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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Rates To Firm, Loan Limits To Rise

December 1, 2017 -- Despite a slight downward wobble in fixed mortgage rates this week, odds continue to favor somewhat higher rates as we enter the final month of 2017. A solid economy, a Fed beginning to trim its holdings and highly likely to lift short-term rates in less than two weeks' time all suggest that somewhat higher mortgage rates are in the offing.

There's not much to be alarmed about, though. It's not as though these items have suddenly appeared or surprised financial markets in any way; the economy has put up 3-percent GDP figures for two quarters in a row, the recently started balance sheet reduction plan has been well described for almost six months and the economy appears to no longer need ultra-cheap money to help it along.

Of late, growing expectations that some manner of growth-boosting tax reform (or cuts for some, at least) has also been added into the mix, with forecasts of a rising deficit and an increase in government bond issuance at the top of investor's minds, too. Should more bonds come into the market in the coming years, this would occur as the Fed is accelerating its divestiture of holdings, meaning there would likely be a lot more supply for private investors but little certainty that there will be sufficient future demand to absorb it.

As well, should the economy grow at a faster clip more reliably, this also increases the likelihood that the Federal Reserve too will speed up its timetable of raising short-term interest rates back to a more normal or neutral stance. Although these are tomorrow's problems for investors to manage, there is enough concern about them as to help firm rates a bit today and in the weeks ahead.

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The estimated growth rate of the nation's Gross Domestic Product was ratcheted higher in the second review and is now reckoned to be a 3.3 percent rate. The Wall Street Journal noted "The U.S. economy is running at its full potential for the first time in a decade, a new milestone for an expansion now in its ninth year. Total economic output in the third quarter was slightly above the maximum sustainable level of output as estimated by the nonpartisan Congressional Budget Office. This is a measure of the economy’s potential to produce goods and services based on the supply of people working and how productive they are." According to the Federal Reserve Bank of Atlanta's real-time tracker, the aggregate of economic data for the fourth quarter so far puts GDP growth at a 3.5 percent clip. Faster growth by itself won't necessarily see the Fed become more aggressive in 2018; for that, we'll need to see inflation marching toward (or passing) the central bank's inflation target of 2 percent core inflation. In the third quarter, that rate was 1.4 percent, but was up from 0.9 percent in the second.

But is the inflation trend continuing? Seems like it. The Fed released its regional survey of economic conditions (Beige Book) covering the six-week period leading up to November 17. While another litany of modest-to-moderate growth across districts (5 districts noted "modest", 1 "modest-to-moderate" and 6 reported "moderate" assessments of economic activity) there was a bit of an ominous statement that seemed to escape most reviews: "Price pressures have strengthened since the last report." We review these reports regularly, and it has been a good long while since we recall seeing a statement such as this, but we've been noticing an upward trend in wide-ranging price measures for a number of months now. The report also reported that "several Districts noted input cost increases in manufacturing. In many cases, these increases in transportation and manufacturing [costs] were passed through to consumers."

Stronger growth and rising prices are two ingredients needed for higher interest rates.

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Home prices continue to rise at a fast clip. The October-to-October comparison of price changes by the FHFA found a 6.8 percent increase; reflecting this, the conforming loan limit for single-family mortgages will be lifted to $453,100 for 2018. "High cost" areas (some 220 counties and areas) see expanded limits available, with maximums in some markets as high as $679,650.

It seems to us that not all that long ago, there was much hue and cry about getting the government out of the mortgage business and inviting private money back in so that taxpayers wouldn't have to shoulder the risk of losses should they occur. The GSEs have been in conservatorship for almost 10 years now and it's fair to say that their presence in the market has rarely been larger or more important. However, expanding their loan-limit footprint now doesn't make much sense; the jumbo mortgage markets (private money) are functioning quite well and there haven't been reports for years that well-heeled borrowers can't obtain financing at reasonable cost. According to the trade newsletter Inside Mortgage Finance, about $119 billion of mortgages that exceed the conforming loan limit of $424,100 were produced during the third quarter of 2017, a total which includes about $33 billion of conventional, FHA and VA loans that fall within the agency limits for high-cost housing markets. The private market financed the rest, and no doubt would love to have had a crack at 30 percent more business that would have been available if the high-cost limits weren't in place.

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   Mortgage data: Today's Rates Historical Mortgage Rates Mortgage Trend Graphs
   Calculators: Downpayment Decisioner Tri-Refinance Calculator PMI Cost Calculator
   Resources: Housing & Salary Study ARM Index Data Home Value Estimator

That Fannie and Freddie are backing more loans and will soon be backing more loans with higher amounts should be a concern to even those not in the market for a mortgage. Fannie and Freddie have been directed for years to drain the capital that serves as a buffer against losses being passed to the taxpayer. In January, this capital buffer moves to zero, meaning any loss will be directly passed along to those who ultimately pay all the nation's bills. Despite being profitable and paying back funds well in excess of the estimated $187 billion they needed to stay afloat in the aftermath of the housing market collapse, the Treasury has continued to sweep billions in profits from the GSEs, leaving them exposed. To date, the GSEs have turned some $271 billion back to Treasury; with full GSE reform stalled again (and again, and again) a decision will soon need to be made as to whether to allow them to retain at least some capital. Yes, the housing market is solid now, but with an aging expansion unlikely to last forever, it's not unreasonable to expect delinquencies and foreclosures (and losses) to at least start to creep up in the coming years.

