the month and its annual rate stepped back to a flat 2 percent. Core PPI, a tally that leaves out food and energy costs, doubled the headline with a 0.2 percent rise for the month. Core CPI moved to an annual rate of 1.8 percent, breaking a 5-month string of a 1.7 percent rate. The Fed prefers to track a different core measure of prices, but if core CPI is moving upward after a lull, it's a good bet that the core PCE marker the Fed likes is moving that way, too.

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Prices are firming up a bit around the globe, too, and this is starting to be more regularly reflected in the monthly measure of import prices. In October, the aggregate costs of goods coming onto U.S. shores rose by 0.2 percent, a little bit of a deceleration from September's 0.8 percent spike but sufficient to see import prices now rising at a 2.5 percent annual basis, more than double the level seen as recently as July. Goods headed to other places from the U.S. saw no increase in costs last month, but even then, prices of outbound items are running an annual increase of 2.7 percent, triple July's rate.

To be sure, price pressures for PPI, CPI and imports and exports are still quite low, but it does appear that the pattern has changed to an upward one overall in the last few months.

After a storm-related spike in September, retail sales settled back to a more muted level in October. The 0.2 percent increase in spending was tempered by falling sales are building supply stores and gas stations, which were goosed in September. So-called "core" retail sales that exclude auto and gas station sales rose by 0.3 percent. In general, consumer spending continues to grow at a solid if unspectacular rate, much as it has throughout this economic expansion.

The nation's home builders continue to be very happy about the current stat of the market. The National Association of Home Builders index of activity rose by 2 points in November to land at a value of 70, a very robust figure and the second highest monthly reading in about 12 years. Measures covering sales of single-family homes powered upward by two points to 77, expectations for the next six months slipped by a point to 77, and the measure of traffic at model homes and showrooms regained the breakeven level of 50 for the first time in six months.

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Of course, it's easier for builders to be optimistic when they are busy. Housing starts rose by a fat 13.7 percent in October, pushed there by a 36.8 percent leap in starts of multifamily homes. Single-family starts, the larger and more important component of the market, managed a 5.3 percent gain to an annual rate of 877,000 units, while multifamily starts moved to a 413,000 annual rate. Overall, starts are running at a 1.29 million annual rate, the fastest rate in about a year and a level that is easily among the best of the expansion to date. Permits for future building also increased, rising by 5.9 percent to a 1.297 annual rate, so there is likely to be some more construction coming as we roll into 2018. That will be welcomed, as thin inventories of homes available for sale are curtailing growth in home sales and any additional supply can only help in the long run.

A few local looks at manufacturing activity found solid conditions, if perhaps slightly less so than in recent months. The Federal Reserve Bank of New York's local manufacturing gauge fell back by 11.8 points to fall to a still-solid 19.4 for November, where a sub-measure of orders rose even as employment metrics softened a bit. That was exactly the case just next door in the district served by The Philadelphia Federal Reserve, whose own barometer slipped by 5.2 points to 22.7 for the month. The headline figure was still strong, and as in New York, the measure of new orders moved higher while job gains moved a little lower. Meanwhile, the Federal Reserve of Kansas City chimed in with its own report, which showed an overall deceleration of 7 points to a reading of 16 but a softening of new orders and employment gains. All three of these gauges are in months-long periods of solid to strong expansion, and manufacturing continues to contribute to economic growth of late more than it has in recent years.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Nov 10 Oct 13 Nov 11
6-Mo. TCM 1.34% 1.26% 0.56%
1-Yr. TCM 1.52% 1.41% 0.70%
3-Yr. TCM 1.76% 1.65% 1.08%
5-Yr. TCM 2.01% 1.94% 1.42%
10-Yr. TCM 2.34% 2.33% 1.98%
FHFA NMCR 4.00% 4.05% 3.58%
FHLB 11th District COF 0.729% 0.732% 0.703%
Freddie Mac 30-yr FRM 3.90% 3.88% 3.54%

Industrial production moved higher in October, rising by 0.8 percent. Manufacturing added to the gain, with this sector's output rising by 1.3 percent; mining output was a bit of drag this month, slipping by 1.3 percent, but utility output powered the top-line number higher as it expanded by 0.2 percent. The percentage of industrial production floors in actual use rose again to 77 percent, the highest it has been in about two years, if still well below long-run norms of closer to 80 percent.

Weekly claims for unemployment benefits ticked higher in the week ending November 11, moving up to 249,000 new applications for assistance. Initial claims have moved up by +10K in each of the last two weeks, and are the highest in about six weeks. It may be that hiring has cooled a little bit after October's spurt, but it may also be that last Friday's federal holiday for Veteran's Day has distorted things a bit. We'll learn more about these trends in the days ahead.

An early-week firmness in interest rates (reflected in the five-basis point rise in the 30-year FRM Freddie reported on Thursday) has faded, and rates have stabilized, if not declined just a little in the last day or so. We seen no real no real change in mortgage rates for many months, which wobbled their way on down to 2017 lows through the summer and as autumn approached, and have since wobbled their way back upward as we have moved toward winter. Eventually, and probably soon, there will be headlines of "mortgage rates crack 4 percent", arguably spooking potential homebuyers. Don't believe the hype; for a $100,000 loan with a 30-year term, the increase in monthly payment between this year's low of 3.78 percent and 4 percent is just under $15 bucks a month. That shouldn't be enough to scare anyone from buying a home or even generate much more than passing concern.

For next week, and given where this week ended for underlying mortgage-rate influences, call it a move of two basis points in either direction for the average conforming 30-year FRM Freddie Mac will report next Wednesday (Thursday being the Thanksgiving holiday).

For a forecast for mortgage rates that carries almost to the end of the year, have a look at our Two-Month Forecast. Although the clock is ticking on 2017, you might also have a glance at our recent mid-year update to our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing.

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