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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Big Bump In Rates, But Expect Some Settling

October 12, 2018 -- It's certainly hard to ignore the noise surrounding the biggest spike in mortgage rates since November 2013, let alone that the run up puts 30-year fixed-rates at more than seven year highs.

No one should be surprised that interest rates are rising, even though the speed or size of the move may have caught some off guard. Economic growth has been very strong for a while now, job growth continues apace, inflation has made its way back to the Fed's desired levels, and the Fed itself is not only continuing on a path of raising rates and trimming its balance sheet but is no longer providing the kind of forward guidance it had been for years.

Interest rates moved higher because things are economically good; this week, concerns that ever-higher rates might diminish this economic goodness took its toll on stocks for a time, with multiple selloffs trimming more than 1,200 points off of the Dow Jones Industrial Average. Investors selling these relatively riskier holdings had cash in hand that needed to be put somewhere; the newly-higher yields on bonds looked attractive enough to pull in some of that cash, and this in turn chopped the top off of the rate spike. The yield on the 10-year Treasury peaked this week at an intraday value of 3.256%; by late Friday, it had shrank back to 3.158%.

Fixed mortgage rates do follow the yield on the 10-year Treasury, but it's not exactly always a one-for-one move. The spread between the two often hovers around 160 basis points or so, but can certainly be more or less, depending upon investor demand for Treasuries relative to investor demand for Mortgage Backed Securities (MBS) and other forms of mortgage-related debt. As such, mortgage rates may move less (or more) than the Treasury note.

What's happening with home prices? Which markets have recovered... and which still lag behind? Check out the fresh update to HSH's Home Price Recovery Index, covering price changes in 100 metropolitan areas -- and see our Home Value Estimator tool to reckon changes in your market during your ownership period!

Mortgage rates around the 5% mark are still historically favorable, but this perspective is really little more than a conversation piece for older homeowners to kick around the backyard firepit. What matters now is the perspective of potential homebuyers. It's unlikely that an 18-year old in high school back in 2008 cared much about mortgage rates, but a 28-year old wannabe homebuyer certainly cares now, and it may feel a little as though mortgage rates are the highest they can remember.

The reality is that there is a generation of folks in their prime homebuying years to whom a 5% mortgage rate seems high, and odds favor that somewhat higher rates will come over time; we've not seen a 6% rate since the week just before the Fed began the very first of its mortgage-support programs, now just about 10 years ago.

If home sales are any indication, potential homebuyers already seem weary of challenging market conditions, with high home prices, limited inventory of desirable homes to buy and what may feel like demanding mortgage borrowing conditions. Add to this blaring headlines about higher mortgage rates, and it seems like at least some buyers may become discouraged. That's not to say a slackening in demand is necessarily a bad thing; should it occur, this would in turn tend to help boost thin inventories of homes to buy and would also likely at least temper outsized growth in home prices. Theoretically, prices in markets that have become "frothy" over time could even see price declines at some point as a means of balancing affordability diminished by higher mortgage carry costs... or maybe not, as such a leveling could be achieved with a flattening of home price gain amid quickening income growth, too.

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At some point, mortgage rates will again crack 5% (some measures have us above this level already), and 5.25%, and 5.5% and perhaps even make it all the way back to 6%. We are not yet near "neutral" for Fed policy, and could see the federal funds rate pushed up by more than a percentage point yet (even by this time next year). While long-term mortgage rates aren't strongly influenced by the fed funds rate, they are not immune to its position on the yield curve.

Of course, there is no guarantee that inflation will speed up, or that economic growth will surge, or that foreign buyers will continue to snap up U.S.-backed debt at the same pace they currently are, and more or less of any or all of these things plus plenty of other items will dictate where interest rates will go as time wends forward.

In the meanwhile, we have the tempering of the rate spike to consider, which came in part from investors looking to escape the maelstrom of the equity markets this week, but also from fairly benign inflation reports. On a monthly basis, prices upstream of the consumer did tick a little higher in September, with the Producer Price Index rising by 0.2%, its first rise since June. "Core" PPI, a measure which excludes volatile inputs like fuel and food also rose by 0.2%, moving higher after a flat August reading. Despite the near-term rise, the annual trend for prices tracked here is actually down; headline PPI was as high as 3.3% as recently as June, but has now eased to a 2.7% annual rate. Core PPI has softened more modestly, but has shed 0.2% since running at a recent 2.8% peak in July.

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A mellow consumer price review helped soothe markets further when it was released on Thursday. The Consumer Price Index managed just the barest possible gain of 0.1% for September, less than was expected and half of increases tallied in July and August. Core CPI rose by just 0.1% for a second consecutive month and inflation measured here is generally cooler than it was earlier this year. On an annualized basis, headline CPI is now at 2.3% (down from 2.9% in July) and annual core CPI held steady at 2.2%, a level attained in four of the last five months.

