U.S Mortgages – Rates Ease Back on October’s Risk Aversion

Following last week’s upward move, mortgage rates eased in the week ending 1^st November, with 30-year fixed falling by 3 basis point to 4.83%.

Risk aversion through the week ending 26^th October had driven demand for U.S Treasuries, leading to the fall in yields, with the Italian coalition government’s budget and rising concerns over the effects of the ongoing U.S – China trade war on the Chinese and global economies also weighing, China’s GDP number having come in softer than expected in that week.

Adding to the recent market stress has been concerns over the FED moving more aggressively on rates, with talk of a need to move beyond normalization adding to the financial market angst and demand for U.S Treasuries.

Economic data through the last week provided some relief for the equity markets, with the release of the FED’s preferred Core PCE Price Index figures, which saw the annual rate of inflation holding steady at 2%, while consumer confidence hit an 18-year high in October, according to the CB figures released on Tuesday.

Upbeat nonfarm payroll figures released by ADP and a rebound in unit labour costs in the 3^rd quarter provided further support for the FED’s outlook on policy however, while weaker than expected manufacturing sector activity in October provide further evidence that the U.S – China trade war has had some impact on the U.S economy.

The risk on sentiment through the lat week, supported by some upbeat quarterly earnings figures has seen U.S Treasury yields pick up through the week that will likely see mortgage rates resume their upward trend in the coming week’s figures.

On the downside for the housing sector, following a string of weak stats, there was a further slowdown in U.S house prices, with the S&P / CS HPI Composite – 20 n.s.a recording a 5.5% rise in house prices in August, year-on-year, falling short of a forecasted 6% rise and down on July’s 5.9% increase.

The housing sector has garnered plenty of attention of late, with the rising mortgage rate environment and lack of inventories raising concern over affordability that has led to a downward trend in mortgage applications. Freddie Mac noted in the week that a chronic lack of supply, driving house prices higher, has been of greater significance than rising mortgage rates. Freddie Mac also stated that first-time buyer and entry level home sales have remained firm across most of the country, with a fall in house sales concentrated in the more expensive segments of the sector.

Labour market conditions and rising wages have certainly eased pressures from rising mortgage rates, with an easing in house price gains also supporting the demand observed by Freddie Mac at the lower end of the property ladder.

Freddie Mac weekly average rates for new mortgages as of 1^st November were quoted to be:

• 30-year fixed rate loan decreased from 4.86% to 4.83% in the week, while up from 3.94% a year ago. The average fee remained unchanged at 0.5 points.
• 15-year fixed rates fell from 4.29% to 4.23% in the week, while up from 3.27% from a year ago. The average fee rose from 0.4 points to 0.5 points.
• 5-year fixed rates slipped from 4.14% to 4.04% in the week and up from last year’s 3.23%. The average fee held steady at 0.3 points.

Mortgage Bankers’ Association Rates for the week ending 26^th October were quoted to be:

• Average interest rates for 30-year fixed, backed by the FHA, increased from 5.07% to 5.08%, its highest level since April 2011, with points increasing from 0.61 to 0.62 (incl. origination fee) for 80% LTV loans.
• Average interest rates for 30-year fixed with conforming loan balances remained unchanged at 5.11, its highest level since February 2011, with points easing from 0.52 to 0.50 (incl. origination fee) for 80% LTV loans.
• Average 30-year rates for jumbo loan balances decreased from 5.01% to 4.94%, with points remaining unchanged at 0.28 (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, fell by 2.5% in the week ending 26^th October partially reversing the previous week’s 4.9% increase, week-on-week.

The Refinance Index fell by 4%, in the week ending 26^th October, reversing the previous week’s 10% surge, with the share of refinance mortgages falling from 39.8% to 39.4%.

According to the MBA, while 30-year fixed mortgage rates held steady over the week, total applications were in decline overall, with purchase applications easing back over the week and over the year, this being the first year-on-year decline in purchase activity since August. The pullback in purchase activity was attributed to the rise in mortgage rates through the year and the recent stock market volatility.

For the week ahead, it’s a quiet week on the data front, with key stats including non-manufacturing PMI numbers, September’s JOLTs job openings, consumer sentiment and wholesale inflation figures. While we will expect the numbers to have some influence on the direction of U.S Treasury yields, the markets will likely be gripped by the U.S mid-terms on Tuesday, which could well overshadow corporate earnings through the week, and the FED’s November policy decision.

On top of the mid-terms, progress on trade talks between the U.S and China, Italy’s budget and Brexit will also be of influence market risk appetite, though to a lesser extent barring the unexpected.