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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Nervous Markets, Declining Mortgage Rates

December 7, 2018 -- It may be that the U.S. economy continues to do well but investors don't seem convinced that the future is as bright as it once was, given any number of recent events. After a rough November, major stock indices seemed to have found a happier place to close the month and start December, but that optimism abruptly faded this week. You can find items of concern almost anywhere you look. Growth is slowing or has slowed in major developed economies, including China, Japan, Germany and the whole of the EuroZone. The Brexit process isn't going very smoothly, threatening to upend growth further. A 90-day delay of the imposition of new tariffs on goods coming from China may only forestall the new levies, threatening potential growth next year. Oil prices have slumped hard in the last six weeks, probably augmenting lower coming inflation on at least a transient basis.

The Treasury "yield curve" -- interest rates plotted against various time maturities -- just turned partially negative, and the Federal Reserve will again raise short-term rates in just a couple weeks' time, further flattening or even more completely inverting the yield curve, which some technical investors suggest means an impending recession. A yield curve inversion has predated every recession back to 1975, but direct central bank intervention into markets via QE-style programs may have distorted or muddied this signal to some degree... but how much is not clear.

Just last week, markets cheered when Fed Chair Powell noted that short-term interest rates were "just below" a level that would be neutral for the economy. If the Fed was nearly done raising rates, they would remain at low levels, supporting the economy and the corporate profits that in turn support equity prices. Bond yields shrank, losing some of the forward premium that typically happens when it is expected that the Fed will continue to raise rates. This week, and in the context of (and in addition to) the climate described above, it seemed as though the realization hit the market that the reason the Fed might slow the pace of rate increases (or even pause them before long) is because the economy is decelerating from a strong pace. A decelerating economy means a more challenging climate for corporate profits, and so equity prices began to stumble. A lack of belief that some new detente between China and the U.S. was in the offing sparked a more furious selloff on Tuesday, with money moving into Treasuries, further depressing yields, with the influential 10-year Treasury's yield falling to more than three month lows at one point.

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We might also throw into the mix slack demand for mortgage credit helping to press mortgage rates lower, too. Home sales have been generally softening for months, refinance activity largely died with the initial flare in rates to start 2018 and hasn't much improved. In such lean lending times, lenders tend to do what they can to keep borrowers coming in the door, and that can mean trimming rates and more. In its OCC Semiannual Risk Perspective for Fall 2018, the Office of the Comptroller of the Currency raised a regulatory eyebrow about an increase in lending to riskier borrowers by banks, including allowing for higher back-end debt-to-income thresholds and higher acceptable loan-to-value ratios, and noted that "Much of this easing is in direct response to competition from nonbank lenders." To be sure, there's no current "race to the bottom" for underwriting, and the notation in the report is more of a disapproving finger-wag than an expression of serious concern, at least for now.

So mortgage rates are slipping a bit, and at least some borrowers are taking the opportunity to refinance on the dip. The Mortgage Bankers Association's weekly index of mortgage applications noted a pickup in refinance activity in the past two weeks, the first back-to-back increases noted for this class of borrower since September. Holidays or not, if rates continue to leg down it's good bet that refi activity will flare higher, especially as it's last call for HARP, which comes to a close at the end of the month. We'd bet that not many homeowners are aware that there is a Streamline Refinance program in place to replace HARP.

Amid the global turbulence, the U.S. economy seems to be holding up very well. According to the Institute for Supply Management, manufacturing activity picked up again in November, with their barometer adding 1.6 points to climb back up to 59.3 for the month, a very strong reading. Submeasures of new orders powered back into robust territory, rising by 4.7 points to move to 62.1 for the month, and employment also strengthened, gaining 1.6 points to move to 58.4 for the period. Collectively, a solid upward bounce here after a softer sort in October.

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The ISM's report covering non-manufacturing service-related businesses revealed that the largest component of the U.S. economy is also doing well. In November, the ISM services index edged 0.4 points higher, remaining in robust territory with a 60.7 value for the month. Measures of new orders edges higher, rising 1 point to 62.5 for the period, and while the employment-tracking component of the index eased a bit, falling 1.3 points to 58.4, it remains very strong.

The ISM reports are so-called "diffusion indexes", where values above 50 indicate expansion and those below reveal contraction. Levels around 60 where these presently lie are historically consistent with strong growth in the economy,

Construction spending has faltered a bit in recent months. October posted a 0.1% decline in overall outlays for projects, a third consecutive overall decline. Residential project spending dragged the headline figure down, posting a decline of 0.5% for the month, and slumping sales of new homes seem likely to keep residential spending muted for at least a time. The October decline wasn't only limited to housing, as spending on commercial and industrial building also fell by 0.3%. Only spending on public works projects (+0.8%) supported the top-line number. Even with the recent downtrend, construction spending remains some 4.7% above year-ago levels.

According to AutoData, sales of new vehicles put in another solid month in November, ringing in at an annualized 17.5 million rate, the same as was seen in October and up a little from a 17.4 million annual pace in September. It's hard to know if we are still seeing sales goosed by hurricane Florence-related replacement of damaged vehicles, but that seems a likely explanation as sales were trending downward for much of the spring and into summer. Sales may also have been pumped up by Black Friday clear-the-lot deals by dealers, too.

