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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Firmer Rates Now, More In The Summer?

May 27, 2016 -- In recent weeks, the Fed's message to the markets has become a little more clear and strident: Prepare yourself for higher short-term rates. What's been missing from those exhortations is any indication of when the markets should expect a change. For investors, a vague "sometime soon" is harder to prepare for then something more concrete.

Although perhaps not yet cast in stone (or even hardened, to follow the concrete metaphor above) Federal Reserve Chairwoman Yellen at the very least revealed a bag of mortar mix and masonry tools this week, noting at a panel discussion at Harvard University that "probably in the coming months" an increase in short-term interest rates would "be appropriate."

June is a coming month, as is July... and August, and from the Chairwoman's perspective, "growth looks to be picking up." Warmer growth, solid labor markets and perhaps stronger price pressures are all conditions which will cause mortgage rates to rise; if those conditions are happening or even are expected to occur, mortgage rates will rise, and well before the Fed makes any move.

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 rose by five basis points (.05 percent), firming to an average rate of 3.75 percent. The FRMI's 15-year companion managed a seven basis point increase, moving up to an average rate of 3.13 percent for the period. Popular with first-time homebuyers, rates on fully-insured FHA-backed 30-year FRMs remain considerably below their Fannie and Freddie counterparts and increased by just a single basis point to lift the average interest rate to 3.54 percent, just above a 2016 low. Meanwhile, the overall 5/1 Hybrid ARM, more sensitive to any Fed move, rose by another six one-hundredths of one percent to increase to a flat 3 percent for the week, it's highest value in about eight weeks.

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

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If the economy is picking up steam, as it did in the second quarter of each of the last two years, it will be doing so from a stronger point than seen in either of those two periods. The preliminary estimate of first quater Gross Domestic Product growth was revised upward, from 0.5 percent in the initial review last month to 0.8 percent now. Of course, this is still very weak, but the first quarters of each of the last couple of years have seen a decline of 0.9 (2014) and a positive 0.6 percent (2015). It is believed that there are a number of adjustment errors that make the first quarter period hard to accurately reckon, so the softness in each of these periods may be overstated to an unknown degree. Regardless, growth was revised upward, and if the pattern holds may be firming much more quickly right now. The updated GDP report showed no change in the Fed's preferred inflation measures -- headline PCE is 0.3%, but core PCE remained at 2.1 percent, just above the Fed's stated speed limit.

In signs that the long run of low rates and labor market improvement is having at least one desired effect, sales of new homes rose to their best annualized rate since 2007. April's 16.6% leap to a 619,000 pace was far better than markets expected, and came despite a jump in new home prices (plus 9 percent month over month). If it holds, the spike in sales means homebuilders will simply have to build more inventory, which fell to just 4.7 months of stock at the current pace. Presently, there are 243,000 built and available units for sale, down by 1,000 over March, the first actual drawdown of stock from month-to-month since last July.

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Orders for durable goods rose by a stout 3.4 percent in April, fast on the heels of a 1.9 percent gain in March. This was the first back-to-back increase in orders since June-July of 2015 and certainly gives the second quarter a running start. That said, the headline figure did appear to overstate the strength of the report, as much of the increase was concentrated in transportation-related orders; without them, just a 0.4 percent rise was tallied. Also, the so-called "core measure" of durable goods orders (a proxy for broader spending by businesses) actually declined by 0.8 percent, and hasn't posted a gain since January. Despite that, the report was pretty fair.

It may be that next week's Institute for Supply Management report for May will show lackluster gains (if any) in the nation's manufacturing sector. Last week we learned of weaker May factory activity in two regional Federal Reserve districts (New York, Philadelphia). This week we discovered that conditions aren't great in two others, as the Richmond Federal Reserve Bank's barometer slumped from a positive 14 in April to a negative 1 in May; new orders flatlined and employment gains were muted. Out in the heartland, the Kansas City Fed's local gauge also lost momentum as it dipped by one tick to minus 5 for the month. The KC Fed's tool hasn't showed a positive reading in well over a year, but the recent trend was at least heading in the right direction until this stumble. April's ISM was just a hair over the breakeven level of 50, and there doesn't appear to be a reason to expect much by way of improvement at the moment. We'll find out next Wednesday.

