Weekly Mortgage Rate Update- 1-9-24

I took last week off to work on my 2024 interest rate predictions.  After all the research I can say with certainty that rates will go up, go down, or stay the same. 

(OK, I stole this from mortgage commentator Rob Chrisman actually) For more predictions, here is the Fannie Mae forecast for 2024. Economic Developments - December 2023 | Fannie Mae 

There are reasons to be optimistic as we start the year to be sure, with inflation coming down and the economy still hanging in there. But the path to lower rates may not be a straight one or as simple as Fed cuts rates, as I will explain below.

Last week the monthly non-farm payrolls showed 216k jobs added to the economy for the month of December, higher than expected.  However, the past 2 months for October and November both revised lower.  The three-month rolling average gives a clearer picture since it includes the revisions to Oct/Nov,  now at 164k jobs per month.  For context, an average of 150k jobs is still considered strong.  But there are signs of weakness, new jobs added has been slowing in recent months with the private sector showing lowest hiring since the right after the economy reopened in 2020. More important to our inflation outlook, average hourly earnings came in higher than expectations with the year over year average at 4.1%.  Wage inflation is one of the data points the Fed watches closely. All things considered; the December jobs data didn’t make a good case for lower rates with jobs growth slowing some but wages remaining stubbornly high. 

Signs of an economic slowdown ahead as the ISM non-manufacturing report for December came in lower than expectations with a reading of 50.6 (Anything below 50.0 is contracting) This will be key to watch and see if the trend lower continues.  This report is significant because it represents the largest part of our economy and so far, has been the strength in our economic engine. To add a grain of salt, both data points are from December and the seasonality could be skewing the picture.

Diving a little deeper this week- Besides Fed policy there are other factors keeping mortgage rates elevated.  One of those factors is the difference in the 10 year treasury note and the 30 year mortgage bond. Mortgage lenders watch the 10 year note because there is a close correlation to 30 year mortgage rates.   Historically the “spread” or the difference between the two averages 172 bps( 1.72%). Since rates began rising, it has increased as high as 330bps difference ( 3.30% higher than the 10 year)  This is due to multiple factors, but I will cover one of the most important and that is the investor appetite to hold mortgage bonds due to risk of prepayment.  Mortgage bonds are the only bonds that can be prepaid early.  For example, if an investor locked in mortgage bonds with a 7% coupon for 30 years, they risk that those underlying loans in the coupon will pay off their loans before the 30-year term by refinancing.

The spread has begun to shrink some from its highs, which is promising.  If investors feel we are getting closer to a rate that will be neutral for a while, that spread could continue to decline.  Just so you can see how big of a deal this is, if the spread was what it normally; today’s average 30 year conventional mortgage rate would be 5.75%. I will start reporting on the spread in the update when I see movement. I’m attaching the Freddie Mac chart that shows the past 50 year relationship for your reference.

For the week ahead- monthly consumer price index and producer price index will be key, need a negative print to move to lower rates. This would be a surprise reading, currently expecting it to tick up a notch. 

We start the year off with rates at about the same as the last 2 weeks of 2023 -   

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.

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