Building The Next Step

April 9, 2021 -- What comes next? Always a question worth considering, even when the answers of course largely depend upon unknowable future happenstances. Such forward speculation often depends upon current trends continuing as they have been, which usually doesn't pan out or pan out fully. As well, there are any number of emerging items yet unseen which can partially or wholly change the course of things as the future unfolds.

Thirty-year fixed mortgage rates began this year at a record low point, and there was little inkling at the time that they would do more than perhaps grind higher as we moved further into the late winter and early spring. The latest viral surge was raging and there was no way to know when it would subside or the effects of any new economic consequences or restrictions. However, the worst fears weren't realized, the trend in infection improved rapidly, vaccination picking up speed, and suddenly it felt like recovery was imminent. As this happened, interest rates stopped grinding higher; mortgage rates, which spent a three-week period in late January-mid February holding steady then spent the next seven weeks in a sustained increase in anticipation of continued acceleration.

Over that seven-week period, enough data eventually emerged to support reasons for at least some of the upward move -- manufacturing continued a revival, economic and social restrictions were pared back or eliminated, job growth picked up and more. What hasn't changed is that the Fed remains committed to a low-rate environment, that belief that evident inflationary pressures will prove transient and that QE-style bond buying will continue apace. As well, both the last administration and the current one have kicked fiscal supports into high gear, and more such federal borrowing and spending may be coming to an economy near you very soon.

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!

So in a way, the market built the framework for the step up in rates, and the economy put the sheathing and cladding on it, and here we are, standing on the platform. What comes next is a repeat of the process; sufficient evidence or credible speculation that growth, inflation and other factors are on the increase, that viral impacts continue to recede, that restrictions will continue to be eased and more. Armed with such a backdrop, the framework for the next step will be constructed, and should the data bear out the hypotheses, the cladding and such will be added, and rates will move up another step.

But this will only happen once evidence starts to be seen, and at least a majority of investor psyche all leans in the same direction. Until then, the current step should suffice, with some backing and filling for rates around a more central range. The question, of course, is how long does this period last? Well, mortgage rates essentially stopped rising a couple of weeks ago and drifted back a bit this week, so we're already perhaps three weeks standing on this platform and will probably hang here at least a little while longer.

Of course, when interest rates do stage a run-up (or down). it can be helpful to think of investors as standing on a see-saw; moving to one end or the other based on "good" or "bad" news... only to shift positions again, back and forth, always trying to find some semblance of balance. With momentum carrying the action, the lever moves rather more than it should given the evidence, and so some investors slowly move back toward the middle, and the move reverses a bit. Interest rates often move in such patterns; lower or higher than they ought to be based on the evidence.

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So here we are. Yes, things actually are considerably better than they were, but can they continue apace? After a sharp diminishment, infections are kicking a little higher again even as vaccinations may soon be pushing three million fresh injections a day; other countries (France, India) are seeing worse troubles as a fresh reminder that the viral battle yet rages. The economy here and in a few other places has picked up steam, but the reality remains that millions of still unemployed folks are requesting or receiving assistance, tens of thousands of businesses have closed or can only operate in a restricted environment and that even when we (eventually) achieve a state of "fully reopened" that a great distance will remain between that state and "fully recovered", where the economy was back before the coronavirus upended everything.

To be sure, there is more optimism and actual evidence that the economic skies are clearing and that a future of clear, sunny days lie ahead than there is pessimism and evidence that dark and dreary ones are coming again. This suggests that there is limited downside for interest rates and rather greater upside... provided things pan out as expected, which tend to be unusual.

Although data continues to trickle in from February (a slow month for a number of reasons), we're now starting to see more of March revealed, and there has been a lot to like so far. Minutes from the March Fed meeting were certainly more upbeat; the "Staff Economic Outlook" section had passages that included "The U.S. economic projection prepared by the staff for the March FOMC meeting was considerably stronger than the January forecast. Real GDP growth appeared to be picking up at the beginning of this year by more than the staff had expected", "Incoming data on inflation were a little above what the staff had expected", "the downside risks to the economic outlook were seen as smaller than [in January]", "the risks of upside inflationary pressures as having increased... and "the risks to the inflation projection as balanced." At the meeting, the Fed made no change to policy at all, but forward-looking projections seemed to move up the timing of the first rate increase a bit.

Other more upbeat observations from March were released this week, too. After their manufacturing index posted a 37-year high last week, the Institute for Supply Management report covering service-related businesses posted a sizable jump of 8.4 points to land at a robust 63.7 for the month, an all-time high. The measure covering new orders 15.3 points to a hot 67.2, while one tracking employment moved up by 4.5 points to 57.2, its best showing since May 2019. Like the factory side of things, price pressures on the service side are also rising; a value of 74 for the month says that a majority of respondents are seeing higher costs. It was the highest prices-paid figure since August 2008.

The expectation is that we will be seeing higher year-over-year price comparisons as the steep declines from last year begin to drop out of the calculation. Fair enough, but that doesn't change the more immediate reality that prices are kicking higher. Take, for example, the Producer Price Index, a measure of costs upstream of consumers. A full 1% increase in costs happened in March compared to April, driving the annualized figure to a 4.3% rate. As well, so-called "core" PPI (no energy or food costs) bounced up by 0.9% for the month, pushing core PPI to a 3.5% annual clip. Unless there is a sudden, unexpected drop, these figures will both be kicking higher still next month, since year-ago April saw a -1.3% top line and -0.3% core entry added into the equation. Prices are rising, and will continue to; what's not clear is the level at which they start to become a greater concern for markets and the Fed. We'll get the companion Consumer Price Index covering March next week; expect both headline and core components to also show a measurable uptick.

