Rates Steady in October as Increases Expected

Nationally, the contract interest rate on conventional mortgages for home purchase held steady in October 2016. Over the month, the rate on conventional mortgages for home purchase was unchanged at 3.60%, according to data released by the Federal Housing Finance Agency (FHFA). Rates on the purchase of previously occupied homes ticked up 1 basis point to 3.62% while rates on new homes fell 2 basis points to 3.54%.

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The lack of change in mortgage rates overall reported by the FHFA does contrast with the increase in mortgage rates over the month of October in the Mortgage Bankers’ Association’s Mortgage Applications Survey (MAS). This Survey indicates that the contract rate on conventional mortgages rose 5 basis points to 3.72% over the month*. However, the FHFA release more closely parallels results from Freddie Mac’s Primary Mortgage Market Survey (PMMS). The commitment rate on conventional mortgages ticked up 1 basis point to 3.47% over the month of October*.

Despite some divergence, over the longer term, these 3 series track each other fairly closely. Between 1990 and 2000, the trend in the 3 series matched, although the rates reported by MBA’s MAS and Freddie Mac’s PMMS were more similar while FHFA’s MIRS was often a bit lower. Since 2000, the three series have been in near unison both in its point estimate and the overall trend.

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The monthly data covers the month of October, but the weekly mortgage rate data for November indicates that rates have clearly begun to rise. As shown by the figure below, between October 28th and November 25th, the contract mortgage rate calculated by the PMMS rose from 3.47% to 4.03%. Over the same period, the MAS increased from 3.75% to 4.23%. Further, mortgage rates are expected to continue climbing in the near term. In its most recent forecast, dated October 28th, NAHB expects the rate on a 30 year fixed rate mortgage to climb in each of 2017 and 2018.

The increase in mortgage rates follows the increase in the 10-year Treasury note. A rising rate on the 10-year partly reflects the desire to make progress on monetary policy normalization, which has been impeded by a series of unrelated surprises over the course of the year. However, momentum has been building and expectations of an impending increase in the federal funds rate has pushed interest rates modestly higher in the second half of the year.

A more seismic impact from a different set of rate expectations has been set in motion by the surprise outcome of the November election. Proposals for fiscal stimulus via tax cuts, government spending and regulatory reform have led to expectations of stronger economic growth, higher inflation and higher interest rates. The yield on 10-year Treasury securities has moved up over 50 basis points since November 8.

However, the sustainability of the immediate response to the election by interest rates is still to be determined. Incorporating the potential policies promised during the campaign into forecasts about the path of rates in the near-term may be premature as it remains to be seen if and for how long the recent jump in rates will be sustained once the reality of governing sets in.

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* The MAS and PMMS are both administered weekly. The monthly mortgage rate is calculated as the simple mean over the weeks in the month.



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