Mortgage Rates Fall After Weak Economic Data

Mortgage rates slightly improved to start the week, but for most lenders, it was enough to erase the weakness seen last Friday.  Behind the move was much weaker-than-expected manufacturing data out of New York.  Weak economic data tends to encourage investors to buy bonds.  Among those bonds are the mortgage-backed-securities that dictate mortgage rates.  As more are bought, prices rise and rates fall.

The move was small, with most lenders continuing to quote conventional 30yr fixed rates of 4.0% for top tier scenarios.  this improvement (like most) would be seen in the form of slightly lower closing costs for the same old rates.  There are still a few lenders on either side of that by an eighth (3.875% or 4.125%). 

U.S. inflation temporarily ‘very low,’ says Fed’s Fischer

U.S. Federal Reserve Vice Chair Stanley Fischer addresses The Economic Club of New York in New York March 23, 2015

U.S. inflation is only temporarily “very low” due in part to commodity prices, while the U.S. economy has nearly achieved full employment, Federal Reserve Vice Chairman Stanley Fischer said on Monday.

“A large part of the current inflation is temporary. It has to do with the decline in the price of oil; it has to do with the decline in the price of raw materials,” he said on Bloomberg TV.

“These are things which will stabilize at some point,” Fischer added, in comments that were careful not to tip his hand on when he thinks U.S. interest rates should rise.

“We are in a situation with … nearly full employment but very low inflation.”

The U.S. central bank has kept rates near zero since the depths of financial crisis in 2008, but could start tightening policy as soon as next month, given unemployment has fallen to 5.3 percent from a recessionary high of 10 percent.

The Fed’s preferred inflation measure is 1.3 percent, below its 2-percent target, which has sown caution among some policymakers.

Rates will not stay this low “forever, and we need to be looking ahead as we go,” said Fischer, a close ally of Fed Chair Janet Yellen. Employment has been “rising pretty fast … yet inflation is pretty low.”

He said the Fed “would be happier if we saw more physical investment than financial investment” given the monetary accommodation.

Globally, Fischer said the deflationary trend “bothers” the Fed, but is one of many factors the U.S. central bank is watching.

Lower Rates Stoked Modest Refi Demand Last Week

Last week was the best one for mortgage applications in quite some time in terms of percent gains versus the previous week (outright index levels remain generally depressed, especially in the Refi Index).  The Mortgage Bankers Associations Market Composite Index, a measure of application volume, rose 4.7 percent during the week ended July 31 on a seasonally adjusted basis.  Unadjusted it was up 5.0 percent.

The Refinance Index increased 6 percent from the previous week and the refinance share of mortgage activity rose to 51.3 percent from 50.6 percent. Both the seasonally adjusted and unadjusted Purchase Index were 3 percent above the previous week’s level.  The unadjusted Purchase Index was up 23 percent compared to the same week in 2014.  It was the largest year-over-year gain since the 35 percent posted during the week ended November. 22, 2013, a week distorted by the Thanksgiving holiday.

“Despite recent concerns about the economy, both purchase and refinance applications increased strongly in response to lower interest rates last week,” said Lynn Fisher, MBA’s Vice President of Research and Economics. “Refinance activity was the highest since May when rates were last at this level. The increase in purchase activity was also notable for this time of year, up 23 percent relative to a year ago.”

The share of all applications that were for FHA-backed loans increased to 13.8 percent from 13.7 percent while the VA share decreased to 10.5 percent from 10.9 percent. The share of USDA loan applications dipped 0.1 percent to 0.9 percent.

As MBA’s Fisher said, the increased loan application activity was in reaction to further reductions in mortgage interest rates.  Contract rates were down for all tracked loan products, some to the lowest levels since May, and effective rates declined for those with fixed rates.

The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances ($417,000 or less) decreased to 4.13 percent, the lowest level since May 2015, from 4.17 percent.  Points declined to .34 from 0.36.

Jumbo 30-year FRM with jumbo loan balances (greater than $417,000) had an average rate of 4.08 percent, also the lowest level since May 2015, compared to 4.12 percent the previous week.  Points fell to 0.27 from 0.35.

FHA-backed 30-year FRM contract rates averaged 3.96 percent with from 3.98 percent, with points easing back to 0.22 from 0.26.

The average contract interest rate for 15-year FRM decreased by 3 basis points to 3.36 percent, another three month low. Points were at 0.37 compared to 0.38 the prior week.

The average contract interest rate for 5/1 adjustable rate mortgages (ARMs) also dropped to its lowest level since May, 3.02 percent, from 3.04 percent.  Points rose to 0.43 from 0.37 leaving the effective rate unchanged. The ARM share of applications increased to 6.8 percent from 6.6 percent.

MBA derives application volume and rate information from its Weekly Mortgage Application Survey which covers over 75 percent of all U.S. retail residential mortgage applications.  The survey has been conducted since 1990 among respondents including mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100.  Interest rate information presumes loans with 80 percent loan-to-value ratios and points include the origination fee.