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Last week's blockbuster job report for March didn't change at least one portion of the picture of the labor market: Way too many people are still filing for unemployment assistance. The improvement in new requests for help legged down in mid-February but has mostly since stalled, at least at first glance. In the week ending April 3rd, another 744,000 new applications for UI benefits were posted across the country, up 16,000 from the prior week. Certainly, with the changeable Easter holiday there could have been some seasonal adjustment issues, but aside from a one-week foray down in the mid-600K range, claims have held in the low-mid 700s for 6 of the last 7 weeks. That said, there has been some decline in new claims for special Pandemic Unemployment Assistance (PUA), so even with traditional claims stubbornly high, the number of folks requesting benefits in total was below 1 million for a third consecutive week, so that's something. Odds favor that claims will continue to fall, albeit slowly as more jobs open than come to a close; the latest JOLTS survey said there were 7.367 million job openings in February, the highest rate in more than two years, and this looks to be increasing. As an asides, the next leg up for interest rates will probably come when the next leg down for claims hits and sticks for a while, or at least a change here will be part of the construction, anyway.

Consumers went on a significant borrowing binge in February, but why isn't exactly clear. Perhaps the expectation of another round of stimulus checks and tax credit and such was the impetus -- crank up spending today, pay for it with government largesse tomorrow. Whatever, the reason, consumer credit balances expanded by $17.6 billion during the month, the strongest spate of debt accumulation since November 2017, and probably a bit of a rebound from a very cautious level of borrowing seen in January (up just $0.1 billion). As is usually the case, installment borrowing (autos, education) led the way with a $19,5 billion increase, but the real change was in usage of revolving credit (credit cards and the like) which rose by $8.1 billion. Although the largest increase since December 2019, this is hardly a remarkable amount, but is a change in the recent pattern, where outstanding balances have routinely pared each month over the last year. A sign that consumers are actually starting to feel confident their ability to use future income to pay for today's purchases or a false signal? Only time will tell.

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The nation's imbalance of trade continues to expand, but both imports and exports stumbled a bit in February. The $71.1 billion difference between the value of goods and services coming to the U.S. and leaving it was the widest ever. The dollar value of imports coming here fell by $1.8 billion during the month, but exports slumped by $4.9 billion. Although U.S. imports have more than fully recovered pandemic declines -- a sign that our economy is gaining strength -- exports have not yet returned to pre-pandemic levels, as our trading partner's economies remain soft and the U.S. dollar remains pretty high, making our exports less competitive in global markets. Compared to last February, imports are +$11.9 billion; exports -$24.5 billion, so there remains a lot of lost ground to recover for the U.S.

The recently-plateaued run-up in mortgage rates has had the expected effect, crushing refinancing activity and even curtailing homebuying, although that segment is struggling from items beyond the cost of financing. In the week ending April 2, the Mortgage Bankers Association reported another 5.1% overall decline in requests for mortgage credit. The Easter weekend/holiday may have played a role here, but the decline is part of a longer trend; in the last 12 weeks there have been just two where applications increased. Requests for purchase money mortgages have fared better during that time, posting a number of week-to-week increases, before flagging of late with a 4.6% decline in the latest week; requests for refinancing had just one week with a barest-positive blip six weeks ago and that barely interrupted what is now a nine-week string of declines. A settling of rates this week may lead a few folks to jump back in for a refinance, but it would likely take rates cruising back under the 3% mark to create much of a spark... and as long as the economy is getting better (or even just holds at present levels) that's increasingly less likely to happen.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Apr 02Mar 05Apr 03
6-Mo. TCM 0.04% 0.07% 0.14%
1-Yr. TCM 0.06% 0.08% 0.15%
3-Yr. TCM 0.35% 0.29% 0.29%
10-Yr. TCM 1.72% 1.49% 0.65%
Federal Cost of Funds 0.876% 0.911% 1.100%
30-day SOFR (daily value) 0.00000% 0.03400% 0.30336%
FHLB 11th District COF 0.408% 0.457% 0.598%
Freddie Mac 30-yr FRM 3.18% 3.05% 3.33%
Historical ARM Index Data

More clues of course will come next week; the Fed's regional survey of economic conditions ("Beige Book") is due out, and we'll get a look at retail sales for March to see if the February weather dip is reversed. Add to that some new info on prices, manufacturing, housing and consumer moods, and the March picture will come in to clearer focus. Some of this may inform what comes next, for mortgage rates, but for the moment, investors seem to be gaining comfort with regards to the overall state of things. With that as a backdrop, we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac might find a little more space to settle next week, but as was the case this week, there's a equal chance that they might increase by a little, too. Such is the case when rates are dancing on a plateau, awaiting the next step to be built. We'll be pondering these things and more as we work on a new Two-Month Forecast next week.

How are mortgage rates expected to trend as we look toward spring? See our latest Two-Month Forecast, where our expectations for rates until mid-April are revealed.

2021's just got to be better than 2020, right? Maybe, but it all depends on how you look at it. To see our take on mortgage rates, home sales, home prices, the Fed and more, check out our 2021 Outlook

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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