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Mortgage Rate Trends: Weekly Market Commentary & Forecast

HSH Market Trends
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Firmer Rates, Both Short And Long

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December 8, 2017 -- Largely backing and filling for almost all of the fall so far, 30-year fixed mortgage rates turned this week again to filling, with a small rise all but taking back two small declines over the past two weeks. While shorter-term mortgages such as 15-year FRMs or 5/1 ARMs have seen their rates leg higher during that period (to eight-month and more than six-year highs, respectively) 30-year FRMs have largely tread water, wobbling in a very narrow range, and haven't topped the 4 percent mark since a one-week flare back in July.

With the economy solid, the Fed reducing its balance sheet and poised to raise short-term rates another notch this coming week, it may not be long before the most popular U.S. mortgage more routinely features average rates with a "four handle". To be sure, it wouldn't take much of a bump from here to break over that threshold.

With the economy closing out the year on what seems to be a pretty solid note -- the current running estimate for fourth quarter GDP is just under 3 percent -- there is no reason for the Federal Reserve to not raise the federal funds rate a quarter of a percentage point when its meeting comes to a close next Wednesday. This meeting will also feature an updated set of member economic forecasts and projections for monetary policy, and we think there will be a consensus expectation for three increases in the key policy rate in 2018.

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The employment situation report for November, this week's most important economic report, showed that a gain of 228,000 new hires took place during the month, a figure fairly close to a downwardly-revised 244,000 for October. Soft patches in May and storm-influenced September have kept average monthly job growth at a moderate 174,000 for the year to date but this is a level still strong enough as to both pull disenfranchised workers off the sidelines (albeit slowly) and also foster somewhat stronger wage growth. Average hourly earnings in November ticked up by 0.2 percent, raising the annual gain to a 2.5 percent rate. The nation's official rate of unemployment remained at a low 4.1 percent rate for a second consecutive month and the labor force participation rate also remained steady at 62.7 percent. Wage gains are gently firming, and some forecasts expect acceleration as the labor market continues to slowly tighten in 2018. If wages should start to kick higher, so may inflation, and this could see the Fed at least consider lifting rates at a more accelerated pace next year, too.

Worker productivity moved higher in the third quarter of 2017 and is now reckoned at a 3 percent annual rate, a doubling of the previous quarter's pace. The bump in output per worker continued a mild but positive six-quarter string, and in the latest quarter the increase in output was sufficient to drive down the cost of labor per unit each worker produces by 0.2 percent. Last quarter, the decline was 1.2 percent; persistently falling labor inputs costs could increase profitability for businesses, and with skilled labor increasingly hard to come by could lead to stronger wage gains for employees with no corresponding effect on overall inflation. That's a healthy situation the Fed would love to see, as it raises the standard of living very broadly, but a happenstance that has been hard to come by for many years.

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The broadest sector of the economy is comprised of service-related businesses. The Institute for Supply Management's barometer of non-manufacturing businesses eased a little in November, sliding 2.7 points to land at 57.4 for the month, a level that suggests a firm pace of activity, and one closer to trend than last month's almost 10-year high. Two stronger months of service activity in September and October appear to have been influenced by floods and hurricanes and so the indicator has settled back to a level we've seen on a number of occasions in 2017. Measures of both new orders for services and of employment metrics also cooled a bit but remain at levels that don't warrant much concern.

The nation's imbalance of trade expanded in October, with the mix reflecting a stronger pace of economic growth in the U.S. During the month, the trade deficit expanded by $3.8 billion, all of it attributed to a like-size increase in imports as export growth remained flat. All of the expansion in imports came from goods, so it looks like consumers and businesses here are opening the pocketbooks to a greater degree, while other economies try to goose growth by increasing exports. Although flat, exports remain at a high level and are some 13 percent higher than last year at this time.

Confident consumers seem to have less concern of late about adding to their debt loads. In October, new balances of consumer debt rose by $20.5 billion, the largest expansion since last November. The mix of new borrowing saw a $8.3 billion expansion on revolving lines of credit (credit cards), the strongest rate of borrowing in a year's time, and a $12.2 billion rise in installment credit usage, the kinds of loans used for purchasing autos or financing education. Sales of cars and trucks had a post-storms spurt but have started to settle again, and so installment borrowing may cool in the months ahead as it had been earlier this year.

