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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Benchmark Fixed-Rate Mortgage At Seven-Year High

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May 18, 2018 -- We noted a few weeks ago that it wouldn't take much to change headlines from "four year highs for mortgage rates" to "seven year highs", and that's exactly what happened this week. To be fair, the increase noted in the average 30-year fixed-rate mortgage wasn't even a tenth of a percentage point, but the six basis point increase was sufficient to lift the benchmark mortgage rate to 4.61%, a level reached exactly seven years ago this week. Unlike now, however, interest rates were on their way down to what were then about 60-year lows in the midst of some difficult economic times.

Not so at the moment. While the economy isn't exactly roaring -- it has rarely done that in this expansion for very long -- the drumbeat of moderate growth continues, and has finally been joined by the kind of inflation pattern that the Fed believes is healthy. The central bank's "dual mandate" of maximum employment and stable prices could be considered to have been effectively engineered, but keeping these items at acceptable levels and maintaining balance without allowing imbalances to form is a far trickier process.

We may get a little bit of additional clarity into the Fed's thinking when the minutes of the May FOMC meeting are released next week. The Fed was not expected to lift the federal funds rate (and didn't), but there are growing expectations both inside the Fed and out that more rate hikes are due this year and beyond. At the turn of the year, perhaps three hikes in 2018 were expected; now, there is a growing consensus that we'll get a total of four. Futures markets suggest a 100% chance of the next increase in just about four weeks' time.

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That interest rates are firming is to be expected. We have an active central bank looking to engineer a soft landing by raising short-term rates, massive sales of new debts by the U.S. Treasury, oil prices that have been on a steady path higher over the last six months and growing evidence that inflation will likely overshoot the Fed's 2 percent target for at least some time (and by an unknown amount).

What's also unknown is the effect higher mortgage rates will have on home sales. To be sure, mortgage rates are by no means at "high" levels and haven't really returned to what might even be considered "normal". However, a young potential homebuyer who has only known rates in the threes and fours will of course perceive rates moving toward 5 percent as expensive even as more experienced hands know well that even a 5 percent rate is historically very good. In fact, and according to Freddie Mac's data series starting in 1971, the first appearance of a 5% rate didn't come until 2009, so it is only in recent, crises-era times where the Fed was directly manipulating the mortgage market that rates have managed to be even that low.

For a range of reasons, housing has lacked traction throughout the recovery and expansion; true, it is much improved compared to the depths of the recession and price collapse but sales have managed to only return to moderate levels. Supplies of existing homes remain tight, tempering sales and builders continue to create new supply at a measured pace. They are optimistic, though, as the National Association of Home Builders index of member moods posted a two-point increase in May, with the headline index rising back to 70, a robust level if one that has become commonplace since late last year. A measure of single-family sales also perked higher, rising two points to 76, while expectations for activity in the next six months and an assessment of traffic at showrooms and model homes held at 77 and 51 respectively.

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Housing starts -- the initiation of construction of homes -- still isn't moving upward despite builder optimism. The 1.287 million (annualized) rate of construction in April was some 3.7% below the level attained in May, but up by about 10% compared to the same time a year ago. Starts of single-family homes edged 0.1 percent higher, but have been relatively flat overall for months now, while multi-family starts swing back and forth from gain to decline. Building permits to cover future activity also don't reveal much by way of acceleration, either; they slipped 1.8% in April compared to March, easing to a 1.352 million annual rate.

We'll learn more about housing in the next week when sales of both new and existing homes for April are released. One thing to remember is that sales of existing homes are tallied when they close escrow, and reflect transactions started 45-60 days earlier, while new homes are counted as sold when the contract is signed. As such, one better reflects market conditions already past while the other may better reveal the current state of things.

One item that seems to help foster the rise in interest rates this week was Tuesday's report covering April retail sales. Why this seemed to move the market is a bit of a mystery, as the headline figure showed only a 0.3 percent increase in sales, a modest or perhaps moderate figure, and one that could actually even be considered rather subdued, as it comes in the context of both an increase in take-home pay from the tax-bracket reduction of 2018 and at a time when tax refunds often spur sales. Even a measure of "core" sales (no autos or gasoline) managed only the same 0.3 percent rise, and both the headline and core figures were lower than seen in March. Retail sales were much stronger just six months ago but had little effect on rates.

