October 29, 2010 — It is commonplace that the party in power will lose seats during mid-term elections. If the pollsters and pundits are correct, Tuesday might bring a fair sea change to Washington
The first two years of the present administration have featured sweeping changes to a number of areas near and dear to the mortgage and housing markets, from the distorting effects of homebuying incentives to financial market and regulatory reform. In the midst of crisis, unique steps were taken by central banks to support the economy and we seem likely to continue on this path. Huge stimulus packages have come and gone. Millions have lost their jobs, and a few more folks will join their ranks on Tuesday.
At this point, mortgage markets are waiting for change.
Interest rates remain low, of course. HSH’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the average rate for 30-year fixed-rate mortgages rose by six basis points (.06%), ending HSH.com’s national survey at 4.64%. Important for first-time homebuyers and low-equity-stake refinances, FHA-backed loans are available at an average rate of 4.28%, while the overall average rate for hybrid 5/1 ARMs was 3.53% for the period. HSH.com’s public data series include rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public.
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It might be said that uncertainty is holding back recovery in the housing market and the broader economy. Old, well-understood processes have been replaced by murk, whether it’s how much risk someone might take by buying a home or investing in a mortgage, or even what happens when a loan fails. These all used to have certain resolutions, or at least their risks were known and could be planned around, but today, there is no clarity.
The entirety of the secondary mortgage market remains unresolved, with reform kicked down the road repeatedly. Tax policy is up in the air, too; at this moment no one knows what their obligations to the Federal government will be come January. Reform of consumer finance regulations is in its nascent stage, with an unclear way forward. The entire health industry is also in upheaval, and there are plenty more examples.
Although we are no longer in crisis nor panic, the lack of a clear path forward is keeping the recovery at bay, or at least in a muted pattern.
The best measure of the nation’s output — Gross Domestic Product — came in at a soft 2% rate in the first reading for the third quarter. While better than the 1.7% seen in the second quarter, it’s an insufficient pace to solve the poor job market, even if consumption has been strengthening over the past year. It’s a reasonable bet that a new focus on job creation will come after the polling is through next week, no matter how substantial the turnover in Congress.
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.
At the moment, the economy matters more than social policy to a great many people. Even though we have now been out of recession for better than a year, you would be hard-pressed to find many folks cheering about the state of the economy or their own well being. This is clearly seen in the various measures of consumer moods, which remain at very low levels and can find no traction amid the economic mire. The latest reading of Consumer Confidence bumped up to 50.2 in October but remains little changed over the past year and a half. That’s mostly the case with the indicator which follows Consumer Sentiment, too; at 67.7, the index has retreated back to year-ago levels after some mild improvement in the spring. The weekly ABC News/Washington Post poll of Consumer Comfort has found only discomfort for months and months, with the indicator drifting again towards 2010 lows of late. At minus 47 for the week, it’s closer to bottom than to the top of a weak yearlong range.
After the homebuyer tax credit expired, there has and continues to be a disruption in the formation of demand. Existing home sales rose by 10% in September compared to August — the largest one-month gain in the series history — but the 4.53 million (annualized) rate of sale was still 19% below year-ago numbers and is little more than a bounce off the bottom… and there are enough houses available to sate demand for the next 10.7 months, even if no more become available for sale. The case was much the same with sales of new homes, which rose by 6.6% during the month to 307,000 annualized — but remain almost 22% below sorry year-ago levels, and even below the alarmingly-low pace which became the impetus for the first homebuyer tax credit. Unsold new home supply on hand remains elevated at 8 months, and pace of moving already-built stock has slowed to a crawl.
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The production-led recovery has lost some of its momentum as stockpiles have been rebuilt, but thankfully there is still some strength to be seen. Orders for durable goods rose by 3.3% in September, a nice turnaround from the 1% decline in August and rather better than expectations. After a weak patch, some resumption of factory activity was seen in the region covered by the Richmond Federal Reserve, and the Kansas City region found itself on fairly solid footing for the month, too. Local surveys of purchasing manager groups in the New York and Chicago areas both found continued expansion of growth among their members. Collectively, activity seems to have stabilized after what was a pretty rocky summer.
The latest National Activity Index from the Chicago Federal Reserve pointed to an economy growing below par. This amalgam of some 85 economic indicators came in at minus 0.58 for the month of August, a little softer than the -0.49 for August. It is thought that the natural inflationless growth rate for the economy is perhaps 2.8%, and we remain below that, but September’s general tenor was better and so should be the NAI. The last two positive readings for this indicator came in March and April (0.51 and 0.42, respectively) and we were enjoying about 3.7% GDP growth at that time.
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According to the latest Employment Cost Index, the cost of keeping an employee on the books rose by a muted 0.4% in the third quarter of 2010. Wages rose a meager 0.3% while benefit costs moved 0.6% higher for the period. Low employee costs usually help produce more solid profits for businesses and this in turn may produce greater hiring. However, the aforementioned tax and health care issues make the future cost of adding workers unknown and so employers simply aren’t doing it unless absolutely necessary. The October employment report comes next Friday, but there’s little to indicate a surge of hiring during the month. At least there were slightly fewer firings during the week ending October 23, when “just” 434,000 new applications for benefits were processed.
Elections are times for either change or reaffirmation. Reaffirmation comes when people find themselves positively responding to a “Am I better off now than before?”-type question. Change comes when the answer is “no”. It’s hard to look across the various economic landscapes and find any venues that are in satisfactory condition, save low interest rates, and even they are merely a reflection of the ongoing malaise. Given the wickedness of the recession and the far reaching and enduring effects of the financial market collapse, no one should expect that we’d be in fantastic shape very quickly. However, we do have a right to ask for certainty, for clarity, and for considered thought to be given to the most pressing matters, especially the ones that affect so many people.
Mortgage markets will continue to be in the murk for at least a couple of months yet, even if there is substantial turnover in Congress. Mortgage rates have little reason to move far or fast at the moment, and so we’ll continue to wander around present levels next week.
For more about what we think is coming after Tuesday, have a read through 4 Factors and 3 C’s: Mortgage Markets After The Elections, where we look at how political change might affect the pace and shape of change to the economy and the mortgage market.
Looking down the road toward Thanksgiving? Take a look at our just-posted-today Two-Month Forecast.
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