Analyzing Mortgage Rate Data

In the week ending August 02, 2024: The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased to 6.55% from 6.82%. Mortgage rates are at the lowest level since May 2023. The spread between the 30-year fixed-rate mortgage and the 10-year Treasury yield declined to 2.51 percentage points. Mortgage rates are down 74 basis points from the 2024 peak. The result? A little refi boomlet! The seasonally adjusted refinance index increased nearly 16% from the previous week. The refinance index remains 59% higher compared to the same week one year ago. The refinance share of mortgage activity increased to 41.7% of total applications from 38.2% the previous week. The seasonally adjusted purchase index increased a modest 0.8% from one week earlier, but remains 10.7% lower than the same week one year ago. Average purchase mortgage applications in the first week of August have decreased 3% compared with the month of July, and remain nearly 9% lower compared to one year ago. But it's still early in the month. Why such a sluggish pickup in purchase applications despite the decline in rates? Well, rates declining from 6.75% to 6.5% only results in a 1 percentage point increase in the share of renters who could afford the median-priced home. Affordability remains constrained, and while inventory has picked up, it's still historically low.

This morning's economic news: mortgage rates keep dropping, mortgage applications rising in response, productivity growth strongest since 2003 and unit labor costs fell. What does it all mean? The Fed is done hiking and they should start working on clearly communicating how they expect the upcoming rate normalization process to play out. Absent another massive exogenous shock, the Fed is on the glidepath to mission accomplished. However, annual inflation prints aren't likely to read "2.0%" until late 2024 at the earliest, so they need to start finding the right messaging for normalizing policy *in anticipation* of inflation durably returning to target or rather focusing on annualized inflation trends. Details of the data releases below and in the chartpack: According to the MBA Weekly Applications Survey, during the week ending Dec. 1 the average contract rate for a conventional 30-year fixed-rate mortgage declined -20bps to 7.17% and mortgage application activity increased 2.8% w/w (sa). Mortgage rates ⬇️ -20bps Mortgage apps ⬆️ +2.8% Most notable data point from the release: refi applications are now up 10% y/y. ► 10-year US Treasury yields declined -7bps to an average of 4.38% during the week ending Dec. 1, resulting in a -13bps tightening of the FRM30-10y UST spread to 2.79%. ► The average contract rate for a jumbo 30-year fixed-rate mortgage declined -19bps to 7.35%, resulting in a 1bps widening of the jumbo-conventional spread to 0.18%. ► Meanwhile, the average FHA contract mortgage rate also declined -20bps to 6.98%, resulting in an unchanged spread (-0.19%) between the FHA and conventional rate. With mortgage application activity up another 2.8% w/w (sa), the index is now down only -11% year-over-year but still down -57% compared with pre-pandemic levels (i.e., the average of the same week in 2017, 2018 and 2019). ► The weekly increase was driven primarily by a 13.9% (sa) increase in refinancing applications, which are now up 10% y/y given the easy comparison with late 2022, but remained -73% below the pre-pandemic level. ► Purchase applications declined -0.3% w/w (sa) and were down -18% y/y and -44% relative to pre-pandemic levels. 3Q23 productivity was revised up a bit more than expected (5.2% vs 4.9% cons & 4.7% prior) while unit labor costs were revised down a bit more than expected (-1.2% vs -0.9% cons & -0.8% prior). Q3 productivity growth is now the strongest since the early 2000s outside of a recession. Taking a longer-term view, productivity is now roughly in-line with the pre-COVID trend dating back to the early 2000s. More interestingly, the quarterly decline in unit labor costs adds to the recent string of disinflationary data releases. #ArchEmployee #Mortgage #Rates #Fed #Productivity

The 10-year Treasury borrowing rate is 3.9%. Under normal circumstances and based on a normal historical spread between the two interest rates, the average mortgage rate should be 5.6% to 5.9% today. The mortgage rate spread is instead still abnormally high (at 250 basis points) and therefore yielding 6.4% average mortgage rate. One reason for the large spread is due to the cloudy balance sheet among small and regional banks who have exposures to deteriorating office loans. To raise cash, some banks are selling off mortgage loans and mortgage-backed securities. The Federal Reserve’s own reduction in holdings of Fannie and Freddie backed mortgage backed securities is also at play.