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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Mortgage Rates Remain Mostly Level

April 13, 2018 -- Although it is true that mortgage rates are running at levels equivalent to a four-year high or thereabouts, it's also true that the rise that brought us these mostly happened two months ago. Since then, it's been nearly a steady mortgage rate climate, with an average conforming 30-year fixed-rate no higher than 4.46% and no lower than 4.40%. Stable periods for rates are not uncommon, but given recent considerable volatility in stock markets, an active Federal Reserve and higher prospects for faster growth and firmer inflation (let alone a highly-uncertain political and trade environment) it does feel a little unlikely.

Regardless, a stable rate climate is beneficial to potential homebuyers, as it allows a degree of certainty in terms of expected monthly payment and loan costs. Given the challenges of this spring's homebuying climate, with high home prices and thin inventories of available supply, having at least one facet of the homebuying transaction in a less-fluid position is helpful. That said, odds don't strongly favor rates holding steady over the long haul, what with the expectations for stronger growth, a return of inflation and a Federal Reserve planning on getting rates back to a neutral or even restrictive stance as we go.

The minutes of the March meeting of the Federal Reserve were released this week, and while we of course knew that the central bank both raised the federal funds rate a quarter-percentage point and signaled that perhaps three more hikes may come this year (members were split nearly 50-50 as to whether two or three additional moves are likely), but the minutes did reveal that "A number of participants indicated... that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected." [Read: faster or more sizable rate increases.]

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While it's still unclear what exactly the "neutral" rate for the federal funds may be, previous Fed discussions up until recently had suggested this would be a rate of perhaps 3 percent; the discussion and projections regarding the future that came from this meeting might have moved that up to 3.25 to 3.5 percent, rather closer to the historical average "neutral" rate of about 4 percent. However, at what level does the funds rate become restrictive to economic growth? If the federal funds rate becomes equivalent to the inflation rate, the so-called "real" interest rate would be zero, and so still stimulative. With core PCE presently at a 1.6% annual rate, we may be close to a zero real rate ("neutral") at the moment, and inflation doesn't move higher, the next lift in the federal funds would technically be neutral to mildly restrictive. Of course, growth, inflation and the neutral rate are all moving targets... and given momentum and the lagged effects of changing monetary policy, there no real way to know when we've hit a neutral stance in real time.

At least some Fed members are thinking about that day, and how to let investors in on their thinking as it approaches. For the first time in a long time, the minutes contained some thoughts about how the central bank's messaging will change as we achieve those rate levels. Excerpting from the text of the minutes, "Some participants suggested that... it might become necessary to revise statement language to acknowledge that... [interest rates would]... move from an accommodative stance to being a neutral or restraining factor for economic activity."

Will a half percentage point above inflation (federal funds around 2.25% to 2.5% based on today's core inflation figure) cause measurable economic drag, and if so, how much? Given the Fed's expected path for rates this year, we might find out as soon as September rolls around.

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Of course, mixed messaging about the economy may skew any expected timelines. The soft March employment report was likely a payback for an outsized February gain; likewise, the currently benign reports covering inflation will probably give way to stronger readings in the months ahead. The Producer Price Index moved up by 0.3% in March, up a tick from February but about average for the past three months. Over the past year, PPI has risen by a full 3 percent, as a weaker dollar and rising commodities costs have raised input costs. Core PPI, which excludes certain highly-volatile components that may cause distortions in the readings also managed a 0.3 percent rise, slightly faster than the recent trend even as annual core PPI held at a mild 2.1 percent for a third consecutive month. Not all higher cost inputs make it downstream to the consumer, so the effect on consumer prices from producer can be muted.

The headline for the Consumer Price Index surprised to the downside. For March, headline CPI declined by 0.1%; energy prices declined sharply during the month and food costs managed only a 0.1 percent increase. Despite the decline, headline CPI continued an uptrend and is now at a 2.4% annual level, as some of last year's unexpected declines in prices are aged out of the calculation. Core CPI, which leaves out food and energy costs, posted a 0.2 percent rise for the month, the same as seen in February. Annualized core CPI has finally broken over the 2 percent mark, with this month's 2.1% yearly rise the highest since November 2016.