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   Mortgage data:Today's RatesHistorical Mortgage RatesMortgage Trend Graphs
   Calculators:Downpayment DecisionerTri-Refinance CalculatorPMI Cost Calculator
   Resources:Housing & Salary StudyARM Index DataHome Value Estimator

Two local measures of manufacturing activity revealed very solid conditions. The Federal Reserve Banks of New York and Philadelphia both released their local monthly observations covering May this week, and both moved measurably higher. The NY Fed's Empire State Manufacturing index added 4.3 points to climb to 20.1 for the month, recovering some momentum that was lost in the early part of the year. Submeasures covering new orders and employment gains both bumped higher, too, so the report was roundly solid. Down the Atlantic seaboard a little ways, the Philly Fed's barometer moved considerably higher, with the headline figure rising by 11.2 points to hit 34.4 in May, a figure good enough to be among the top 5 of the last decade. Orders rocketed higher, rising from 18.4 to an eye-popping 40.6 and employment moved up from an already high level by 2.9 points to end at 30.2 for the month. Given that the national trend as tracked by the Institute for Supply Management has one of soft decline over the last couple of months, it will be interesting to see if that pattern in broken when the next report comes in two weeks' time.

In April, Industrial Production also moved ahead smartly rising by 0.7 percent. Contributions to the overall gain came from all measured facets, as manufacturing output rose by 0.5 percent, mining production rose by 1.1 percent (unsurprising, given the increase in oil prices likely driving more domestic production lately) and a 1.9 percent rise in utility output. Overall capacity utilization moved higher again and has now climbed to a flat 78%, the highest it has been in more than three years, but still remains below levels that are thought to contribute to inflationary pressures.

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Initial claims for unemployment benefit continue to hold near 50-year lows, posting 222,000 in the week ending May 12, a figure up a bit from the last three weeks but still extraordinarily low. May seems destined to be another month of solid hiring and will probably show job growth in the 175,000 range when the next employment report comes.

The future of economic activity in the near term seems likely to continue apace, at least as far as can be gleaned from the April report covering Leading Economic Indicators. The Conference Board's monthly review posted a 0.4 percent rise for the month, the same as seen in March and continuing a string of positive readings that began last September when a 0.0 figure happened. Although probably more reflective of activity in the month its components were collected rather than a forward-looking tool, the LEI nonetheless does indicate a fair bit of momentum in the economy, and so suggests that solid growth is likely to continue in at least the upcoming month or quarter.

It would be nice if we could have the best of all worlds -- solid growth, increasing incomes, low inflation, rock-bottom borrowing rates but higher investment returns -- but things just don't work that way. Borrowers forget that the lowest interest rates often come in the worst economic conditions -- you know, the kinds of markets that wipe out lots of real and paper wealth as equity prices fall. Increases in incomes generally can't come without either higher productivity, lower input costs or higher prices. In this expansion, productivity isn't much to write home about, input prices are rising... and if you want to get paid more, it seems, you've gotta pay more. As well, if you want low interest rates on the money you want to borrow, you can expect to get low returns on the bonds and cash investments that power such lending.

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Does mortgage history repeat? Usually. Find out what happened last week/month/year with MarketTrends archives!

Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 May 11Apr 13May 12
6-Mo. TCM2.05%1.95%1.03%
1-Yr. TCM2.27%2.10%1.13%
3-Yr. TCM2.67%2.47%1.54%
5-Yr. TCM2.82%2.64%1.91%
10-Yr. TCM2.97%2.80%2.39%
FHFA NMCR4.49%4.28%4.27%
FHLB 11th District COF0.814%0.816%0.591%
Freddie Mac 30-yr FRM4.55%4.47%4.02%

In the end, it's about finding the right balance. Growth that is warm, but not too hot. Inflation that supports higher incomes and prices but doesn't get out of hand. Corporate profits that support solid, regular (but unspectacular) equity valuations that help generate wealth over time. Cash or bond investments that actual provide a return, and mortgage and other borrowing rates that are positioned help provide sustained demand instead of a boom-and-bust cycle -- and home prices that throw off just enough wealth effect as to see homeowners not only feel good about homeownership but also one that supports economic stability.

Getting all these things into alignment again has been and continues to be an uneven process, and one fraught with risk. After working hard for years to reflate assets and stimulate job markets, the Fed is now working even harder to temper the results of the imbalances it created as it manipulated markets to spur the economy. To again get balance, stock price gains will likely need to temper, interest rates for both investors and borrowers will need to rise, home prices will need to level and inflation will need to behave. The rebalancing process will continue for a while yet, or at least until the next recession looms.

Mortgage rates firmed a bit this week. Not all of the increase in underlying yields was captured when Freddie Mac's survey was completed, and at the moment, it looks like we might expect another increase of 3-4 basis points in the conforming 30-year fixed-rate by next Thursday. Get used to "7-year highs for mortgage rates" headlines on a more or less routine basis; to get a longer time comparison, rates will have to get past the 5.05% posted on February 10, 2011. It will be at least a little while before that happens.For an outlook for mortgage rates that carries into the "Dads and Grads" portion of the year, check out our latest Two-Month Forecast.

You might also take a minute to have a have a look at our broad-brush 2018 Outlook. We look out over the year and provide thoughts and expectations for a wide range of housing and economic topic, and even include a long-range forecast for mortgage rates.


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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