Monday, June 8, 2015

A Funny Thing Happened to Mortgage Rates

Keeping you updated on the market!
For the week of

June 8, 2015

A Funny Thing Happened to Mortgage Rates
Depending on the survey you review, mortgages remain at year-to-date highs or hit new year-to-date highs over the past week.
Freddie Mac's survey shows rates were mostly unchanged from the previous week, with the 30-year fixed-rate mortgage averaging 3.87%., in contrast, has the 30-year loan hitting a new high. Its survey shows the 30-year loan averaged 4.03%.
Interestingly, we are seeing something of a convergence with the 15-year fixed-rate mortgage and the five-year adjustable-rate mortgage.'s survey shows the 15-year loan averaging 3.26% and the five-year ARM averaging 3.18%. This makes sense when you consider any interest-rate moves by the Federal Reserve will hit the short-end of the yield curve first.
But credit-market participants aren't waiting for the Fed. They've taken matters into their own hands. Interest rates across the board are up perceptibly over the past month. The 10-year U.S. Treasury note was recently yielding 2.37%, its highest yield since November. (The 10-year note is a reliable proxy for the direction of mortgage rates.) This seems counter-intuitive when you consider recent news on economic growth.
Indeed, the final revision of gross domestic product (GDP) for the first quarter shows the economy actually contracted 0.7%. What's more, GDP growth isn't expected to have picked up much pace in the second quarter. Most estimates we've seen have GDP growing at less than 1% (on an annualized rate) for the second quarter. A sluggish economy surely gives the Fed reason to pause on raising interest rates.
Some outside the United States would also like to see the Fed hold off on any rate increase. The International Monetary Fund (IMF) recommends the Fed hold off until the first half of 2016.
Not that the IMF necessarily matters. Fed Chair Janet Yellen said she still expects to increase interest rates this year, but only if the economy meets her forecasts. We remain skeptical that it will. This is why we thought a June rate increase – forecast by many at the beginning of the year – was unlikely to occur. We wouldn't be surprised if the Fed made no move on interest rates until 2016 (as the IMF would like).
Why, then, are interest rates in general and mortgage rates in particular rising?
Markets are anticipatory animals. What's occurring in the moment doesn't influence decisions today. What the future is expected to bring is what gets people to act. Investors appear to be anticipating a pick up in inflation. Recent data show that consumer prices rose in the European Union economies. This was the first sign of European consumer-price inflation in six months. The news has prompted many investors to sell bonds worldwide. (Financial markets are intertwined. What happens in Germany now influences what happens here.)
With that said, we see mortgage rates taking a breather. The 30-year fixed-rate mortgage bobbing about 4% seems reasonable to us. We base our outlook on current expectations for GDP growth, U.S. consumer-price inflation, and the unlikelihood the Fed will do anything with the federal funds rate until the end of summer.
Then again, you never know for sure. As we frequently mention, the risk is in the waiting.


Date and Time
Mortgage Applications
Wed., June 10,
7:00 am, ET
Important. Moderating lending rates should lead to an uptick in mortgage activity.
Retail Sales
Thurs., June 11,
8:30 am, ET
1.0% (Increase)
Moderately Important. Retail sales remain weak across the board, which is indicative of sluggish economic growth.
Import Prices
Thurs., June 11,
8:30 am, ET
Moderately Important. Imports continue to support a non-inflationary pricing environment.
Producer Price Index
Fri., June 12,
8:30 am, ET
0.25% (Increase)
Moderately Important. Producer-level inflation remains dormant and will have no impact on interest rates.


Don't Fear Higher Mortgage Rates  
Rising rates has taken some steam out of mortgage activity. Refinance activity dropped 12% last week. Purchase activity was down 3%. Activity is down over the past few weeks. (The good news is that mortgage credit availability continues to trend higher.)
Borrowers are obviously put off by higher rates, but they'll adjust in short enough time. Expectations are key. If borrowers believe that lower rates are unlikely, they'll act today on today's rates. They'll also act if they believe rates are likely to rise.
The problem is that many borrowers get anchored to the recent past. They saw 3.75% on the 30-year loan a few weeks ago. That means many think they'll 3.75% again. We might, but at this point we don't think so. Besides, 4% is still a very good rate. Ten years ago, the 30-year fixed-rate loan was being quoted over 6%.
What's more, rising rates are frequently indicative of an improving economy. After all, the Fed said it won't move on raising rates until the data support it. Supporting data would include strong economic growth.
Article Courtesy of Patti Wilson, American Momentum Bank.

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