  Find these only at HSH.com!
   Mortgage data: Today's Surveyed Rates Historical Mortgage Rates Mortgage Trend Graphs
   Calculators: Downpayment Decisioner Tri-Refinance Calculator PMI Cost Calculator
   Resources: Housing & Salary Study Mortgage Rate Surveys Home Value Estimator

If the employment report for May shows a rebound in what has been a moderating pattern for hiring, it would make a move by the Fed in June much more likely. After a near-term monthly peak of almost 300,000 new hires last November, the trend has mostly been a cooling one, easing to just 160,000 new hires last month. That said, 0.8 percent GDP growth in the first quarter may not have required much by way of new workers to meet production goals, but if the economy is warming up we may see hiring start to trend upward again. To the extent that weekly initial unemployment claims can provide clues, it would appear that we might actually see low-end figure, as claims numbers in May have been rather above those posted in April. However, initial claims have been slipping back to trend after a couple of week spike that closed April and begin May. New claims for benefits fell by 10,000 to 268,000 in the week ending May 21.

Consumers seem to feel better about their situations. The final May reading of the University of Michigan survey of Consumer Sentiment sported a 5.7 point gain for the month, with increases in assessments of current conditions and expectations for the future both contributing to the rise. The increase this month was the first gain of 2016 and puts us on par with levels seen last June and July. It's interesting to note that this is also occurring at a time when gas prices have been generally firming, trimming purchasing power to some degree, which often seems to temper enthusiasm, but the assessment of present conditions is now at a level last seen in 2007, so the effect must be limited at today's relatively reasonable prices.

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HSH's Statistical Release features charts and graphs
for eleven mortgage products, including Hybrid ARMs.
Our legacy state-by-state statistics are now here.
Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  May 20 Apr 22 May 22
6-Mo. TCM 0.42% 0.36% 0.08%
1-Yr. TCM 0.62% 0.54% 0.23%
3-Yr. TCM 1.02% 0.96% 0.98%
5-Yr. TCM 1.34% 1.31% 1.56%
FHFA NMCR 3.75% 3.73% 3.80%
SAIF 11th District COF 0.678% 0.670% 0.700%
HSH Nat'l Avg. Offer Rate 3.70% 3.68% 3.98%

In the week (and weeks) ahead, we're going to learn a lot about where mortgage rates will go this year. The Fed seems on a path to get at least one rate increase under its belt in 2016, and there are reasonable chances that more will come (we're still on the record as expecting two). Mortgage and other interest rates have risen along with the increasing probability of a Fed move, but markets know very well that there are limits to what the Fed can do, given a rough world economy and strong appetites for U.S.-backed debt. Given the situation, a Fed lift will probably create more flattening of the yield curve -- short-term rates closing in a bit on long-term ones -- but may have only limited overall effects on rising the longer-term rates that influence fixed-rate mortgages.

We'll see about that, probably in the next "couple of months". At the moment, though, we'll come out of the unofficial start to summer's holiday weekend and right into a torrent of first-of-the-month data -- the twin ISM surveys, car sales, imbalance of trade, employment report and more. The mild uptrend for rates seems likely to persist next week, so we think we'll see a 2-4 basis point increase in HSH's FRMI, perhaps a little more of the data is on the stronger side.

For a longer-range outlook for mortgage rates and the economy, one which will run through mid-July, have a look at our new Two-Month Forecast. If you're wondering where we'll go after that, you might have a look at our 2016 outlook.

For a really long-range outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".


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 Calculators to learn exactly when you will no longer have a mortgage balance greater than the value of your home.

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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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