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Mortgage Rate Trends: Weekly Market Commentary & Forecast

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Low Rates Not All About The Fed

June 21, 2019 -- As was largely expected, the Federal Reserve didn't lower short-term interest rates this week, but rather provided markets with some assurance that they will act soon if the current unsettled economic climate begins to more seriously affect economic growth. At the moment, though, it's worth considering that the current level of long-term interest rates and mortgage rates have come with no action on the part of the Fed; in fact, their last change to rates some six months ago was an increase, not a decrease.

The Fed stood pat this week for the simple reason that, although there are some signs of wobbliness or slowing, the economy continues to perform fairly well despite all manner of "headwinds" at a time when inflation is only a little below where the Fed would like it to be. The same cannot be said for other major developed economies, where faltering growth and downward pressure on already weak prices is spurring rounds of interest rate cuts and moves toward greater stimulus. While we are by no means isolated from the rest of the world's troubles, the simple truth is that things are more dire elsewhere. Investors in those countries know it and have been (and are) taking appropriate actions.

Investors looking to move money out of riskier assets (such as stocks) that won't perform well in a diminished economic climate have a limited number of places to move their cash. These concentrations of funds have flowed into sovereign bonds, pushing the yields of some of them into fairly deep negative territory. For example, 10-year Japanese government bonds now carry a negative yield of nearly 17 basis points; German Bunds now have yields even lower than that, with investors paying a 0.28% premium to park their money out of harm's way. Investors generally don't prefer to lose money, even on a safe choice, and the search for yield has seem a wash of cash flow into other economies where at least some return can be had, but in turn, this has depressed yields in those markets, too. Ten-year U.K. Gilts yield about 0.85%, a yield that has declined by a third since February, and while 10-year Treasury yields have declined markedly over that time despite record debt issuance, they still offer a return of about 2%, a yield high enough to compare against comparably-risky Italian-backed bonds at about 2.15%. Overall, the case is that negative and lower-than-U.S. returns in countries around the globe are dragging U.S. yields down, and pulling down mortgage rates with them.

With inventories of available homes tight and mortgage rates steady, low-to-moderate income homebuyers may need a little help. To lend a hand, HSH has revised and updated our popular "Homebuyer Assistance Programs By State" to help borrowers connect with the essential supports they need to become homeowners.

Rather than any Fed policy, it is this wash of cash that has driven interest rates down for much of this year. This is not to say that the Fed's actions or inactions plays no role; in fact, by standing by and not acting as dark clouds have gathered, the Fed has fostered this market-engineered downturn in long-term interest rates. Consider, if you will, that when the Fed is cutting rates, it is in response to economic weakness or to try to spur a little inflation; If the Fed does nothing while the market thinks it should, investors believe that the darkening skies will soon turn stormy, and growth and inflation will retreat... but that lower rates will be coming tomorrow, and the skies will brighten again. If lower rates do come tomorrow, this can improve the yield on bonds bought now, as investors will pay a premium for an above-current-market yield.

As such, in a case where the Fed cuts rates and the skies do brighten, riskier assets become a better bet, and money starts to flow from bonds, lifting yields; at the same time, faster growth may tend to firm up inflation, also lifting yields. Since the Fed has stood idly by while overall conditions have softened (as they have) then the pattern of investors moving money out of risk assets may continue along with expectations for a sluggish period of growth and muted, if any, inflation... and downward pressure on yields and rates will remain. It is the Fed's inaction which has helped mortgage rates to fall.

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The Fed this week removed from its statement the reference to "patience", and instead promised that they "will act as appropriate to sustain the expansion", but probably only if "sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective" fail to continue. Financial markets think things will be bad enough in the near future to expect about a 70% chance of a cut as soon as the July meeting, and are priced as though several more will occur before the end of the year. In terms of whether the Fed does cut rates next month, much is said to be riding on the resolution (or at least progress) of the trade-and-tariff dispute with China. Any sort of settling there would improve global economic prospects to a degree and likely a rate cut (if any) further down the calendar, while a continued escalation would probably force the Fed's hand at some sooner point in time.

If an agreement happens, interest rates may firm up a bit; if no agreement happens and the Fed cuts rates to help temper any spreading weakness, interest rates could also firm up a bit, or at least have less downward pressure. For the moment, unsettled market conditions seem the most likely path.

Meanwhile, the latest bunch of economic data were on the modest-to-moderate side. As might be expected given the troubles with trade, manufacturing is slowing, or at least is in the two districts covered by two regional Federal Reserve Banks. In June, manufacturing activity slowed considerably in the regions covered by the Federal Reserve Banks of Philadelphia and New York. The New York area had a hard stall, with their headline figure dropping from a positive 17.8 in May to a negative 8.6 in June; the 26.2-point fall was the largest one-month decline in the nearly two decades the index has been calculated. Submeasures covering new orders also dropped precipitously, cratering from +9.7 to -12.0, and employment turned south as well for the month. The Philadelphia district fared comparably better, but a 16.3-point fall in their overall index left it at just 0.3 for the month. Orders tracked here remained positive, if slightly less so (down 2.7 points to 8.3) while employment remained fair at 15.4, down from 18.2 in May. The components of the Philly report seemed to us more solid than did the headline, but there was no masking the weakness in the Empire State outline. In both districts, inflation remained at a low level in a rather flat trajectory.

