U.S Mortgages – Up Again to Make it 3-In-A-Row

U.S mortgage rates rose for a 3^rd consecutive week, in the week ending 13^th September, with mortgage rates hitting their highest levels since the beginning of August, 3 weeks of rises reversing 3 previous weeks of decline.

According to Freddie Mac, mortgage rates are sitting 0.82% higher year-on-year, which is the largest year-on-year increase since May-14.

A number of factors contributed to the jump in mortgage rates, including August nonfarm payroll and wage growth figures and last week’s July JOLTs job openings that reflected employee optimism in the market with a rise in quit rates, suggesting more wage growth to come.

While the economic data was certainly a positive, softer August inflation figures released on Thursday were not enough to reverse the uptick in 10-year Treasury yields, an anticipated further pickup in the pace of wage growth supporting a bounce back in the annual rate of inflation.

Adding further upward pressure on yields was news of a sizeable widening in the U.S deficit, raising concerns over an increased supply, leading to a pullback in demand for U.S Treasuries, with talk of the U.S reaching out to China to resume trade talks, further easing demand.

Freddie Mac weekly average rates for new mortgages as of 13^th September were quoted to be:

• 30-year fixed rate loan increased from 4.54% to 4.60% in the week, while up from 3.78% a year ago. The average fee remained unchanged at 0.5 points.
• 15-year fixed rates rose from 3.99% to 4.06% in the week, while up from 3.08% from a year ago. The average fee increased from 0.4 points to 0.5 points.
• 5-year fixed rates remained unchanged at 3.93% in the week, while up from last year’s 3.13%. The average remained unchanged at 0.3 points.

Mortgage Bankers’ Association Rates for the week ending 7^th September were quoted to be:

• Average interest rates for 30-year fixed, backed by the FHA, increased from 4.79% to 4.84%, with points decreasing from 0.69 to 0.51 (incl. origination fee) for 80% LTV loans.
• Average interest rates for 30-year fixed with conforming loan balances increased from 4.80% to 4.84%, with points rising from 0.43 to 0.46 (incl. origination fee) for 80% LTV loans..
• Average 30-year rates for jumbo loan balances increased from 4.67% to 4.72%, with points rising from 0.3 to 0.47 (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 1.8%, following on from the previous week’s 0.1% decline, week-on-week.

The Refinance Index slid by 6% to the lowest level since Dec-2000, in the week ending 7^th September, following the previous week’s 1% fall, with the share of refinance mortgages falling from 38.9% to 37.8%.

The Mortgage Bankers Association also released its latest mortgage credit availability report, which reported that the Mortgage Credit Availability Index (“MCAI”) fell by 0.3% to 183.5 in August.

A fall in the MCAI is indicative of tightening lending standards, while in contrast, a rise indicates a loosening of credit standards. The Conventional MCAI fell by 0.9%, while the Government MCAI rose by 0.1%. Looking at the components of the MCAI, the Jumbo MCAI fell by 2.1%, while the Confirming MCAI increased by 0.8%.

The fall in overall credit availability was the first in 4-months, with the Jumbo MCAI reportedly sliding from its record high reached in July.

Falling mortgage applications, rising mortgage rates and a tightening in overall credit availability is a bad combination for the housing sector that is already under pressure as median house prices decline, the median sales price of houses sold in the U.S falling from a 4^th quarter 2017 peak $337,900 to a 2^nd quarter 2018 $309,800.

While by historical standards, median sales price are still well above historical levels, median sales prices’ previous peak sitting at a pre-Global Financial Crisis $257,400 back in the 1^st quarter of 2007 (according to figures released by the Federal Reserve Bank of St Louis), the fall in mortgage applications attributed to inflated property prices and rising mortgage rates will be of concern. Strong labour market conditions and a pickup in wage growth are capable of fuelling the rental market at the expense of house prices that could ultimately hit the U.S economy should U.S households begin tighten the purse strings.

For the retail sector and inflation, a downward trend on house prices would ease inflationary pressures on retail goods as rental costs decline, leading to the ability to reduce mark ups that have been needed to maintain margins, though how quickly retailers respond to falling rates is ultimately key, falling house prices and stable retail prices certainly a negative for the sector and the U.S economy as a whole.

For the week ahead, economic data scheduled for release out of the U.S is on the lighter side, but not lacking influence. NY State and Philly manufacturing PMI numbers will provide further guidance on the state of the U.S economy amidst the ongoing trade spat with China. For the housing sector, August building permits, housing starts and existing home sales will give further direction on the housing sector, which appears to have peaked.

Outside of the data, with the FED now into its silent period, the Oval Office will likely have the ultimate influence on yields and ultimately mortgage rates through the week.