Financial Friday

WEEKLY UPDATE

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Weekly Review

This past week investors were more focused on macro events than on individual economic reports. Stock market sentiment was negatively impacted by continuing geopolitical troubles with North Korea and its nuclear weapons testing program, the weekend arrival of potentially catastrophic Category 5 hurricane Irma in Florida, and waning confidence in Congress to enact meaningful tax reform that would ignite the US economy.  In particular, reports were circulating that the conservative House Freedom Caucus was beginning to write its own version of a tax reform plan, and the prospect of multiple, competing plans appeared to weigh on sentiment last Thursday.

In housing, CoreLogic reported their Home Price Index (HPI) showed home prices increased significantly both month-over-month and year-over-year in July.  Nationally, the average cost of a single-family house increased nearly 0.9% from this time last month and 6.7% from this time last year.  The CoreLogic HPI Forecast suggests the trend of higher home prices will continue, leading to another 5% national gain in home prices year-over-year by July 2018.

CoreLogic CEO Frank Martell stated “Home prices in July continued to rise at a solid pace with no signs of slowing down.  The combination of steadily rising purchase demand along with very tight inventory of unsold homes should keep upward pressure on home prices for the remainder of this year. While mortgage interest rates remain low, affordability cracks are emerging as over a third of U.S. top cities are now overvalued.”

As for mortgages, mortgage application volume increased during the week ending September 1.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose 3.3%.  The seasonally adjusted Purchase Index increased 1.0% from the prior week while the Refinance Index advanced 5.0%.

This past week, the national average 30-year mortgage rate decreased to 3.84% from 3.90%; the 15-year mortgage rate decreased to 3.12% from 3.18%; the 5/1 ARM mortgage rate moved lower to 3.10% from 3.18% and the FHA 30-year rate fell to 3.35% from 3.50%.  Jumbo 30-year rates decreased to 4.10% from 4.18%.

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

The FNMA 30-year 3.5% coupon bond ($103.828, +35.6 bp) traded within a 37.5 basis point range between a weekly intraday low of $103.578 on Tuesday and a weekly intraday high of $103.953 on Thursday and Friday before closing the week at $103.828 on Friday.

The bond managed to move higher this past week despite very choppy trading and while continuing to be extremely “overbought.”  The holiday-shortened week’s trading action was highlighted by alternating days of the bond moving higher, then lower.  This choppy trading also resulted in alternating daily buy and sell signals from positive and negative crossovers in the slow stochastic oscillator.

It is difficult if not impossible to forecast directional movement in such a choppy trading environment.  Given that September is historically the worst performing month for the stock market; we could see mortgage bond and Treasury prices continue to improve slightly resulting in stable to slightly lower rates.  However, from a purely technical perspective, mortgage bonds are not likely to remain at such extremely overbought levels for much longer and will be susceptible to a move lower toward support levels resulting in rates edging a little higher from current levels.

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