  Find these only at HSH.com!
  
   Mortgage data: Today's Rates Historical Mortgage Rates Mortgage Trend Graphs
   Calculators: Downpayment Decisioner Tri-Refinance Calculator PMI Cost Calculator
   Resources: Housing & Salary Study ARM Index Data Home Value Estimator
  

With an unclear picture of potential "winners and losers" in the tax bills in Congress, it's little wonder that consumers might express a little more concern for the future even as they are enjoying the moment. That's the takeaway from the December preliminary review of Consumer Sentiment from the University of Consumers, where the headline value slid back by 1.7 points to 96.8 for the month to date. While assessments of current conditions remain upbeat, sporting a rise of 2.4 points to 115.9, a level that would rank among the to 15 all-time highs, but concerns about what's to come saw the expectations component drop by 4.3 points, carving off a lot of the improvement in outlook that was built over the last few months.

The tally of new orders received at factories tailed off in October with a decline of 0.1 percent for the month. Although orders for non-durable goods rose by 0.7 percent, a slump in orders for durable goods of 0.8 percent was enough to keep the top-line figure in the red. The report's "core" measure of orders by businesses (leaving out aircraft and expensive transportation items) managed a 0.3 percent gain for the month, but this was considerably cooler than the 2.3 percent September bounce.

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Not to worry, though, at least if the measure of inventory levels at the nation's wholesalers is any indication. Wholesale stockpiles were drawn down by 0.5 percent overall during October, largely due to a third strong month of sales of +0.7 percent. Four of the past five months have featured gains in sales. Stockpiles of durable goods expanded by a mild 0.1 percent but inventory levels relative to sales remained constant; for non-durable goods, sales expanded a bit more slowly but the effect was also enough to keep holdings steady. Overall, the aggregate measure of inventory to sales edged downward, so more orders to factories seems likely to be the outcome, and that should help boost the economy as the year comes to a close.

The labor market continues to feature low levels of layoffs and filings for unemployment assistance. The outplacement firm of Challenger, Gray and Christmas reported that there were 35,038 announced job reductions in November, up a bit from recent months but still very low, with the last 12-month period cumulatively seeing the fewest number of workers affected by announced layoffs in about 20 years. As well, initial claims for unemployment benefits continue hold close to 40+ year lows than not, with a new 236,000 new applications for benefits filed in the week ending December 2.

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Current Adjustable Rate Mortgage (ARM) Indexes
Index For The Week Ending Year Ago
  Dec 01 Nov 03 Dec 02
6-Mo. TCM 1.44% 1.28% 0.61%
1-Yr. TCM 1.62% 1.45% 0.80%
3-Yr. TCM 1.87% 1.73% 1.40%
5-Yr. TCM 2.10% 2.00% 1.83%
10-Yr. TCM 2.36% 2.36% 2.37%
FHFA NMCR 3.98% 4.00% 3.61%
FHLB 11th District COF 0.737% 0.729% 0.601%
Freddie Mac 30-yr FRM 3.90% 3.90% 4.03%

The year is rapidly coming to a close and there is a chance we won't crack the 4 percent mark for mortgages before it ends. That said, we're pretty close right now, just a handful of basis points below that level. The influential interest rates which underlie mortgages have been generally steady to firmer in the last couple of days, and with the Fed on tap for a move mid-week, we are likely to nudge a little closer to the "psychologically important" 4 percent breakpoint. With the rate hike already "baked in", any additional upward bump will have to come as a result of a measurable or notable change in policy outlooks, released as part of the "dot plots" that will accompany the close meeting. With six months of 3 percent plus growth in GDP, we think there is a chance that a member or two might have lifted their expectations for the coming year.

Of course, Freddie Mac's weekly survey will have largely been completed by late-day Wednesday, so any additional kicker for rates would not show until another week has passed. For now, we think that we'll see a two or three basis point increase in the average offered conforming 30-year FRM rate when Freddie reports next Thursday.

For a forecast for mortgage rates that runs all the way past Groundhog Day, have a look at our Two-Month Forecast. Although the clock is ticking on 2017, you might also have a final glance at mid-year update to our 2017 Outlook. Check it out to see how our forecasts and expectations are progressing as the year ends. Our 2018 Outlook is coming soon.

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