U.S Mortgages – On the Rise, but not by Much…

Mortgage rates were on the rise in the week ending 26^th July, the moves through the week seeing rates hit the highest level since late June according to figures released by Freddie Mac.

The rise back to June levels will raise some concern over the outlook for the housing sector, with June new home and existing home sales figures released over the last week suggesting that the combination of rising house prices and mortgage rates are beginning to cause prospective home buyers to pause.

It’s not just the jump in mortgage rates through the current year that has impacted, with rising consumer prices also a factor to consider as the FED looks to maintain its quarter rate hike schedule.

While labour market conditions have continued to tighten, wage growth as not been as impressive as one might have expected, ultimately to offset the impact of rising mortgage rates and consumer prices, not to mention upward trend in house prices.

On the trade front, while Trump and Juncker may have averted an EU – U.S trade war, of greater concern will be the possible effects of a prolonged trade war with China, inflationary pressures likely to build further, which would not only dampen consumption, but also weigh on the economy and labour market conditions.

Through the week, in spite of disappointing housing sector data, the July manufacturing PMI showed a slight pickup in productivity, while service sector activity saw marginally slower growth, the combination of which continued to support robust growth going into the 3^rd quarter, which was a positive.

Adding to the upbeat sentiment was a rebound in durable goods orders in June, which came in ahead of Friday’s 1^st estimate GDP numbers for the 2^nd quarter.

10-year U.S Treasury yields were on the rise through to Thursday, supporting the upward move in mortgage rates, though softer than expected PCE Price Index figures for the 2^nd quarter saw yields pullback on Friday, the PCE Price Index rising by 1.8% year-on-year in the 2^nd quarter, down from a 2.5% rise in the 1^st.

The FED’s preferred inflationary measure, the Core PCE Price Index rose by 2% in the 2^nd quarter, which was softer than a 2.2% rise in the 1^st.

The softer than anticipated figures will put a greater emphasis on the June Core PCE Price Index figures due out on Tuesday, softer numbers easing pressure on the FED to lift rates two further times this year, which would see yields pullback further should the FED raise any concerns over inflation in Wednesday’s rate statement, any further pullback in yields likely to see mortgage rates hit reverse in the week.

Freddie Mac weekly average rates for new mortgages as of 26^th July were quoted to be:

• 30-year fixed rate loan increased from 4.52% to 4.54% in the week, while up from 3.92% a year ago.
• 15-year fixed rates rose from 4.00% to 4.02% in the week, while up from 3.2% from a year ago.
• 5-year fixed rates held steady at 3.87% over the week, while up from last year’s 3.18%.

Mortgage Bankers’ Association Rates for the week ending 20^th July were quoted to be:

• Average interest rates for 30-year fixed, backed by the FHA, remained unchanged at 4.78%, following the previous week’s fall.
• Average interest rates for 30-year fixed with conforming loan balances held steady at 4.77%.
• Average 30-year rates for jumbo loan balances increased from 4.66% to 4.72%.

Weekly figures released by the Mortgage bankers Association showed that the Market Composite Index, which is a measure of mortgage loan application volume, fell by 0.2%, partially reversing the previous week’s 2.5% slide, week-on-week.

The Refinance Index increased by 1% in the week ending 20^th July, following the previous week’s 2% rise with the share of refinance mortgages continuing to recover from their lowest level since December 2000 hit earlier in the month, with the refinance share of mortgages rising from 36.5% to 36.8%.

For the week ahead, it’s a particularly busy week on the economic calendar, with key stats through the week including consumer confidence, personal spending and inflation figures on Tuesday, the market’s preferred ISM manufacturing PMI number and ADP nonfarm employment change figures on Wednesday and the all-important wage growth and nonfarm payroll figures on Friday, which are released alongside service sector PMI and trade figures.

There’s also the final set of stats from the housing sector, with pending home sales numbers scheduled for release on Monday, where another set of disappointing numbers could be the final piece of evidence needed to support those suggesting that the sector may have already peaked out. Freddie Mac has reported that unsold inventories have begun to rise for the first time in 3-years and, with building permits and housing starts having tumbled in June, a further rise in inventories would certainly suggest a material fall in demand, both new home sales and existing home sales likely to be looked at much more closely in the coming months.

With mortgage rates on the rise, the hope of a shift in housing sector conditions could see a jump in inventories that should lead to shift in market conditions in favour of buyers, though economic conditions suggest that the housing sector is unlikely to see a material correction for now.

Outside of the stats, the FED will be delivering on its August interest rate decision and, while the FED is expected to hold, the rate statement could set the markets up for a possible September rate hike that would support another rise in mortgage rates through the week, though noise from the Oval Office will also be a factor to consider and inflation figures on Tuesday will need to hold steady at a minimum.

Progress, or lack of, on trade negotiations with China and any escalation in rhetoric between the U.S and Iran are possible dampeners that could see a jump in demand for U.S Treasuries, which would pin back any rise in mortgage rates in the week.