Weekly Rate & Market Update 1-8-16

Question of the week: What do you think will happen to interest rates this year?

Answer: Before looking forward a look back. As you can see from the chart below in 2015 the benchmark 30 year fixed rate started the year at 3.625% and ended the year only 0.25% higher at 3.875%, the same increase as the Fed rate hike in December. Between the first and last Fridays of the year the rate reached low of 3.375% at the end of January and a high of 4.00% for three weeks at the end of June and early July. For the last two months of 2015 the conforming rate drifted between 3.75% and 3.875%.

After a steady climb from below 3.50% in April to the high in late June-early July rates stayed within a 0.25% range.

The stability seen in the second half of 2015 should continue into 2016, absent extraordinary external events (see below for such an event) that could push rates lower. Forces that could push rates higher appear to be absent from the economy for the foreseeable future.

What forces cause higher rates? Robust, or even more than modest, economic growth, strong growth in employment and high consumer confidence are all factors that lead to higher interest rates. While 2015 had better economic activity since the recovery began in June 2009, the activity was not what would be considered more than moderate. Had the economic and employment growth been stronger the Fed would have raised rates sooner and mortgage rates would have continued to increase through 2015, and not peaking mid-year before dropping in the second half of the year.

What was absent in 2015 does not appear to be readily present in 2016. Manufacturing continues to be weak, international markets are weakening with Europe facing economic pressures from millions of refugees and China’s long predicted economic slowdown gaining enough momentum that the government can no longer create data to mask it.

Like in most years there will be a spike in rates at some point in the year, probably in the middle of the year as last year, however unless it is accompanied by strong economic growth rates should settle back down.

While it is only an opinion, mine is that rates for 2016 for 30 year conforming fixed rates should not climb above 4.25% and spend most of the year below 4.00%.

We’ll check back in twelve months to see if my opinion had any merit.

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Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

The most significant data for the U.S. economy released this week was the employment report for December. It showed an unexpectedly large increase in new jobs, 292,000 of which 275,000 were in the private sector. Wages were flat from November but up 2.5% from December 2014. While the total number of new jobs showed strength, within the number some concerns are that a not insignificant number of the new jobs were seasonal and temporary. Ordinarily this report would result in a spike in interest rates, however with the situation in China and its markets this report had no impact on rates.

So what is with China? Chinese stocks have been having an exciting week, with trading stopped twice when its primary market dropped 7% each day. The losses in China spilled around the globe and stocks prices fell through much of the week. The result was beneficial for U.S. interest rates as investors engaged in the traditional “flight to quality” by selling riskier stocks and buying safer bonds and fixed rate instruments such as mortgages. Adding to the China concerns were the devaluations through the week of the yuan, China’s currency, by its Central Bank. Trying to make its exports cheaper the devaluations spook investors who are concerned that the economy that is 17% of the global economy is not as sound as the 7% growth the Chinese government says is occurring. Overall the China syndrome has been very positive for lower rates.

Interesting side note….China’s stock market has over 200 million retail investors, i.e. people. Many treat the stock market like a casino, instead of betting on red however they bet on concrete, steel or car tires. Comparatively there are almost 320 million people in the United States, so it would be as if two out of every three people in the U.S. had active stock accounts they traded. Volatility is not unusual in the Chinese market because of the composite of investors, and not many foreign investors are active in the market due to the volatility and lack of fundamentals in trading practices.

Rates for Friday January 8, 2016: Rates increased Christmas week and then remained steady through New Year’. This week however rates did move down and are where they were just before the Christmas/New Year’s holidays.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.75% Down 0.125%
30 year high-balance conforming 4.00% Down 0.125%
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.50% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs, recent rate change reduces credits

I hope everyone had a good year end. The Smith family did, we took what has become an annual sojourn right after Christmas to spend a week in Scottsdale just doing not much. One activity we enjoy is catching up on the holiday movie releases. One of the movies that we saw that I highly recommend is The Big Short about the mortgage markets and how they were built up and the subsequent collapse. It is very well done and gives you a look behind the curtain. Many long time readers of the Weekly Rate & Market Update know I talk about Mortgage Backed Securities and how they dictate our rates, this movie goes into some detail about that market and its role in the meltdown. Great writing, acting and a must see.

Have a great week, keep those resolutions going for one more week!

Dennis