Rates Rising, But Resistant
April 19, 2019 -- As expected, mortgage rates firmed up a little more this week, moving closer to a mid-point of a 2019 range. Mortgage rates have been surprisingly lower than expected to begin the spring, with a downturn in rates fostered by a spate of soft economic news. In just a few weeks' time, this seems to be changing, and while mortgage rates aren't storming higher there remains upward pressure for them.
The first few months of the year featured all manner of data that was said to be "noisy", affected by everything from seasonal adjustment issues to the uncertain effects on both the economy and numbers-gathering as a result of the partial government shutdown. The underlying trend in growth and inflation had been more difficult to discern, but as we move forward, the picture is clearing, and seems to be of a rather brighter hue than pessimistic investors once believed.
By way of a working reference, just consider the GDPNow tracker from the Federal Reserve Bank of Atlanta. Just five weeks ago, GDP growth for the first quarter reckoned by this model was at just 0.2%, a virtual standstill and one which sparked fears of a recession and talk that the Federal Reserve should consider slashing rates to prop up growth. After weeks of improving news, the current estimate has been pushed all the way back up to 2.8%, a level not only quite strong, but one even better than the fourth quarter of 2018. We'll get the actual "advance" report covering Q1 GDP next Friday, and if it comes in at or near the present estimated level, not only will chatter about rate cuts cease, but at least a few investors will start to nervously watch for signs that inflation is picking up.
With inventories of available homes tight and mortgage rates steady, low-to-moderate income homebuyers may need a little help. To lend a hand, HSH has revised and updated our popular "Homebuyer Assistance Programs By State" to help borrowers connect with the essential supports they need to become homeowners.
The Fed has essentially said that if inflation remains quiet, it won't be very likely to raise rates, even if growth is above the economy's potential and the labor market continues to tighten. That may be true, but as we discussed here last week, at least some Fed members are willing to change their minds about keeping monetary policy on hold. Regardless of that base level of interest rates for the economy, if growth is re-strengthening after a soft patch as it appears to be, longer-term interest rates and mortgage rates will rise, at least to a degree.
With regard to the labor market, signs seem to indicate that things are tightening again. Initial claims for unemployment assistance, already at about a 50-year low last week, legged even lower in the week ending April 13, sliding to just 192,000 new applications filed. This was the fewest number since three weeks after the Woodstock festival. A blowout hiring spate in January was followed by nearly no hiring in February, but March saw a rebound and it looks like April will follow suit.
Also helping to power the economy along, consumer spending picked up smartly in March. Retail sales for the month rose a stout 1.6%, above forecasts and a big turnaround from a market-worrying 0.2% decline in February. Although higher gasoline prices and a flare in auto sales did goose the headline figure higher, so-called "core" retail sales manages a 0.9% rise anyway, more than covering a 0.7% decline in February. Delayed tax refunds and lingering government shutdown effects likely affected February, but not so for March, where sales may also have been aided by a resurgent stock market in the early part of 2019.
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In information gathered in the six weeks leading up to April 8, the Fed's own survey of regional economic activity (aka "Beige Book") suggested that the economy is doing okay. "Economic activity expanded at a slight-to-moderate pace in March and early April... a few Districts reported some strengthening." Given the time period here, and relative to the GDPNow report referenced above, it's an open question to whether or not the districts that reported improvement were polled toward the end of the period or not. As far as inflation goes, "prices have risen modestly", "input costs increased in the modest-to-moderate range", driven by "tariffs, freight costs, and rising wages". So far, cost increases mostly are being absorbed, as "the ability of firms to pass increased input costs on to consumers was mixed." Labor markets remained solid, as the report noted "Employment continued to increase nationwide, with nine Districts reporting modest or moderate growth and the other three reporting slight growth." Certainly, there's nothing here to suggest darkening economic skies that might continue to keep interest rates down.
Given trade and tariff issues in the headlines so often in the last year (and still, if one clears the political noise out of the way), it's worth noting that the nation's imbalance of trade has declined of late, with the $49.4 billion gap in February the smallest since last June. The trade deficit shrank as a result of a $2.4 billion increase in exports, suggesting that the economies of our trading partners have also improved at least a little, while imports rose by just $0.6 billion for the month. Exports should add a little to GDP for the first quarter, but it may be a challenge to get them to increase much as at the moment, as a still-soft economic climate in China, Japan, Germany, the Eurozone and more seem likely to temper demand for U.S. goods and services for a bit.
