April 16, 2010 — Mortgage rates backed off a little this week, breaking a four-week upward push. These kinds of “two steps forward, one step back” patterns aren’t unusual at all early in an economic recovery, but it is worth noting that as they occur, the general working range for interest rates does tend to tick slightly higher as time progresses.
HSH’s market-spanning Fixed-Rate Mortgage Indicator (FRMI) decreased by eleven basis points (0.11%) this week to an average 5.38%. The FRMI includes rates for conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation and so covers a wide swath of the market. The FRMI’s 5/1 Hybrid ARM companion lost eight basis points, finishing the survey week at 4.44%. The average rate for FHA-backed 30-year fixed rates rang in at 5.10%. The FHA program is estimated to be capturing as much as 35% of new originations, as it is the only market response available for less-than-stellar borrowers or those with small down payments.
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If you missed it, HSH’s blog has been running a poll to see how you feel about once again re-extending the Homebuyer Tax Credit. While the on-off-on-again availability of the credit has likely distorted consumer response, we tend to think that the credit has value in supporting the still-struggling housing market. Even supportive lawmakers are wary of another extension, fearing developing a market dependency on such gimmickry. Although that’s certainly a valid stance, the additional demand fostered by the credit is valuable, and the latest evidence seems to point to a pickup in housing-related activity, probably due to the again-approaching deadline.
New Housing Starts rose by 1.6% in March to a 626,000 annualized rate of initiation. While the boost was led by multifamily housing, the all-important single-family sector held pretty steady. In fact, the last three months for single-family starts (annualized 507K, 536K, and 531K, respectively) have been the best quarterly string since the August-October 2008 period. Better still, the expression of future activity for single-family projects has been strengthening, too, while overall permits increased by 7% in March.
The uptick in starts in March led to an upturn in optimism among builders in April, where the National Association of Homebuilders index of member sentiment bounced up to 19, well above estimates. Sales moved higher, expectation for sales in the next six months moved higher and traffic in sales offices improved after a pretty dreadful March. To the extent that the tax credit is helping to support homebuilding, it helps a broad range of businesses, lifting their prospects and ultimately the prospects of people looking for work. While by no means the sole driver of recovery, it is nonetheless an important one.
Daily FRMI rates are available on HSH.com.
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The production-led economy recovery seems to be continuing. Industrial Production moved just 0.1% higher in March, but that small gain masked solid increases in manufacturing (+0.9%) and mining output (+2.3%). The tempering factor was a 6.4% reduction in utility production, as normal weather patterns resumed in most parts of the country, lessening the demand for power. The percentage of factory floors in active use continues to creep higher and now stands at 73.2%, up two-tenths of a percent from February. Fresher reports covering regional factory activity in New York State and the Philadelphia Federal Reserve’s district both showed increasing strength, with both employment levels and length-of-workweek measurements increasing during the month.
Of course, those production gains rely upon a continuation of present trends. After a long extra-lean period, overall inventory levels at businesses of all stripes have begun to be rebuilt over the past few months, and another 0.5% was added to stockpiles during February. That said, downstream final sales are improving at about the same pace, and measures of goods on hand relative to sales are holding steady, presaging additional ordering and further strengthening the recovery.
To that end, Retail Sales bounced 1.6% higher in March, besting expectations. While nudged higher by a rebound in auto sales, leaving those and volatile gas-station sales out of the equation still left a 0.7% bounce in sales. While a portion of this was no doubt due to pre-Easter holiday shopping, gains were fairly widespread, including a sizable gain in building material sales. Some of those may have been related to home and business repairs from blizzards followed by widespread floods in the eastern US in late Winter.
The Federal Reserve’s report on regional economic conditions found that economic activity “increased somewhat” in eleven of its twelve districts, with St. Louis the laggard. The report, gathered prior to April 5, noted that “some hiring activity was evident,” inflation pressures “generally remained level” and that “manufacturing activity increased” in most districts. However, the adjective “mixed” to describe activity was used 15 times in the summary, so the economic recovery could be characterized as uneven at best at this moment.
That price pressures are flat is a good thing. The longer inflation remains at bay, the longer the Fed can afford to keep interest rates at the low levels required to keep things moving. The ‘headline’ Consumer Price Index ticked just a tenth-percent higher in March, and that came on the heels of an unchanged February. “Core” prices (excluding food and energy) were unchanged in March and have risen just 1.2% over the past year (headline has drifted 2.4% higher over that time). However, the cost of energy has been rising pretty steadily since December; if the rise persists, there is a risk of infection into other costs, just as there was when oil flared moved north of $100/barrel last time. We’re not there yet, but it certainly bears watching.
The aggregate cost of goods coming onto these shores rose by 0.7% during March, goosed solely by the rising cost of petroleum products (removing them from the calculation, costs fell by 0.2%). Overall, import costs have risen by 11.4% over the past year. Goods destined for export rose a like 0.7% amount in March, but have increased only 4.6% over the latest 12-month period, so we are exporting considerably less inflation than we are importing. As you might expect, such a balance, coupled with a growing economy, is beginning to serve to expand our nation’s imbalance of trade once again. The Trade deficit for February rang in at $37.7 billion, rather above forecasts, as imports gained 1.7% while exports lagged with just about a 0.3% increase. Still, the fact that both imports and exports are rising is a good indicator of worldwide recovery.
Although the news continues to point to brighter prospects, there are few signs that the recovery is deepening and widening at a rate sufficient to be self-sustaining. Initial jobless claims moved higher again in the week ending April 10; while probably distorted by the Easter holiday, the trend over the last couple of weeks is moving solidly in the wrong direction if we hope to be out of the economic woods sooner. Some 484,000 new applications for assistance were filed at state windows during the week of April 10.
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Sources: FRB, OTS, HSH Associates.
That being the case, consumers remain unhappy. The weekly ABC News/Washington Post poll stormed higher a few weeks ago to year-high levels, but just as abruptly turned face last week and declined. The minus-47 mark for the indicator for the week ending April 11 is squarely in the middle of a bleak range, and the traction needed to break it remains elusive. That’s pretty much the case with the initial April report on Consumer Sentiment from the University of Michigan; while nowhere near ‘happy,’ their indicator had been steady to higher in recent months, but the initial 69.5 reading so far this month would be the lowest figure since last November (should it remain at this level). On top of poor job markets and other economic issues, there are a lot of persistent troubles in the news, and yesterday’s tax filing day probably didn’t help moods, either.
We remain cautiously optimistic about the economic recovery. Given enough time, the natural tendency is one of growth, but of course it is pushed and pulled in various ways as the consumers and governments react in various ways. While some recoveries have bounced strongly higher, this one does seem to be still in the “technical recovery” stage, where various supports are still needed to get us back up to speed more quickly. That said, the economic recovery seems likely to be an uneven one for a while yet.
That uneven nature means that we should expect to see periods of rising rates followed by what are probably temporary declines. As we move further and further away from the worst of the economic crisis and grind toward whatever will again pass for normal, patterns of backing and filling are to be expected. Also to be expected is that each such set of moves will probably leave the next set of lows somewhat higher than the previous until we get back to ‘normal’… whenever that may be.
Next week we’ll see what happened to new and existing home sales in March. Will there be sufficient evidence to determine whether the tax credit deserves to be extended again? Joining that question will be durable goods orders, the Producer Price Index, and a few other nuggets of data. Rates spent the better part of this week on a steady-to-downward bent, relative to the last couple of weeks, and we should start next week on a low note. Most likely, we’ll end up about flat at the end of the week.
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