Sales of new homes climbed by 6.2 percent in October, rising to a 685,000 annualized rate of sale. This is the best annual rate in approximately 10 years, and it may be that continued tightness in inventories of existing homes and quickly rising prices are starting to drive more folks to consider new homes instead. On a comparative basis, and all things being equal, a potential homebuyer purchasing an median-priced existing home in the third quarter of 2017 would need an income of $55,390; the same buyer purchasing a median-price brand new home would need an income of $66,425 -- just about 20 percent more. Inventories of new homes are more elastic, too, and despite the surge in sales, there are still some 4.9 months of available unsold supply (282,000 actual units) available, a new high for the expansion.

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The manufacturing sector of the economy continues to do well, if perhaps slightly less so than in recent months. The Institute for Supply Management's latest report covering factory activity in November featured a value of 58.2, down 0.5 points from October, but certainly holding at a very solid level. A measure of new orders strengthened a bit and employment metrics also remained at a high level, and with economic growth in the U.S. and abroad firming, prospects for continued gains in manufacturing in the months ahead remain firm. As well, a local gauge of manufacturing activity in the Federal Reserve's Richmond district rose to a record high level in November, with the indicator's value of 30 capping a 14-month string of gains.

With the economy firing on most (if not all) cylinders, consumer spirits have rarely been higher. The Conference Board reported on Consumer Confidence for November; the headline value of 129.5 was the highest monthly figure seen since way back in December 2000. Assessments of current conditions rose by 1.9 points to 153.9, best since July 2001, and expectations for the future posted a 4.3 point gain to 113.3 for the month. Happier consumers are said to be more likely to open their wallets and power the economy forward more strongly, but the effect can be indirect at best. It remains to be seen how happy (or unhappy) folks will be with whatever comes as a tax bill from Washington, which will of course produce both "winners" and "losers" when all is settled.

As expected, sales of new cars and light trucks settled back somewhat after flood- and hurricane-related gains. AutoData reported a 1.3 percent decline in sales, which slipped to a 17.5 million rate, and likely headed lower in the months ahead. Before the storms hit and goosed sales, the annual pace had been steadily sliding to the low-to-mid 16 million range; with the vehicle replacement cycle long in the tooth and curtailed by tighter financing conditions for weaker credit borrowers, we may be looking at a sustainable trend closer to 16 million than not.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Nov 24 Oct 27 Nov 25
6-Mo. TCM 1.45% 1.27% 0.62%
1-Yr. TCM 1.62% 1.43% 0.79%
3-Yr. TCM 1.86% 1.73% 1.38%
5-Yr. TCM 2.08% 2.04% 1.81%
10-Yr. TCM 2.35% 2.42% 2.34%
FHFA NMCR 3.98% 4.00% 3.61%
FHLB 11th District COF 0.737% 0.729% 0.601%
Freddie Mac 30-yr FRM 3.92% 3.94% 3.94%

Personal incomes rose by 0.4 percent in October, a little better than analysts expected and a like-sized gain to September. The composition of the rise was a little different, though, as wages grew by only 0.3 percent (compared to 0.5 percent) but increases in rental income and funds thrown off from rising asset prices made up the difference. Personal outlays only rose about half of the income gains, and with more income than outgo, the nation's rate of savings ticked up by 0.2 percent to 3.2 percent for the month. At a time of only modest increases in consumer borrowing, such gains in savings have tended to presage some additional spending down the road, perhaps in this case for the upcoming holidays.

There was a bit more economic data to consider this week, as well, but we'll leave it for now. There will be plenty more to cover next week, as the calendar has turned to December and the slew of new economic reports will continue, including the all-important November employment report next Friday. Despite all manner of domestic and global troubles, including a new long-range missile fired by North Korea, financial markets seem largely unfazed; major stock indexes hit record levels again this week and interest rates have only firmed up slightly. In just a few short weeks time, short-term rates are likely to rise again, we'll probably have new U.S. tax policy in place and the ECB will be halving its monthly purchases of bonds. Still, rates are only firming slightly.

Perhaps all these effects will start to show up more strongly in rates in the next couple of months. We'll consider them in that context as we consider our next Two-Month Forecast, due out next Friday.

In the meantime, we find ourselves peering into next week. Even with a late-day Friday fall in bond yields, this week's little dip in mortgage rates is likely to be erased in the coming days, and we will probably see an increase of a few basis points in the conforming 30-year FRM when Freddie Mac reports next week.

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.


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

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