April 30, 2010 — The last of the extraordinary props for the nation’s mortgage and home sales markets have come to an end. Just four weeks after the Federal Reserve stepped away from the mortgage market comes the end of first-time and trade-up homebuyer tax credits. Meanwhile, the effort to prop up failing homeowners though modification and other initiatives enjoys a continuing commitment.
While the Fed program of buying up $1.25 trillion of Mortgage-Backed Securities was easily the more important of the two — after all, both homebuyers and homeowners can enjoy low mortgage rates — but the tax credit has arguably been a key element in fostering demand for home purchases, and spurring consumers to act. We won’t know the actual results of the program for some time, until all tax filings for 2009 as well as for 2010 have been completed, but the home-sale indicators seem to suggest that there has been positive, measurable effect on weak housing markets.
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Mortgage rates have remained low since the Fed exited the stage, and have trended lower over the last couple of weeks as Greece’s (and perhaps Spain’s) economic issues have produced a run into the safe-haven investment of US-backed debt.
HSH’s market-spanning Fixed-Rate Mortgage Indicator (FRMI) remained unchanged this week at an average 5.36%. 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 most popular alternative to the traditional fixed-rate mortgage — a Hybrid 5/1 ARM — sported an average interest rate of 4.41% this week, down just a single basis point from last week’s 4.42%.
Daily FRMI rates are available on HSH.com.
Check out our weekly Statistical Release here (and archives here).
The Federal Reserve Open Market Committee met this week; the release which accompanied the close of the meeting expressed cautious optimism that economic recovery is solidifying, with the Fed noting that “economic activity has continued to strengthen and that the labor market is beginning to improve.” Moreover, the future is looking brighter: “Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels…” With a vote of 9-1, monetary policy (interest rates) remained unchanged and will “remain exceptionally low” for an “extended period” of time. It’s worth remembering that any Federal Funds rate below 1% could be considered to be “exceptionally low,” so the Fed could change rates a number of times during the “extended period” before they would need to re-characterize the interest rate environment.
According to the latest report, the nation has now entered its third consecutive quarter of positive economic growth. The Advance reading of Gross Domestic Product for the first quarter of 2010 found a 3.2% increase in output, down from the fat 5.6% clip of 4Q09. Measures of consumption turned higher while inventory-boosted gains in GDP moved lower. Still, the 3.2% rise is a fair reading, but the economy isn’t yet producing strong enough forward momentum to overcome many of the recession’s effects.
Aside from struggling housing markets, those effects absolutely include a lack of job growth. Job creation is a “lagging indicator,” and it can take an “extended period” of strong economic growth to lead the nation’s businesses to decide that they can’t wring any more productivity from their current pool of workers and have to consider hiring new workers. Even then, business must have confidence in the prospects for forward demand before they’ll begin to think about doing so. We are not yet at that point. While the employment report for April won’t come out until next Friday, continuing high levels of new unemployment claims continue to point to a sagging labor market. Another 448,000 filings occurred during the week ending April 24, the lowest figure in a month. However, the present pattern suggests that there isn’t likely to be a sizable April improvement in hiring over March’s small gain.
One positive aspect about the weak labor market is that there’s little wage inflation to create concerns. The Employment Cost Index, a gauge of the total cost of keeping an employee on the books, ticked 0.6% higher in the first quarter of 2010, breaking a five-quarter string of 0.4% increases in overall compensation. Wage growth was a meager gain of 0.4% for the period, but benefit costs spiked by 1.1%.
The latest review of a group of 85 economic indicators — the composition of the Chicago Federal Reserve’s National Activity Index — found an economy growing close to “potential” in March. “Potential” generally refers to the economy’s natural ability to grow without throwing off inflation, and the -0.07 reading for the month suggests a modestly growing economy. The NAI was deeply in negative territory at this time last year, but the readings since last November have bounced over and under the breakeven point of 0.
A range of reviews of regional and local manufacturing conditions all found ongoing improvements this month. The Richmond Federal Reserve’s regional indicator of activity bounced to a record high of 30 in April, while the Kansas City Fed’s yardstick moved to a multi-year high reading of 24. Purchasing manager groups in New York and Chicago reported strengthening activity among their members, coupled with increasing employment needs. While it is expected that there will be a pause in production growth as the recovery shifts from one driven by business and inventory-building to one driven by consumer demand, there does seem to be some considerable momentum in those portions of the economy yet.
More’s the pity, then, that these signals of optimism haven’t yet found their way into the consumer psyche. All available measures of consumer moods are treading water, at best, even though some have posted small gains. Consumer Confidence nudged higher to an April reading of 57.9, according to the Conference Board. That was better than a four-point jump from March… which left us only slightly higher than January. Conversely, the University of Michigan survey of Consumer Sentiment sported a dip from March to April, retreating to 72.2 from 73.6, and again roughly the same as we’ve seen over the past couple of months. Backing that up was the weekly ABC News/Washington Post poll of Consumer Comfort, which improved a single tick to -49 during the week ending April 25, still holding close to the bottom of a year-long range.
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Sources: FRB, OTS, HSH Associates.
With the removal of a program said to spur demand, we wonder what the rest of the “spring homebuying season” will look like. It is fair to say that the original tax credit which expired in November 2009 borrowed some demand from the winter months of 2010, but all appearances are that demand was starting to ramp up in March and probably in April. If it turns out that today’s midnight expiry of the extension borrowed demand from May and June, we could be in for a couple of very slow months. Slowing sales coupled with short-sale or foreclosure-boosted inventories are unwelcome news for home prices, which would be pressured downward again. That situation would be worsened considerably by any rise in mortgage rates, the likelihood of which increases with every sign of recovery, let alone any immediate bump which might come if the Greek debt problem can be resolved. All things considered, It’s hard to find much reason for strong optimism about the period just ahead for home sales, and even a spurt of new hiring won’t improve these fortunes very soon.
A torrent of new economic data comes next week. ISM surveys, Construction Spending, productivity measures, auto sales, and the all-important employment report. The collective tenor of reports over the last month or so has generally been mixed-to-better, and we see not reason why this bunch won’t be, too. That said, how long can mortgage rates resist the upward pull of a gently firming economy? No one knows for sure, but we think that since rates resisted the downward pull of global trouble this week that they simply cannot go much lower… and probably are due for a little increase next week as a result.
For a longer view, don’t forget to check out the latest Two-Month Forecast.
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