May 21, 2010 — Economic recovery may be underway here, but the positive news continues to be insufficient to keep investors from running to the safety of cash and Uncle Sam. After setting 2010 lows last week, mortgage rates managed another downshift this week and are once again near historic — approximately 50-year — lows.
HSH’s market-spanning Fixed-Rate Mortgage Indicator (FRMI) slipped by another six basis points, finishing HSH’s weekly survey at 5.21%. The FRMI includes rates for conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation, and so covers a wider audience than other surveys. The average 5/1 Hybrid ARM — presently the most popular alternative to the traditional fixed-rate mortgage — came in at an average interest rate of 4.24%.
The weekly average for the benchmark 30-year Conforming mortgage landed at 4.93%, low enough to entice many homeowners to again consider refinancing.
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The minutes of the April 27-28 Federal Reserve Open Market Committee meeting were released this week. A read through those notes reveals a sense of cautious optimism about economic improvement, but an explicit acknowledgment that “the pickup in output would be rather slow relative to past recoveries from deep recessions”, with stronger growth expected in 2011 and 2012. There are of course risks to that forecast — not the least of which is a stagnant housing market, a long period of high unemployment, and soft consumer spending dynamics. To those we add the debt crisis in the euro-zone and associated investor skittishness, so the nascent recovery has plenty of challenges to overcome.
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Closer to our concerns, the Fed discussed the prospects for selling the MBS and agency debt it recently stopped accumulating. There is some pressure for the Fed to divest itself of these investments at a pace faster than the normal runoff and retirement of loans would produce. Although no decision was made on when any such sales might occur, a three- to five-year plan from start to finish was considered, dependent of course upon economic and market conditions. No firm plans were made, but the Fed will consider it again in the near future; for now, the Fed has no plans to reinvest any proceeds from the repayment of principal or interest on the mortgages it owns, but will hold onto those funds instead. How, when, and how fast the Fed places these securities back into private investor hands will ultimately determine any impact on mortgage rates.
As we’ve noted in recent weeks, slow growth coupled with little inflation and a global flight-to-safety all accrue benefit to American mortgage seekers. As such, those contemplating refinances should take advantage. It is somewhat of a shame that the dip in rates didn’t actually occur during the last weeks of the homebuyer tax credits, since it might have goosed activity even further.
No one can dispute that activity increased in the homebuying and homebuilding sector in the days leading up to the tax credit’s expiration. However, we are just starting to see the actual numbers come in to measure the impact of it all. Actual home sales figures aren’t due until next week, but there are indications that the benefits of the tax credit were building strength as time went on.
The National Association of Homebuilders index of member sentiment jumped to a reading of 22, its best level since August 2007. Single family sales, traffic levels, and outlooks for the next six months all increased. That blast of optimism likely occurred from the 5.8% rise in housing starts in April, which rang in at a 672,000 annualized pace, the best pace since October 2008. While the smaller multi-family component of the market saw an 18.6% drop from March, the all-important single-family sector bounced a full 10% higher for the month. Of course, the future remains uncertain, and that expression was seen in the 11.5% decline in permits for new building in the near future.
The production-led economic expansion remains in place, but may be starting to show some fatigue, or at least some signs of leveling off. The Index of Leading Economic Indicators had sported better than a year-long string of positive readings, but that came to an end in April, when a minus-0.1% figure was calculated. The LEI looks to forecast economic conditions as much as six months into the future, but is probably more reflective of the present environment. We already know that GDP growth decelerated from 5.6% in the fourth quarter of 2009 to perhaps 3.2% 1Q10, and it wouldn’t be a great surprise if we have slowed slightly since then.
Two regional looks at manufacturing strength found varying degrees of health. The New York Federal Reserve’s measure of activity in the Empire State slipped from a reading of 30.0 in April to 19.1 in May, a considerable slowing but just to a less-strong posture. Over in the Philadelphia Federal Reserve District, expansion continued but with considerably less urgency then some recent readings would indicate. The Philly Fed gauge moved to 21.4 in May from 20.2 in April, but some key components of the tool indicated more slowing than the top-line number suggests.
Slowing, too, is inflation. April’s reading of the Producer Price Index showed a decline of 0.1% for the month, a mirror image of expectations. The “core” PPI, missing its most volatile components, nudged 0.2% higher for the month. Over the past year, headline PPI has climbed by 5.4%, but the core PPI has risen just 1%. It’s pretty much the same with the prices consumers pay; the Consumer Price Index also sported a -0.1% decline in April, but the core rate of inflation (exclusive of food and energy) remained unchanged from March. Over the past 12-month period, a 2.2% rate of increase has occurred in ‘headline’ prices, with just a 1% lift at the core. Low prices and low inflation expectations can keep the Fed from needing to lift rates, giving the recovery more fuel than it might otherwise receive. Of late, the huge decline in oil prices should short-circuit annual “driving season” increases in the price of gasoline, and should trim any price pressures which were forming from the recent run up to about $85/barrel.
We keep hoping to see the level of weekly unemployment claims make a sudden or (better yet) steady run down into the 300,000s, but that’s still not happening. During the week ending May 15, another 471,000 new souls stood in unemployment lines requesting benefits for the first time, an increase of 27,000 over the past week. That being the case, it is a little surprising that the ABC News/Washington Post poll of Consumer Comfort moved closer to its 2010 highs, landing at a still-weak reading of -44 during the week ending May 16.
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Sources: FRB, OTS, HSH Associates.
There’s quite a bit to think about and consider, relative to the Fed’s outlook and the emergent euro-zone debt crisis. How much damage to world economic growth has been done in the last couple of weeks, and is there more yet to come? If so, when can any crisis-induced slowing of activity be expected to show? Will the sudden strong wash of cash onto these shores suddenly reverse course, once the worst danger seems to be past? Will the US recovery be able to shift from business to consumer at a fast enough pace to get us back toward full employment by 2012, or has that been pushed back further? A lot of questions, but no immediate answers. Most likely, a round of global slowing of unknown velocity will take place, and export-led growth from here may slow.
Until that occurs, sometime in the future, there are current market conditions and a cascade of data next week to evaluate. New and existing home sales, several measures of manufacturing activity, an update to the last GDP report, a couple of reviews of consumer moods and more. We admit to surprise at the intensity of the euro-market mess, and more surprise at the velocity of the flight-to-quality run of cash to the US. There seems little reason for mortgage rates to continue declining, based on economic fundamentals and risks, but then we’ve held that opinion for the past few weeks only to be confounded every time.
Back in the old, pre-financial market meltdown days, mortgages used to be among those products which benefited from these kinds of flight-to-quality moves. Today’s new securities, of course, have market and interest rate risks, but are built from mortgages comprised of much better borrower stock than those of a couple of years ago. This being the case, and with risks associated with investing in mortgages at the beginning of what should be a long decline, they may be becoming more attractive to investors seeking to park some cash. If so, that’s good news for housing market moving forward. We’ll see.
In equity markets, it has been said that “the trend is your friend” so we’ll stop fighting it; slightly lower rates on tap next week.
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