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Mortgage rates are on the decline. Now at a two month low, the 30-year fixed rate is down to about 4.75 percent. It had reached a high of over 5 percent at the beginning of last month. With the continued volatility on equities, more and more dollars are flowing into US Treasuries. The 10-year Treasury yield hit an intraday low of 2.82 percent on Thursday, the lowest level in more than three months. It was trading at 2.89 percent in early Friday trading.

This has provided a window for people looking to refinance and also for those who may be on the fence about purchasing a home. Mortgage rates are still considered high compared to 2017, but they are still well under what we saw a decade ago.

Even though mortgage rates have fallen, home prices are still high, turning many folks away from purchasing. According to CoreLogic’s home price index, 35 percent of the country’s 100 largest metro areas have overvalued housing markets.

According to the Mortgage Bankers Association’s data, total mortgage applications rose 2 percent last week, seasonally adjusted, compared to the week before. The purchase market is still struggling, however, as the volume of applications is down 19 percent from this time in 2017.

The average loan size itself also decreased and is now at its lowest level since December of last year. Joel Kan, the MBA’s Associate Vice President of Economic and Industry Forecasting, believes this likely means there are fewer jumbo borrowers along with some first-time buyers seeing success in the market.

There are a lot of reasons why this is happening and they’re all related thought it might not seem like it. Here’s a look at what’s happening in the current economy and why these factors are driving rates down.

Bond market rallies as the yield curve continues to flatten

mortgage rates fall

In its fervent attempts to stave off inflation and spur continued economic growth, the Federal Reserve may have painted itself into a corner.

Right now, bond yields are on a slippery slope toward a yield curve inversion. Before we jump to too many conclusions, know that yield curve inversions don’t always lead to recessions, but recessions are typically preceded by yield curve inversions. Recessions normally happen about a year or two after the inversion occurs. It’s important to note that right now, the Fed says its key indicator for a recession, the difference between the 10-year treasury and 2-year treasury, has not inverted. The difference is currently at 13 basis points.

When longer-term bond yields drop, so do 30-year mortgage rates, which is good for homebuyers or those looking to refinance. The issue is that the short-term interest rates are still scheduled to go up with an expected rate hike from the Federal Reserve this month. When shorter term bond yields increase at a faster pace then longer-term yields, the curve flattens as we have seen for quite a while now

If the Fed raises rates in December, as it is expected to do, and the market does not support it, the curve will continue to flatten and sit on the brink of an inversion. At least one analyst from Forbes believes that the Fed has given itself no choice and has to go along with the aforementioned hike.

While these flattening yield curves lend themselves to talks of recession, it’s important to remember this data is simply a forecasting tool, not a certainty.

US China trade talks feed uncertainty

mortgage rates fall
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An explosive development this week was also partly to blame for tanking stocks. Huawei Chief Financial Officer Meng Wanzhou was arrested in Canada and the United States is seeking extradition. According to Reuters, Wenzhou is being accused of using HSBC Holdings Plc to “evade U.S. sanctions against Iran.” Huawei is one of the world’s largest mobile phone manufacturers and it’s based in China.

The arrest caused a massive sell off in Asian markets and stoked fears of U.S.-China trade policy worsening. On the news of the arrest Thursday, the Dow initially plummeted another 780 points putting it down over 1,000 points over a two-day span. It was able to mostly recover the intraday losses by the end of trading on Thursday due to a report in the Wall Street Journal. That report indicated the Federal Reserve may take a wait and see approach on raising mortgage rates after December.

The news of Wanzhou’s arrest added yet another wrinkle and even more uncertainty to the trade truce between Chinese President Xi Jinping and President Trump. The truce, announced by the White House, is expected to last just 90 days, but there are discrepancies about a start date. According to the President, the truce is allowing the leaders of each country to come to an agreement. If they don’t, he says the U.S. will raise tariffs on Chinese goods from 10 to 25 percent.

The tariffs are likely to increase inflation through increased production costs which would lead the Fed to stay on its path of incremental increases in short term rates. However, a few analysts are predicting that the Fed will only increase mortgage rates twice in 2019, a step back from the predicted three increases.

Jobs and payrolls slowing

Courtesy of Bram Naus

The Bureau of Labor Statistics’ monthly jobs report shows that the unemployment rate is holding steady at 3.7 percent, but only 155,000 jobs were added which is well below the estimate of 190,000.

Payrolls are still slow on a month-to-month basis with non-farm payrolls increasing by just $0.06 for hourly earnings. As we near the end of the year, average hourly salaries as a whole are up by 3.1 percent.

The Moody’s/ADP report earlier in the week showed private payrolls grew by 179,000, which was significantly below estimates of 195,000. Moody’s chief economist believes that since the November report did not include any significant weather effects, these numbers are an indication of a “slowing in underlying job creation.”

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About the Author:

Greg Richardson

Greg Richardson is Movement's Senior Advisor of Capital Markets & Strategy and a contributing author to the Movement Blog. His weekly market update is a must-read commentary on financial markets, the mortgage industry and interest rates. Greg is an industry veteran who knows how to read the financial tea leaves and make complex industry data easy for loan officers, real estate agents and homebuyers to understand.