The week's economic news took a backseat to continuing political turmoil over alleged collusion between former Trump presidential campaign officials and the Russian government.  The stock market showed a sharp increase in volatility by plunging on Wednesday following allegations Tuesday evening that President Trump had requested ex-FBI Director James Comey to drop his investigation into retired general Michael Flynn who had business ties to Russia and briefly served as Trump's National Security adviser.

Investors sold stocks and bought bonds as obstruction of justice allegations expanded the controversy surrounding Trump and threatened to weaken the Trump administration's agenda for business-friendly legislation such as tax and health care reform.  As a result, bond prices moved higher sending Treasury yields to three-week lows.

In housing, the Commerce Department reported April Housing Starts fell 2.6% to a seasonally adjusted annual rate of 1.172 million units to miss the consensus forecast of 1.255 million.  A sizeable drop in apartment construction, an often volatile sector, was primarily responsible for the decline.  Construction of single-family homes edged higher by 0.4% to an annual rate of 835,000 units while construction of multi-family units fell 9.2% to a rate of 337,000 units.

Furthermore, Building Permits fell 2.5%, driven by a 4.5% decline in the single-family segment while multi-family permits increased by 1.4%.

As for mortgages, mortgage application volume decreased during the week ending May 12.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) fell 4.1%.  The seasonally adjusted Purchase Index dropped 3.0% from the prior week, while the Refinance Index retreated 6.0%.  Overall, the refinance portion of mortgage activity decreased to 41.1% total applications from 41.9% from the prior week.  The Refinance Index fell to its lowest level since September 2008.  The adjustable-rate mortgage share of activity decreased to 8.1% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance was unchanged at 4.23% with points increasing to 0.37 from 0.31.

For the week, the FNMA 3.5% coupon bond gained 39.1 basis points to close at $103.02 while the 10-year Treasury yield decreased 9.11 basis points to end at 2.2346%.  Stocks ended the week lower.  The Dow Jones Industrial Average fell 91.77 points to end at 20,804.84.  The NASDAQ Composite Index dropped 37.53 points to close at 6,083.70 and the S&P 500 Index lost 9.17 points to close at 2,381.73.  Year to date, the Dow Jones Industrial Average has gained 5.01%, the NASDAQ Composite Index has advanced 11.52%, and the S&P 500 Index has risen 6.00%.

This past week, the national average 30-year mortgage rate declined to 4.02% from 4.09%; the 15-year mortgage rate fell to 3.28% from 3.34%; the 5/1 ARM mortgage rate edged higher to 3.09% from 3.07%; and the FHA 30-year rate dropped to 3.75% from 3.85%.  Jumbo 30-year rates decreased to 4.31% from 4.36%.

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

The FNMA 30-year 3.5% coupon bond ($103.02, +39.1 bp) traded within a 83 basis point range between a weekly intraday high of $103.297 on Thursday and a weekly intraday low of $102.469 on Tuesday before closing the week at $103.02.  Wednesday, mortgage bonds powered their way above a previously formidable dual layer of technical resistance formed by the 25-day moving average (102.67) and the 38.2% Fibonacci retracement level at $102.81.  Wednesday's advance coincided with weakness in the stock market triggered by political turmoil.  The bond then traded lower on Thursday when the stock market showed greater stability and was turned away from the 200-day moving average resistance level (103.34).

The stock market continued to recover on Friday, helping to push bonds lower for a successful test of support (and former resistance) at the 38.2% Fibonacci retracement level (103.297).  The bond now finds itself nearly "overbought" while just above what appears to be a solid layer of technical support.  If support holds in the coming week, mortgage rates should remain very close to where they currently are.  However, a failure to hold support could lead to a slight worsening in rates to end where they were a couple of weeks ago.