Mortgage rates remain in tight channel

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Published Date 12/14/2017

Today's Mortgage Rate Summary

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up.

Rates Currently Trending: Neutral

Mortgage rates are moving slightly higher so far today.  The MBS market improved by +34 bps yesterday. This may've been enough to improve mortgage rates or fees.   The market experienced high volatility yesterday.

Today's Rate Forecast: Neutral

Retail Sales: This was a robust report. The Headline November reading showed a MOM gain of 0.8% which is almost three times higher than expectations of 0.3%. Actually its better than that considering that October was revised high from 0.2% to 0.5%.

Ex-Autos the data was even better with a 1.0% gain vs est of 0.6%, plus October was revised upward from 0.1% to 0.4%.

Jobs: Initial Weekly Jobless Claims were lower than expected (225K vs est of 239K) and the more closely watched 4-week moving average dropped to 234,750 which is extremely low.

Import Prices: The November data showed a MOM increase of 0.7% and a YOY gain of 3.1% which is trending towards inflationary pressure.

Business Inventories: Matched expectations with a -0.1% decline.

Tax Reform: The Leadership of both the House and Senate have agreed on a compromised tax plan. However, it still needs to be voted on. IF (and that is a big IF) it gets the votes in the House and Senate as before, then it will pass. However, the Dems want to delay it until the new Alabama Senator is installed and rumors of AZ R McCain in the hospital along could put that at risk.

While the final language of the joint bill is not available yet, we do know the major key points:

• Corporate Tax Rate: Falls to 21 percent from 35 percent. The House and Senate bills, as well as Trump, had earlier proposed 20 percent. Going to 21 percent gave tax writers more federal revenue needed to make the tax cut immediate. U.S. corporations have been seeking a large tax cut like this for many years.
• Pass-Through Rate: Creates a 20 percent business income deduction for owners of pass-through businesses, such as sole proprietorships and partnerships. The House had proposed a 25 percent tax rate; the Senate, a 23 percent deduction.
• Minimum Corporate Tax: Repeals the corporate alternative minimum tax, which was set up to ensure profitable companies pay at least some federal tax.
• Top Individual Rate: Falls to 37 percent from 39.6 percent. The House had proposed maintaining the 39.6 percent top rate and condensing the current seven tax brackets to four. The Senate had proposed cutting the top rate to 38.5 percent and maintaining the seven brackets.
• Permanence: The expectation is individual tax rates will snap back to current levels in less than 10 years. The individual tax rates in the House bill were permanent. The individual tax rates in the Senate bill would have expired after 10 years.
• SALT: Both the House and Senate had proposed scaling back a popular individual deduction for state and local tax payments by limiting it to property-tax payments and capping it at $10,000. The compromise bill is expected to keep that cap, but also allow for continued deduction of state and local income tax payments.
• Mortgage Interest: Caps the mortgage interest deduction at $750,000 in home loan value, down from the current $1 million. The House had proposed a $500,000 cap. The Senate bill left it at $1 million.
• Death Tax: Roughly doubles the exemption from the federal estate tax on inherited assets to about $11 million, but leaves the tax in place, mirroring the Senate proposal. The House bill had raised the deduction, but also entirely phased out the tax.
• Obamacare Mandate: Repeals a federal fine imposed on Americans under Obamacare for not obtaining health insurance coverage. The House bill did not repeal the Obamacare individual mandate.

Bank of England: In a rare unanimous vote, the BofE kept their key interest rate unchanged along with their asset purchase program and said to expect "gradual" rate increases moving forward. Inflation is a concern as their CPI is at 3.1% due to rising Import Prices but they expect that to moderate down to 2.0% and also expect a very strong 3rd QTR GDP but that the 4th QTR will pull back from those highs.

European Central Bank: They also left their key interest rates and policies alone. They did upwardly revise both their GDP growth expectations (from 2.2% to 2.4% 2017, from 1.8% to 2.3% 2018) and inflation expectations (from 1.2% to 1.4% in 2018). They already had a bond taper schedule in place but (as usual) said that they could buck that schedule and add purchases at any time if needed.

Today's Potential Rate Volatility: Average

Mortgage rates are pulling back some today after the move lower yesterday. We're looking for moderate mortgage rate volatility with a bias toward slightly higher rates.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

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All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

Daniel Harwood

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