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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Discerning, Discussing Direction Difficult

January 11, 2019 -- The partial government shutdown doesn't yet seem to be greatly impacting the overall economy, but the longer it lingers, the more difficult it is to discern what's actually happening. Although there are still quite a few important economic reports being released from private sources or those government operations unaffected by furlough, the puzzle is missing more pieces as time wends forward.

Not too many reports have gone by the wayside, but their number is increasing. Presently, we while we know builders became increasingly unhappy in November and December we have no clarity on what has become of sales of new homes for the last month of 2018; as well, we know there are on-going concerns about trade and tariffs, but now have no information on what's happening with trade flows and other key facets of the economy. Most economic reports of course aren't very close to real-time, given lags of gathering and reporting. That said, they do provide useful clues to where we have been economically and provide a basis for evaluation against "now".

Since spooking the financial markets after raising rates last month, Fed Chair Powell has taken great pains to reassure investors that the Fed isn't blindly going to continue to raise interest rates, but rather is considerably less rigid in its approach than some of their language would indicate, with "patience" and flexibility in monetary policy both increasing in a changing climate.

At the turn of each year, HSH peers into the crystal ball and produces our Annual Mortgage and Housing Market Forecasts. We cover mortgage rates, the Fed, home prices and sales, reverse mortgages, expected credit conditions and more. Have a look, and see what you think!

Minutes of the December FOMC meeting were released this week. Reading through them, it is readily apparent that the Fed chair did a poor job of conveying the Committee's intended message in his post-meeting press conference.

In the minutes, it was noted that "Participants emphasized that... monetary policy was not on a preset course; neither the pace nor the ultimate endpoint of future rate increases was known. If incoming information prompted meaningful reassessments of the economic outlook and attendant risks, either to the upside or the downside, their policy outlook would change."

In trying to convey this, the group looked to tweak the language it uses: "Members agreed to modify the phrase "the Committee expects that further gradual increases" to read "the Committee judges that some further gradual increases." The use of the word "judges" in the revised phrase was intended to better convey the data-dependency of the Committee's decisions regarding the future stance of policy; the reference to "some" further gradual increases was viewed as helping indicate that, based on current information, the Committee judged that a relatively limited amount of additional tightening likely would be appropriate."

The Fed might have done well to release this explanation rather than the statement they did publish; while more wordy, it certainly expresses the reasoning behind the change and might have better served to calm restive markets.

This bring us to a point of concern: A data-dependent Fed with less data on which to formulate future decisions. A lack of a full set of data for the Fed to use to assess the current and expected future climate increases the risk of surprising the market at some point. For the Fed, discerning the direction of the economy, inflation and that of monetary policy will become increasing difficult the longer the shutdown runs.

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For the technically inclined, the minutes contained a long discussion about managing monetary policy over the longer run. Draining excess reserves from the banking system while using new tools to try to control fund flows does carry some risks. The interplay between balance sheet reduction and paying interest on excess reserves while also setting a target rate for the federal funds isn't quite clear and could actually inject volatility into markets rather than help to calm them.

It has long been known that the Fed would prefer to hold only enough Treasury securities on its balance sheet to conduct effective monetary policy, and that it would like to only hold Treasuries. Trying to get to desired appropriate levels is why the Fed has been in portfolio runoff mode of up to $30 billion per month in maturing Treasuries and $20 billion per month of retiring MBS. While the amount of Treasuries being retired can be easily plotted, that's not the case with MBS, and at the moment, the Fed isn't even hitting a $20B reduction target each month of MBS. Fed staff noted that "Under the baseline outlook, prepayments of principal on agency MBS would remain below the $20 billion redemption cap for the foreseeable future" but if rates drop and refi activity picks up, they might actually see some redemptions above that amount and would then purchase new MBS from the market for anything over $20B.

Fed participants also noted that "the passive runoff of MBS holdings through principal paydowns would continue for many years after the size of the balance sheet had been normalized." Importantly, for the first time we can recall since the Fed started buying MBS and agency bonds way back in 2008, "Several participants commented on the possibility of reducing agency MBS holdings somewhat more quickly than the passive approach by implementing a program of very gradual MBS sales sometime after the size of the balance sheet had been normalized." We'll see about all that, but if mortgage rates should firm up and remain "elevated" for a longish period of time, discussions of selling MBS in order to continue to reduce this component of the Fed's balance sheet will likely come into play (perhaps to try to maintain a target of $20B per month reduction)... 2020 anyone?

  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

There was some important new economic data out this week, and most of it was pretty fair. The Institute for Supply Management's report covering non-manufacturing businesses did tell of some slowing in the largest sector of the economy, but unlike the ISM manufacturing report, there wasn't much to be very concerned about. The ISM services index did shed 3.1 points to ease from a robust 60.7 to a very solid 57.6 for December, and measures of new orders edged a little further in to robust territory, adding 0.2 points to climb to 62.7 for the month. The employment measure eased, arguably because it's increasingly hard to hire workers given a very low unemployment rate, but even then, the 56.3 value for this component is still very solid, too. Also, as has been the case elsewhere, last year's flare in prices has faded somewhat of late, with the "prices paid" subindex breaking a yearlong string of readings over 60 (fairly strong price pressures), falling 6.7 points to a mellower 57.6 for the period. Overall, the largest component of the economy seems to remain on track, may pick up a little going forward, is still creating jobs and is doing so in a climate of fading inflationary pressure... pretty good all around.