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   Mortgage data:Today's Mortgage RatesHistorical Mortgage RatesReverse Mortgage Rates
   Calculators:Home Equity CalculatorTri-Refinance CalculatorPMI Cost Calculator
   Resources:Housing & Salary StudyARM Index DataHome Value Estimator

Lower mortgage rates in the market this spring haven't done much to spur home sales, but then again, rates haven't been all that high, and sales have mostly been held back by the availability and prices of homes rather than the cost of financing, Lower rates only help if there is something available and desirable to purchase at an agreeable price, and that's not much been the case for a while now. Although we won't get to know about sales of newly-constructed homes until next week, we did learn this week that the National Association of Home Builders Housing Market Index tempered a little in June, easing two points to 64 even as forecasts called for a slight increase. Measures covering sales of single-family homes eased by a point to a still-robust 71, while expectations for the next six months slipped by two to 70. Traffic at model homes and showrooms remains about par, but did slide by a point to 48 for the month. The HMI is a diffusion index using a value of 50 as breakeven; values above indicate expansion, and those below signal contraction.

Builder moods and outlooks were likely held in check by a leveling of building activity in May. For the month, housing starts eased by 0.9%, ticking down to a 1.269 million (annualized) rate. Starts of single-family homes (the most important sector of the market) were down by 6.4% to an annual 820,000 new units started, while multifamily construction bounced 10.9% higher to 449,000 units. Permits for future building activity remain on a muted track, rising just 0.3% to 1.294 million (annual) units expected to be started, and the trend here has been soft for the year to date. It may be that new home construction is about as strong is it is going to get in an expansion that has now lasted about 10 years.

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Sales of existing homes did manage a mild gain in May, rising by 2.5% to a 5.34 million annual rate of changing owners. While the strongest pace since February, it is still a fairly pedestrian number, and one that is actually 1.1% below the same month a year ago. Sales of existing homes are tallied when the deed closes, and are reflective of market demand 45 to 60 days earlier; As this would be the March-April sales period -- a time before the most recent plummet in mortgage rates -- we might see some pick up in sales in the June and July reports over the next couple of months. This of course relies on whether more homes become available in areas of greatest need and demand; presently, there are 4.3 months of available supply, the highest number since last October, if still well below the six-month level which is considered optimal. With the advent of the spring market, prices of homes being sold have again flared higher, rising 4.8% above year-ago levels. Price gains had softened into the three-percent range at times in recent months, lending some hope to potential homebuyers that slowly-rising incomes might catch up, but that's less the case at the moment.

Low and falling mortgage rates should be kicking refinancing higher, but there are limits, and a strong upsurge in applications in the week of June 7 was tempered to a degree in the week of June 14, The Mortgage Bankers Association noted that overall applications declined by 3.5%, a measure evenly distributed among applications for both purchase-money mortgages and refinancing. A new decline in rates that we expect to see next week will likely see a few more homeowners jump in to refinance on the dip.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Jun 14May 17Jun 15
6-Mo. TCM2.20%2.43%2.09%
1-Yr. TCM2.02%2.32%2.34%
3-Yr. TCM1.83%2.15%2.68%
5-Yr. TCM1.88%2.18%2.82%
10-Yr. TCM2.12%2.40%2.95%
FHFA NMCR4.15%4.36%4.49%
FHLB 11th District COF1.095%0.958%0.814%
Freddie Mac 30-yr FRM3.82%4.06%4.57%
Historical ARM Index Data

The Conference Board's index of Leading Economic Indicators posted a flatline of 0.0% change in May. Already in a soft and stumbling pattern since a downturn last October, the latest LEI suggests that the economy held its own in May but really is exhibiting no momentum to close out the second quarter of 2019. With a current running rate for GDP reckoned at a flat 2% (lots of data yet to come for the period, of course) it looks like this modest rate for GDP is about the best we can expect for now. The good news is that even with only modest hiring in May and a slower overall economic period, there are no cracks being seen in the labor market, where initial claims for unemployment benefits remain low and stable, with just 216,000 new applications processed in the week ending June 15.

The current position for interest rate and mortgage rates are the result of a wide range of influences and forces, including difficult political climates here and in other places, military saber-rattling and escalating tensions in familiar places around the globe, trade-and-tariff disputes and more, issues that lower interest rates here or there really can't much affect or improve. Growth here is soft, but continuing, perhaps moreso than in other places, but the cause largely isn't tight monetary policy here or anywhere else, and it's certainly not clear that easier or even extraordinary policies by central banks has had much effect on increasing inflation. It's a wonder that investors seem to think that lower rates are a key to changing or improving any of these things, but perhaps it's more about perception than reality at this point.

As you might expect, bond markets remain unsettled. Treasuries are getting rather more play than are mortgage-backed or related bonds, but the indication as we close the week is that another decline in mortgage rates will be seen next week. Given roiling markets, it's been a little challenging of late to reckon future near-term movements, but it looks like we could see a 5-7 basis point decline in the average offered rate for a conforming 30-year FRM when Freddie Mac reports next week.

For an outlook for mortgage rates that carries just past America's 243rd birthday, check out our latest Two-Month Forecast.

You might also see our 2019 Outlook, where we provide observations and speculations for ten topics that are in and around the housing and mortgage markets. We're now just a few weeks away from a mid-year review of our prognostications.

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

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