September 24, 2010 — While near-record low mortgage rates have kept homeowners and mortgage lenders busy with refinancing, the same cannot be said for the nation’s builders and Realtors. Low rates can only do so much to spur demand.
The Federal Reserve has, at times, expressed concerns about deflation. Deflation is simply defined as widespread price declines for all manners of goods and services, and is troublesome since it promotes a ‘wait until tomorrow’ attitude among consumers when it comes to purchasing them. Since these items will ostensibly be cheaper, who could be blamed for waiting? However, this effect is the polar opposite to a period of rapidly rising prices, when the incentive is to move quickly.
Mortgage rates can be a catalyst for quickened activity, but they are insufficient in times of deflation. There needs to be some additional reason for people to act.
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As far as rates go, HSH’s overall mortgage monitor — our weekly Fixed-Rate Mortgage Indicator (FRMI) — saw the average rate for 30-year fixed-rate mortgages remain unchanged to begin Autumn at 4.75%. Thirty-year FHA-backed mortgages rolled out lender doors at an average rate of 4.44% this week, while the FRMI’s Hybrid 5/1 ARM cousin showed up at 3.67%, down five basis points (.05%) from last week. HSH.com’s FRMIs include rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public.
The housing market is dealing with deflation, not on any economy-wide basis but in asset deflation — specifically, continued downward pressure on home prices. Unlike the market fury — when everyone was trying to get in before prices rose and they got locked out of the market, or were trying to capitalize on the frenzy by flipping homes and pocketing the equity — we have a situation where there are potential buyers who prefer to wait on the sidelines, hoping for a better price.
Housing Starts ticked slightly higher in August, lifting from July’s 541,000 rate to a 598,000 annual pace. Much of the lift came from the always-volatile multifamily sector, but the larger and more important single-family component barely budged from poor levels. As you might expect, weak housing starts prevented any improvement in builder moods, and the September report from the National Association of Home Builders came in at 13 again for the month, unchanged from August. Showroom traffic levels moved down during the period, and present levels are only a few ticks above lows posted during the depths of the recession. As a diffusion index, the NAHB indicator uses 50 as a breakeven point, a level last crossed (on the way down) way back in April of 2006. Given that permits for future building only increased a whisper during August, it’s a fair bet that we’re not going to see that level anytime soon, either.
HSH has several lengthy series of statistics dating back to the 1980s for FRMs and ARMs, Conforming, Jumbo and FHA products. These can be licensed for use — interested parties should inquire here.
Not only are housing starts quite poor, sales of new homes are too. After falling to record lows back in May — where records date to the 1960s — sales of new homes have barely crawled off the floor and came in at identical 288,000 readings in both July and August. Declines in available completed inventory have slowed considerably and so there are still 206,000 units of unsold standing stock, enough to keep the market sated even with no new building at all for nearly nine months.
There was a little spark of fleeting optimism when the National Association of Realtors release existing home sales data for August. “7.6% increase” read the headlines, but some of the luster fades when you realize that it was perhaps the second-worst reading in the series’ history (dating to 1999). The bump in sales did trim the months of available supply back from 12.5 months to 11.6, but considering ‘normal’ inventory levels should be six months or less, it’s quite clear that there’s not much to cheer about here.
Weak sales serve to reinforce the deflationary trend in home prices, which has carved off 20 to 30 percent (more in some areas) from peak levels. Demand for homes would naturally be forming if the economy was growing and lots of new jobs were being created, but that is simply not the case at the moment.
Attempts at stimulating housing demand using interest-free loans, then first-time homebuyer tax credits, and then even repeat-buyer credits, did produce some of the desired effects, but were structured with hard deadlines which saw procrastinators rush into the market at or near the last minute — so much so that lenders became swamped with transactions which even necessitated an extension of the deadline to get loans closed. That extension comes to a conclusion next Thursday, Sept. 30. The distortion in demand has seen the market in a mini boom-and-bust cycle twice over the past year, and we are certainly suffering in the bust phase right now.
Home price deflation is an ongoing concern; job growth isn’t happening, either. Low mortgage rates cannot do all the heavy housing lifting on their own, and additional incentive — stimulus, if you will — needs to be applied to get the market moving at a fast clip. We believe that it is time to bring back the homebuyer tax credit, but we have an idea we think will stimulate demand now, when it is most needed, and finish in such a way that it won’t leave a disruptive hangover in its wake. Although we started to champion the idea a few weeks ago, the latest housing numbers simply underscore its need.
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for 11 products, including Hybrid ARMs.
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With regard to hiring and job creation, well, there continues not to be any. Weekly claims for new unemployment benefits bounced higher again during the week ending September 18, when another 465,000 former workers filed for assistance, breaking a hopeful five-week string of declines. To the extent this influences optimism, the weekly ABC News/Washington Post poll of Consumer Comfort shed three points, falling back to minus-46 and remaining solidly in the middle of a truly awful year-long range.
The Federal Reserve met to consider the economic situation this week. No policy change was expected, and none came, a given since their primary tool (Federal Funds rate) holds near zero already. While acknowledging that growth is slight — “the pace of economic recovery is likely to be modest in the near term,” noted the Committee — there was some additional concern expressed about deflation, too. Inflation is running below “levels [the Fed] considers consistent with its mandate” of stable prices and full employment. If things begin to worsen, however, the Fed “is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” Given that the rates the Fed controls by policy are near zero today, this indicates that (if needed) the Fed might re-start a program of wide-scale purchases of Treasuries to help keep rates low for businesses and consumers. Frankly, we think they’d prefer not to, since there are unknowable long-term effects of such programs.
Perhaps the Fed won’t need to take such action, if the index of Leading Economic Indicators can be believed. The 0.3% gain in this indicator was its best showing since May, when a downshift in stronger pattern began to take hold. The LEI purports to foretell economic activity up to six months in the future, but probably better reflects the present set of economic conditions. Nonetheless, if even a modestly stronger economic climate is forming — not all that hard when you begin from a 1.6% GDP rate — it would be sufficient to keep the Fed at bay for the moment.
Orders for Durable Goods looked pretty bad at minus 1.3% for August, but peeling back the veneer revealed that the decline was all related to transportation — planes, cars and such — which bounce around, since they represent high-dollar items. Business-related spending on so-called “core capital goods” managed a firm 2% gain for the month, a nice rebound from a 5.3% decline in July which sparked fears of a reformation of the recession. The most recent recession ended a full year ago, according to the NBER, the “official” arbiters of the start and end dates of economic downturns. However, the recovery which has ensued has been tepid and untrustworthy, and might even prove temporary.
The old month comes to a close and a new one begins next week. This means a slew of data is due, everything from revised and final second quarter GDP readings to consumer confidence to auto sales. We’ll also see what happened to employment trends in the month of September. Amid this troubled-but-holding kind of economic environment, mortgage rates have formed a pretty flat spot, holding in just a few basis point range for the past seven weeks. Can’t see much reason for them to break this pattern, and we’ll hold pretty steady next week, barring any unforeseen surprises.
P.S. If you missed it over the last few weeks, you should have a look at our plan to help responsible homeowners who are underwater. Unlike the “FHA Short Refi” idea, the concept doesn’t penalize homeowners or investors… and there might even be no cost to taxpayers, either. Curious? Read HSH.com’s Value Gap Refinance idea, and be sure to let us know what you think.
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