While the Fed's preferred measure of inflation (core Personal Consumption Expenditures) may be held hostage by the shutdown, we did get a new Consumer Price Index for December to help reveal current price pressures. Headline CPI eased by 0.1% during the month, dragged backwards by declining oil and gasoline prices. Excluding those from the tally, the "core" CPI rose by a modest 0.2%, the same as was seen in November and October. Over the last 12 months, headline CPI has been settling back; the present annual 1.9% rate was as high as 2.9% as recently as July. Core CPI is rock-solid, though, holding at an annual 2.2% rate in December -- a value held in seven of the last eight months. Falling oil prices will likely damp headline inflation and perhaps even core inflation to a degree... and while credit will likely be hard to come by for them, it just may be that earlier Fed hikes have set us on a level path for core prices.

With regards to the Fed, futures markets place only low probabilities of another hike in rates anytime soon. We'll see about that, but both the January and March meetings are pegged at just a 0.5% chance of a rate hike, and only about a 17% chance of one by June. In fact, futures markets place a greater likelihood of a fed rate cut by next January; odds of that are currently placed at nearly 25%. These things do change all the time, and the Fed's official outlook is still for perhaps two hikes in rates in 2019.

If HSH's weekly MarketTrends newsletter is the only way you know HSH, you need to come back and check out HSH.com from time to time. You'll find new and changing content on a regular basis, unique calculators, useful insight, articles and mortgage resources unlike anywhere else on the web.

Consumer borrowing put in a solid month in November. Outstanding balances on consumer debt expanded by $22.1 billion during the month, continuing a borrowing binge that starting in October ($25.0B). Balances for installment loans (autos, education, etc) led the way with an increase of $17.4 billion; those on revolving accounts (credit cards) expanded by $4.8 billion, a bit of slowing after a blowout $9.3 billion spend in October. To the extent that the equation of more borrowing equals more spending equals a stronger economy, economic growth should be solid in the fourth quarter. While the official initial reckoning is subject to shutdown delay, the GDPNow tracker from the Atlanta Fed does put the current pace for the quarter at 2.8%, a solid enough figure... but this model is also likely starting to miss some key economic data inputs, too.

Holidays behind us, mortgage shoppers finally could take advantage of the decline in mortgage rates. While of course including at least some holiday-caused pent-up demand, the Mortgage Bankers Association noted that there was a 23.5% surge in new applications placed for mortgages in the week ending January 4. Purchase apps popped by 16.5%, but the effect of lower rates really showed in refinance applications, which spiked by 35.5% compared to the last week of 2018. Provided rates hang around present levels, there will probably be some residual upside in the next few weeks at least.

Likely still distorted by seasonal-adjustment effects of the New Year's Day holiday, initial claims for unemployment assistance nonetheless dropped by 17,000 in the week ending January 5, falling to 216,000 new applications for benefits. It's not clear to what degree (if any) the federal furlough will add to the ranks of those seeking assistance, but outside of any of that influence the labor market is cruising along at a high level.

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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
 Jan 04Dec 07Jan 05
6-Mo. TCM2.51%2.56%1.60%
1-Yr. TCM2.58%2.70%1.82%
3-Yr. TCM2.44%2.78%2.04%
5-Yr. TCM2.47%2.77%2.27%
10-Yr. TCM2.65%2.90%2.46%
FHFA NMCR4.86%4.75%3.98%
FHLB 11th District COF1.060%1.079%0.737%
Freddie Mac 30-yr FRM4.51%4.63%3.99%
Historical ARM Index Data

Mortgage rates managed a greater decline than we expected this week, but at the moment all signs point to stabilization and perhaps even a slight whisper of firming. Next week, we'll get a look a December producer prices, find out if the moods of the nation's home builders are again increasingly dour, get a round-the-country review of regional economic conditions from the Fed's Beige Book, a couple of local reviews of manufacturing and some inkling as to whether or not consumer sentiment has been impacted by roiling stock markets, the government shutdown and the resumption of fractious political theater in the headlines.

We think that we'll see virtually no change in 30-year fixed mortgage rates when Freddie Mac reports next Thursday, possibly a basis point or two increase. That said, there were rather outsized declines in 15-year FRMs and 5/1 ARMs this week... those might reverse a bit.

For an outlook for mortgage rates that carries though the depths of winter, check out our latest Two-Month Forecast.

You might also see our new 2019 Outlook, where we provide observations and speculations for ten topics that are in and around the housing and mortgage markets.

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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