Lower mortgage rates to start the traditional spring homebuying season should have a positive effect on home sales. Optimism among the national home builders continues to improve after stalling late last year; the National Association of Home Builders Housing Market Index for April rose by one point to move to a robust 63 and has added 7 points since a December nadir. A submeasure covering sales of single-family homes also rose by a point, landing at 69, the highest figure since last October, while expectations for conditions in the next six months remained very high at 71. Traffic at model homes and sales offices also rose a bit, adding 3 points to reach 47. We'll get a look at March sales of new homes (and existing homes) next week, but signs appear positive.
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Construction on new homes in March was tilted slightly to the downside. Housing starts for the month came in at 1.139 million (annualized) units begun, down just 0.3% from February. Single-family starts posted an annual rate of 785,000 units (just a touch below February), and starts for multi-family projects were unchanged at 354,000 for the month. While there is no glut of inventory for new homes, supplies last month were adequate to cover 6.1 months of demand, a level considered pretty optimal, making a surge in new building unlikely. Rather, a steady pace seem more the case, and permits for new building were also down just a little, falling 1.7% to 1.269 million annual units expected.
A steady trend in housing -- both building and buying -- would be quite welcome. More new and existing inventory to buy with moderating price increases at a time of still-low mortgage rates would underpin the housing market in a very economically beneficial way and help this expansion to become the longest in U.S. history.
The brightening economic was reflected in the latest Conference Board report covering Leading Economic Indicators. For March, LEI sported a gain of 0.4%, the strongest such reading since last September. This suggest that the economic soft patch that started last October seems to have faded, and that the economy may be adding some new momentum as we move deeper into the second quarter. If nothing else, it does show that the end of the first quarter shook off the effects of difficult financial markets at the end of last year and the government shutdown to start this one and is getting its feet back under it again.
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A couple of local reviews of manufacturing activity in April were both pretty fair, as the Federal Reserve Banks of New York and Philadelphia both chimed in with their latest reviews of factory activity in their districts this week. The New York Fed noting improving conditions, with their barometer rising by 6.4 points to a solid 10.1, pushed higher by an improvement in new orders (+4.5 points to 7.5). Employment metrics eased just a bit but remain solid, while reports covering prices paid continued on a generally low and falling track. Meanwhile, the FRB of Philadelphia regional review saw a little softening of activity, with their marker being moved down 5.2 pegs to land at 8.5 for the month. However, the measure of both new orders and employment both kicked higher (+13.8 to 15.7 and +5.1 to 14.7, respectively), so the headline figure seemed to mask some of the underlying strength. As with New York, prices paid continues on a softening track, so there's little to be seen by way of creeping inflation in these reports.
Inventory buildup at the nation's wholesaling firms slowed in February, with stockpiles rising just 0.2% for the month, the smallest gain since last June. Flagging sales in the period of October through January saw holding steadily increase, but sales have again improved in both January and February, although not enough yet to pull down inventory-to-sales ratios. This measure suggests that wholesalers have enough goods on hand to cover 1.35 months of sales at the present rate; while this may not sound like much, the same measure was 1.28 as recently as last August, so holding have ballooned and need to be worked off a bit before much by way of new ordering will need to happen.
Industrial Production slipped by 0.1% in March, dragged down by a flat report for in manufacturing output and a 0.8% fall in mining production. Utilities managed to trim the fall with a 0.2% gain, and the percentage of the nation's production floors in use eased to 78.8% for the month, so there remains plenty of spare capacity available before any price-increasing bottlenecks in production might form.
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The unexpected spurt of refinance activity is abating somewhat, according to the weekly applications index from the Mortgage Bankers Association of America. After jumps of more than 12 and 38 percent in the last two weeks in March, declines of more than 11% and another 8% have happened since. At current interest rates (let alone slightly higher ones), the pool of potential refinancers is limited. However, applications for mortgages to buy homes (purchase-money mortgages) hit a nine-year high in the week ending April 12, and slightly firmer mortgage rates are far less of a deterrent in a purchase transaction than a refi, so odds favor that purchase apps will continue to climb as long as rates don't get out of hand.
Mortgage rates shouldn't get out of hand, at least not anytime soon. A Fed that needs considerable evidence to consider changing policy (one way or the other) will be comfortable to sit and wait and evaluate. The next Fed meeting comes at the end of the month and should produce nothing of note, excepting perhaps a collective "phew!" at having successfully pivoted on policy and seen positive results.
That said, we do think that rates will continue to firm up next week. The economic data has simply been too solid to expect them to remain at the levels achieved just a few weeks ago. Although the current stance of underlying interest rates does suggest that a larger move might be expected to occur, we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will rise by perhaps 4-5 basis points next week, enough to put it nearly in the middle of the range it has managed so far this year.
For an outlook for mortgage rates that carries to the middle of the spring homebuying season, 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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