Of course, the Fed uses a different measure it prefers to track inflation, core Personal Consumption Expenditures (PCE), but even that gauge has been running at a flat 2% rate for the past four months. Level inflation (or perhaps a fading pattern) might allow for the Fed to raise rates more slowly or even pause at some point, but with inflation only recently having returned to present levels in a long uptick, the Fed seemingly committed to more increases as soon as December and with such policy changes taking months to work their way through the economy, its certainly too soon to even consider these possibilities.

With all the noise about trade and tariffs, it's hard to know if the 0.5% increase in aggregate import prices in September is the result of new duties or actual price increases. Of course, it's also hard to reckon if more expensive goods will mean that we buy less of them (cooling global growth) or simply bite the bullet and pay the higher costs. Regardless, as we are a nation of net imports, such cost increases may work their way downstream and help to firm inflation a bit at some point. September's bump came after a soft period for prices, as the three prior months featured two declines and no change at all, making this increase the first since May. Reflective of that softer stretch, the annual rate of import price increase is still cooling, with the present 3.5% rate well below a recent peak of 4.8% tallied in July. Export prices have also generally been soft; September unchanged reading followed two months of declines, and the annual change in export prices has slumped from 5.3% in June to just 2.7% in September, nearly a 50% decline.

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Inventory levels at the nation's wholesaling firms continued to build up, rising a full 1% in August. In recent months, stockpiles of goods have been increasing somewhat more than sales, and the 0.8% increase in sales for August was certainly solid enough but fell short of equilibrium. Holdings of durable goods expanded by 0.9%; those of non-durable items rose by 1.2% for the period. With the ratio of goods on hand relative to sales still fairly low, it's a good bet that more inventory building will be seen in the coming months, which should provide more support for manufacturing and the broader economy.

The labor market is of course doing well, but the effects of Hurricane Florence are still being seen, and to that, we'll also need to add those from Hurricane Michael. The Florida panhandle took a direct hit from Michael this week; unlike Florence, where days and days of torrential rain caused massive and widespread flooding, Matthew was more of a wind event, with storm surge and high winds causing all manner of destruction. Weekly unemployment claims have edged higher in the last couple of weeks, with 214,000 new applications filed in the week ending October 6, and it's reasonable to expect somewhat more claims in the weeks ahead as Florida and nearby locales begin the recovery process.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Oct 05Sep 07Oct 06
6-Mo. TCM2.41%2.30%1.19%
1-Yr. TCM2.62%2.50%1.31%
3-Yr. TCM2.94%2.74%1.59%
5-Yr. TCM3.01%2.78%1.89%
10-Yr. TCM3.14%2.91%2.28%
FHFA NMCR4.63%4.60%3.99%
FHLB 11th District COF1.015%1.018%0.707%
Freddie Mac 30-yr FRM4.71%4.60%3.85%
Historical ARM Index Data

We won't know for a couple of weeks if this week's stock market rout and interest rate spike have affected consumer moods. However, the preliminary October University of Michigan survey of Consumer Sentiment did see as modest decline. The early review showed a 1.5-point decline in the overall indicator, which eased to a value of 99.0 so far this month; present conditions were judged slightly less favorably than they had been, with a 0.8-point decline to 114.4, and expectations for the future also dimmed just a bit shedding 1.4 points to slip to 89.1 so far this month.

Financial markets remain quite volatile and so even a short-term forecast for rates in the coming days must contain more than the usual level of caution. That said, the bulk of the spike in underlying rates took place more than a week ago now, was interrupted by a Monday market holiday but since then has been flagging, if in an ebb and flow pattern. We're unlikely to quickly or easily return to start-of-October yields for the 10-year TCM, but do look to be starting next week at levels measurably below the recent peak. A busier week of data is on tap, including retail sales and some housing indicators, but it's a fair bet that markets will be focused on the minutes from the last FOMC meeting, due out on Wednesday.

Based upon how financial markets closed this week, and with a grain or two of salt, we think there's a good chance we'll see perhaps a 5 basis point or so decline in the conforming 30-year FRM reported by Freddie Mac next Thursday. You can check our today's mortgage ratespage after 10am Thursday for some updated analysis.

For an outlook for mortgage rates that will carries nearly until Halloween, check out our latest Two-Month Forecast.

You might also take a minute to have a have a look at our mid-year review of our 2018 Outlook. Back in December 2017, we looked out over the year and provided some thoughts and expectations for a wide range of housing and economic topics, and included a long-range forecast for mortgage rates. It's hard to think that we'll be looking to 2019 in just a few short months.


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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