U.S Mortgage Rates on the Move and It’s Going to Hurt

Mortgage rates were on the rise again, hitting 8-year highs in the week ending 17th May, following the previous week’s hold, with mortgage applications continuing to fall through mid-May, May’s month-on-month applications looking weak following the 5% fall in April.

While home owners have found support from the current economic environment that has contributed to the tight labour market environment, rising borrowing costs have been joined by rising energy prices, with gas prices hitting 4-year highs ahead of the peak season for home buyers.

A combination of strong demand and low inventories have seen the upward trend in mortgage rates have a limited impact on the housing sector to date, but with inflationary pressures building, mortgage rates on the rise and house prices also rising, the housing sector could be in for a surprise should rates continue to rise at pace seen through the first 5-months of the year, with mortgage rates heading towards the 5% range.

The resumption of the upward trend will bring into question affordability, particularly with energy prices and house prices on the rise, which could begin to weigh on the demand side and begin easing pressure on inventories, though a shortage of skilled labour and rising material costs continue to be an issue for the sector and new home builds.

According to figures released on Wednesday, U.S building permits slipped by 1.8% in April, while housing starts slumped by 3.7%, which suggests further upward pressure on house price near-term, house price appreciation outpacing the tepid wage growth seen across the labour market.

Freddie Mac weekly average rates for new mortgages as of 17th May were quoted to be:

  • 30-year fixed rate loan rose from 4.55% to 4.61% last week to the highest level since 19th May 2011, while up from 4.02% a year ago.
  • 15-year fixed rates jumped from 4.01% to 4.08% last week, while up from 3.27% from a year ago.
  • 5-year fixed rates rose from 3.77% to 3.82% over the week, while up from last year’s 3.13%.

Mortgage Bankers’ Association Rates for the week ending 11th May were quoted to be:

  • Average interest rates for 30-year fixed, backed by the FHA fell from 4.80% to 4.78%, easing back from recent Jul-11 highs.
  • Average interest rate for 30-year fixed with conforming loan balances eased from 4.78% to $4.77%.
  • Average 30-year rates for jumbo loan balances rise from 4.55% to 4.73%.

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 2.7%, following the previous week’s 0.4% fall week-on-week. The fall coming off the back of the continued uptrend in mortgage rates and in spite of respite in the upward trend through the week ending 11th May.

The Refinance Index also fell, down 4% to its lowest level since Aug-08, following the previous week’s 1% fall, with the refinance share of mortgage activity falling further to 35.9% of total applications, the lowest level since Aug-08 and down from the previous week’s 36.3%, the downward trend continuing.

While mortgage applications have been on a downward trend, attributed to a combination of rising mortgage rates and shortage of housing inventories, delinquency rates have also been on a downward trend.

According to the MBA, the delinquency rate for mortgage loans on 1-4 unit residential properties fell to 4.63% of all loans outstanding in the 1st quarter of this year, down 54 basis points from the 4th quarter of 2017 and 8 basis points lower from the 1st quarter of last year.

The latest MBA report also showed that the percentage of loans in which foreclosure actions were started during the 1st quarter was 0.28%, up 3 basis points from the previous quarter, while down 2 basis points from 1st quarter of last year.

Favourable economic conditions, a low unemployment rate, tax refunds and bonuses and rising house prices contributing to the downward trend in delinquency rates.

While the numbers suggest that lending standards will remain steady, rising mortgage rates and rising house prices will offset some of the factors contributing to the downward trend, as reflected in the 1st quarter percentage of loans on which foreclosure action commenced.

Following 2-weeks of hope, rising energy prices, positive retail sales in April and some hawkish FOMC member commentary saw U.S 10-year Treasury yields hit 3.105%, the highest level since the summer of 2011, driving mortgage rates higher in the week.

While market focus on FOMC member chatter revolves around policy, FOMC voting member Kashkari on Thursday addressed the issue of asset prices and said that he didn’t see any signs of a housing bubble, a much needed positive for the housing sector and for those still looking to get onto the property ladder.

For the week ahead, it’s a particularly busy one on the economic calendar, with a number of FOMC members speaking through the week to provide forward guidance on policy, while the FOMC meeting minutes, May’s prelim private sector PMI, durable goods orders and home sales figures will also be in focus.

Hawkish minutes and FOMC member commentary would see yields on the move again, though we would expect geo-political risk to play a hand in the direction of Treasury yields through the week, NAFTA and U.S – China trade negotiations, U.S sanctions on Iran, the anti-Euro Italian government and North Korea there for the markets to contend with through the week.