  Find these only at HSH.com!
   Mortgage data:Today's Mortgage RatesHistorical Mortgage RatesReverse Mortgage Rates
   Calculators:Downpayment DecisionerTri-Refinance CalculatorPMI Cost Calculator
   Resources:Housing & Salary StudyARM Index DataHome Value Estimator

The Fed's regional survey of economic conditions (called the Beige Book for the color of its cover) found that the economy was growing apace in the six week period ending November 26. Of the 12 Federal Reserve districts, 6 reported "moderate" levels of growth and 6 fell into the "modest" category. The report summary noted that "optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints." Of no surprise to regular followers of the housing market, the report said that "new home construction and existing home sales tended to decline or hold steady". As far as inflation is concerned, price pressures were said to be mostly modest to moderate overall, but "Nearly all [districts] reported that input costs rose faster than final goods prices. Reports of tariff-induced cost increases have spread more broadly from manufacturers and contractors to retailers and restaurants." At the very least, some formerly well-contained price pressures are starting to leak out into the broader economy.

Worker productivity is improving. Should the trend continue it would be very good news for the economy, as worker wages can be lifted more without sparking an inflation spiral. For the third quarter of 2018, the initial estimate of output per worker showed a 2.3% annualized increase, revised upward from the initial estimate last month, but a lesser gain than the 3% achieved in the second quarter. The improvement in output did help trim the measure of labor cost per unit produced from an initial 1.2% to just 0.9%, so there seem to be only muted labor cost increase to pass along into prices at the moment.

Changing trade policy continues to roil financial markets, and the current period is of course no exception. The nation's imbalance of trade widened slightly in October, expanding by $0.9 billion to $55.5 billion for the month. Imports rose by $0.6 billion as exports softened by $0.4 billion. At $55.5 billion, we are now at the widest trade deficit since 2008. Increases in tariffs could eventually theoretically narrow the gap, but only if it means that the U.S. buys less stuff from the outside world; other than that, if demand remains constant, the dollar differential gap may actually worsen as imported goods become more expensive. Of course, a slowing economy would lessen demand, and that would trim the deficit as well, but that's not the case at the moment.

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We had been mentioning here for the last several weeks of the uptrend in new unemployment claims we had been seeing. In the week ending December 1, initial claims did slip a bit to 231,000, but still remain elevated relative to those seen in September, October and November. Just last week, we pondered "Perhaps job growth is starting to cool a bit? We only have to wait until next Friday for an inkling of that."

Our hunch appeared to be correct. In November, new hires came in at a rather lower-than-forecast of 155,000 new jobs filled, as perhaps 200,000 hires were expected. October's initial tally of 250K was also marked down a little, with the revision trimmed to 237,000 jobs created. As well, the nation's rate of unemployment remained at 3.7% and the labor force participation rate also was unchanged at 62.7% for the month. It's too soon to conclude that labor market conditions have stopped tightening, but the trend over the last few months is at least reflective of a slowing in that constriction, if nothing else. As measured in the report, wages continue to creep higher, and are now running at a 3.1% rate over the last 12-month period. The trend here has moved higher in recent months, from an annual rate of 2.7% in the June report, to 2.9% annual in August, and now at a 3.1% clip for the last two months.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Nov 30Nov 02Dec 01
6-Mo. TCM2.53%2.49%1.44%
1-Yr. TCM2.70%2.67%1.62%
3-Yr. TCM2.84%2.92%1.87%
5-Yr. TCM2.87%2.97%2.10%
10-Yr. TCM3.05%3.14%2.36%
FHFA NMCR4.75%4.62%4.00%
FHLB 11th District COF1.079%1.018%0.729%
Freddie Mac 30-yr FRM4.81%4.83%3.92%
Historical ARM Index Data

Despite a rough-and-tumble stock market of late, consumer moods remain quite elevated. In the preliminary December reading of Consumer Sentiment, the University of Michigan barometer remained unchanged from November's final 97.5 value. Assessments of current conditions actually moved 2.9 points higher, to 115.2 in the interim report, again pushing higher after a couple of softer months. Expectations for the future darkened just a bit, dropping 2 points to 86.1 for the month. This is still a pretty solid figure, but one that is actually the lowest value seen since September 2017. At the moment, rising interest rates and an expectation of cooler economic and job market growth are tempering enthusiasm for the future.

There's certainly more data we could cover, but enough said for now. A strong U.S. economy certainly faces more challenges ahead than is has perhaps in the last couple of years, but odds still favor growth continuing for a while yet, at least long enough to make the expansion the longest in U, S. history, After that, well, we'll just have to see how things play out.

The lowest mortgage rates in months are on tap for next week, especially if the major stock indices continue their recent swoon. The six-basis point decline in Freddie Mac's 30-year FRM this week seems likely to be joined by another 4-6 basis point decline next week, That would put the average offered rate for a conforming 30-year FRM at levels last seen in the end of September or early October. It's a shame that the dip is coming in what is typically a quiet time for housing, holidays being what they are, but any dip in rates can only help,

Godspeed, George H.W. Bush, and thank you.

For an outlook for mortgage rates that carries almost to the turn of 2019, 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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