U.S Mortgage Rates Rise as Geopolitical Risk Abates

Mortgage rates were on the rise in the week ending 12^th September. 30-year fixed rates rose by 7 basis points to 3.56%, partially reversing a 9 basis point fall in the week prior.

In spite of the rise, 30-year rates continued to sit at levels last seen in November 2016, according to figures released by Freddie Mac.

Compared to this time last year, 30-year fixed rates were down by 104 basis points.

More significantly, 30-year fixed rates are down by 138 basis points since last November’s most recent peak of 4.94%.

Economic Data from the Week

Through the first half of the week, economic data was on the lighter side. July JOLTs job openings and August inflation figures provided direction.

On Tuesday, while job openings eased slightly, a pickup in quit rates continued to reflect solid labor market conditions.

While the markets continue to price in a FED rate cut next week, there was also a pickup in inflationary pressure in August. The core Producer Price Index rose by 0.3%, month-on-month, which was better than a forecast of 0.2%. In July, the index had fallen by 0.1%.

While the stats were positive for Treasury yields, it was a shift in sentiment towards the U.S – China trade war that delivered a pickup in yields and ultimately mortgage rates.

Freddie Mac Rates

The weekly average rates for new mortgages as of 12^th September were quoted by Freddie Mac to be:

• 30-year fixed rates increased by 7 basis points to 3.56% in the week. Rates were down from 4.60% from a year ago. The average fee remained unchanged at 0.5 points.

• 15-year fixed rates also increased by 9 basis points to 3.09% in the week. Rates were down from 4.06% from a year ago. The average fee fell from 0.6 points to 0.5 points.

• 5-year fixed rates rose by 6 basis point to 3.36% in the week. Rates were down by 57 basis points from last year’s 3.93%. The average fee fell from 0.4 points to 0.3 points.

According to Freddie Mac, pipeline purchase demand continues to pick-up, with purchase mortgage applications up by 9%, year-on-year.

Rising demand reflects the healthy underlying consumer economic fundamentals including a low unemployment rate, solid wage growth, and low mortgage rates.

In spite of a weakening in the manufacturing sector, consumer sentiment has remained resilient, supporting strong home purchase demand.

Mortgage Bankers’ Association Rates

For the week ending 6^th September, rates were quoted to be:

• Average interest rates for 30-year fixed, backed by the FHA, decreased from 3.80% to 3.76%. Points decreased from 0.32 to 0.31 (incl. origination fee) for 80% LTV loans.
• Average interest rates for 30-year fixed with conforming loan balances fell from 3.87% to 3.82%. Points increased from 0.34 to 0.44 (incl. origination fee) for 80% LTV loans.
• Average 30-year rates for jumbo loan balances decreased from 3.94% to 3.84%. Points rose from 0.24 to 0.34 (incl. origination fee) for 80% LTV loans.

Weekly figures released by the Mortgage Bankers Association showed that the Market Composite Index, which is a measure of mortgage loan application volume, rose by 2% in the week ending 6^th September. In the week ending 30^th August, the Market Composite Index had fallen by 3.1%.

The Refinance Index increased by 0.4% in the week ending 6^th September, leaving the index up by 169% from the previous year. The Index had tumbled by 7% in the week ending 30^th August.

The share of refinance mortgage activity decreased from 60.4% to 60.0%, following on from a fall from 62.4% to 60.4% in the week prior.

According to the MBA, the continued fall in mortgage rates over the holiday season left rates close to 3-year lows. While refinances were unchanged, August had been the strongest month for the current year.

For the week ahead

It’s a busy first half of the week ahead.

Key stats include September’s NY Empire State Manufacturing Index and August industrial production figures on Monday and Tuesday.

We can expect some sensitivity to the numbers ahead of a particularly important session on Wednesday.

While economic data due out on Wednesday is limited to August building permits and housing starts, the FED will deliver its interest rate decision.

The markets have priced in a 25 basis point rate cut. Recent stats suggest that there’s no reason for a more aggressive cut.

Assuming the FED cuts by the 25 basis points, the economic projections, rate statement and press conference will have the greatest influence.

A dovish rate cut would lead to a reversal in Treasury yields and mortgage rates. Based on the stats and FED Chair Powell’s last speech, the projections should show that FOMC members expect the U.S to avoid a recession.

A hawkish rate cut would give mortgage rates another boost, assuming that there are no major geopolitical events to rock the boat.