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Although the Federal Reserve prefers to use a measure of core Personal Consumption Expenditure to track inflation, the core CPI and core PCE readings will tend to follow each other in terms of direction, if not necessarily in terms of a change in value. That being the case, and given the lag in reporting, core PCE has likely already moved up from its current 1.6 percent annual rate. The Fed expects this, and lets hope that the move is both mild and that the financial markets are also expecting this, lessening the prospects of a further upturn for rates in the short term. The next update for PCE comes on the 30th of this month.

If tariffs on imported (and exported) goods do kick in soon, it will be a lot less likely that we'll see import prices holding at low levels, as we did in March. The overall value of goods coming onto U.S. shores was unchanged last month, the first non-positive reading since last August. Still, import prices have risen by 3.6% over the last year and have been regularly edging higher since touching a 1.2% annual rate last July. As well, we've been exporting a little inflation of our own over that time; in March, goods headed elsewhere had prices some 0.3 percent higher than in February, and the U.S. has exported an annual 3.4% rate of goods inflation over the last 12 months.

Stockpiles of goods at the nation's wholesalers have been rising strongly for months, with the biggest build so far coming in February. However, the 1 percent increase in holdings was met with a like-sized gain in sales for the month, the net effect was that goods on hand relative to sales remained at a fairly thin 1.26 months. In turn, this increases the chances that more orders will be placed to manufacturers and help to continue to support activity in the factory sector.

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About two weeks from today, we'll get out first look at GDP growth for the first quarter of 2018. It's still too early to fully know, as there is still some pending March data that must be included in the tally, but it looks like we are in for a rather slower growth climate for the period than the near-3% three quarter string we saw to close 2017. The Atlanta Fed's GDPNow tracking tool puts growth for the period at just 2 percent. While it will probably come in a little higher than this running estimate when all is said and done, the period still isn't likely to be anything more than moderate, and may create a question in some minds as to whether three more rate hikes by the Fed are warranted.

Wobbly stock markets and headlines about trade wars (and plenty of other issues) have darkened consumer moods a bit of late. The initial review of Consumer Sentiment from the University of Michigan sported a 3.6-point decline, with the barometer sliding to 97.8 so far this month. A considerable fall in the assessment of current conditions (-6.2 points) was accompanied by a lesser slump in future expectations (-2.0 points). Although at a three-month low, Sentiment remains quite high relative to historic norms. Happier consumers are thought to be more likely to open their wallets and spend to power the economy, but the correlation is a loose one at best, and retail sales have been weak for months despite fairly sunny demeanors.

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Current Adjustable Rate Mortgage (ARM) Indexes
IndexFor The Week EndingYear Ago
 Apr 06Mar 09Apr 07
6-Mo. TCM1.92%1.88%0.93%
1-Yr. TCM2.07%2.05%1.04%
3-Yr. TCM2.41%2.42%1.47%
5-Yr. TCM2.60%2.65%1.88%
10-Yr. TCM2.78%2.88%2.35%
FHFA NMCR4.28%4.12%4.22%
FHLB 11th District COF0.816%0.777%0.616%
Freddie Mac 30-yr FRM4.40%4.44%4.23%

With the calendar moving squarely into the prime spring homebuying season, it's at least moderately good news that mortgage rates are stable. That said, the present level of mortgage rates are little more than a slight deterrent to purchasing a home; more difficult is the ongoing lack of desirable and affordable homes to buy. If you think about it, it might be that much higher interest rates may be the only immediate solution for quelling demand, as this would tend to knock more marginal borrowers out of the market. In turn, this would slow the pace of sales and loosen up inventories of unsold homes, and (if sustained) would tend to at least temper increases in home prices (to the extreme, it might cause outright declines, and no one wants to see that again).

However, that remains unlikely to occur. Rates aren't much moving at the moment, inventories remain thin and homes expensive. We don't think the mortgage rate component of that dynamic will change much next week, but we could see another small move of a couple of basis points in the average conforming 30-year FRM as reported by Freddie Mac. Odds favor a small upward move at the moment.

For a forecast for mortgage rates that carries into the early days of the 2018 baseball season (and NHL and NBA playoffs, too), have a look at our 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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