November 19, 2010 — Housing markets continue to stumble along, with home purchasing remaining at poor levels. Economic fundamentals, most notably employment, continue to exert their influence, keeping the market from making headway. For months, the financial health of banks and borrowers alike has been improved by refinancing of old, higher-rate mortgages. For banks, refinancing activity brings in fee income and profits on sales, contributing to the bottom line; for households, a change in the composition of monthly obligations can bring welcome financial breathing room. Low and especially declining rates have been a catalyst for these benefits, but this week, low rates took a step backwards.
Mortgage interest rates bounced higher this week. HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — revealed that the average rate for 30-year fixed-rate mortgages climbed by 14 basis points (.14%), ending HSH.com’s national survey at 4.76%, the highest such rate since the middle of September. For those buying homes or hoping to refinance with only a small equity position, FHA-backed loans are available at an average rate of 4.43%, and the overall average rate for hybrid 5/1 ARMs was 3.62% for the period. HSH.com’s public mortgage interest rate 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.
The rise in interest rates is largely due to the Federal Reserve’s new program of buying up Treasury securities in an attempt to spur the economy. Some analysts have speculated that the market got a little ahead of itself in preparation for the beginning of the program, and has been forced to back off a little bit. That, coupled with mildly improving economic signals relative to the summer months has pressed rates higher.
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Though rates have shifted higher for at least a time, perhaps we should retain a little perspective. A year ago this week, conforming 30-year FRMs has just cracked below the 5% mark; despite this week’s bump, we are about a half-percentage point below that outstanding mark. However, the extended refinancing wave we’ve seen in 2010 has been milder than those in the past and seems more sensitive to even slight increases in interest rates. Other small flares in rates turned off the flow of refinancing applications sharply, and unless quickly reversed, this one seems likely to do the same. Any downturn in apps will no doubt be exacerbated by the impending holiday season.
But is the economic climate improving enough to warrant a rise in rates? Data out this week was mixed at best, with a few bright spots offsetting some darker ones. We have certainly seen an improving path since the euro-zone influenced summer slowdown. That problem hasn’t gone away, but only stabilized somewhat, and we did see a little flight-to-safety purchase of American debt after Irish banks wobbled again this week.
Among the signs of economic improvement improvement was a 1.2% rise in Retail Sales in October, a fourth consecutive gain. As well, some retailers marked up their expectations for holiday sales, a welcome change after several years of gloom and steep discounts. Rising gas and auto costs contributed to the gain in spending, but even excluding them left a 0.4% improvement in ‘core’ retail sales, the same rise as September.
Perhaps more important was that claims for new unemployment benefits came in at “only” 439,000 for the week ending November 13. While still elevated, the last four weeks are much improved over summer levels, and have moved to their most encouraging levels of 2010. This lends some credence to the argument that the economy is starting to move forward on its own and perhaps might not need all of the Fed’s additional boost. It also suggests that the November employment report might come in better than expected for the first time in a while. While we remain a long, long way from labor market recovery, even small steps will be cheered, since they can become self-reinforcing improvements over time.
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.
Another influence for interest rates is inflation. Simply put, we have very little to deal with at the moment. Prices at the Producer level increased by 0.4% in October, goosed by rising food and energy costs, but the core rate of PPI actually declined by 0.6% for the month, providing a tempering for any price pressures.
This was much the case for costs at the consumer level, too. Food and gasoline costs have been on the rise, pressing the CPI higher by 0.2% for the month, but even with the increase, the cumulative increase in prices over the past year has been just 1.2%. “Core” CPI was unchanged for the third month in a row, and the cumulative 0.6% rise in costs over the past year was the lowest annualized level on record (the series begins in 1957).
There are at least some concerns in the market that the Fed’s easy money policies will stoke inflation, but that remains tomorrow’s problem, and we’ll first need to have some inflation to stoke. For now, they are trying to get prices back to their desired rate of increase, believed to be about a 2% annual rate for CPI. The Fed has countered criticism by pointing to the enormous amount of “resource slack” in the economy and near-deflation as justification for its stance.
The production-led recovery threw is no longer running upward in a straight line and has been throwing off some conflicting numbers in recent months. For example, the Philadelphia Federal Reserve’s survey of regional manufacturing activity bounced sharply higher in November, rising to 22.5 from a reading of 1 in October; however, the New York Fed’s survey of New York conditions took an opposite track, slumping from 15.7 in October to minus 11.1 in November. This was the first below-par reading for the indicator since July 2009.
Most likely, the cause of the uneven reading is due to the fact that the rebuilding of recession-depleted inventories has largely run its course. The broadest measure of stockpiles – at the factory, wholesale and retail levels — increased by 0.95% during September, a third consecutive sizable gain. If inventory levels are rising, there’s less need to place new orders, unless final demand is picking up. For the most part, this has been the case, keeping excess inventories from accumulating. Measures of goods on hand to present sales, while not yet excessive, have moved higher in recent months, but with final demand still shaky, folks at all stages of production are keeping a close eye on inventory levels and keeping supplies tight.
Industrial output was flat in October, but manufacturing’s influence in the calculation was a positive one. The factory gain for the month was the most since July, but the indicator failed to gain any ground due to a 3.4% decline in utility output and a 0.1% decline in mining output. Overall capacity utilization rates overall are holding pretty steady at just below 75% over the past couple of months, while the percentage of factory floors in active use, now at 73%, continues to tick slowly higher as the recovery continues.
The index of Leading Economic Indicators points to continues expansion. The 0.5% rise in October was a mirror image of September’s and points to a resumption of growth after the summer swoon. While thought to portent economic activity as far as six months ahead, the LEI probably better reflects the present environment. If so, it would appear that the economy is running somewhat warmer in the fourth quarter of 2010 than the 2% GDP we endured in the third quarter.
Even with an expanding GDP, housing remains mired in recession. Housing starts for October came in with at a very subdued 519,000 annualized rate for the month, the lowest such figure of 2010. Starts were down 11.1% from September, driven back by a 43.5% decline in multi-family project initiations. Starts for single-family homes, the larger and more important portion of the equation, shed 1.1% to fall to 436,000 annualized, among the lowest levels this year. Permits for future building did increase by 0.5%, but that came on the heels of the lowest reading of the recovery and is nothing to get too excited about, especially since single-family permits have remained in a low pattern little changed for four months now.
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Sources: FRB, OTS, HSH Associates.
This of course explains a lack of optimism on the part of the nation’s home building trades. The National Association of Homebuilders market index moved a lone tick higher to 16 in the month of November, with single family activity unchanged from the previous month but some rising expectations for the next six months. As a diffusion index, the NAHB uses a breakeven of 50, a level we’ve not seen in a number of years now. Unless there is a sudden spike in activity — even more unlikely now with the bump in interest rates — the tax credit fueled mark of 22 will be the high for the year, itself a very poor level.
Perhaps the slackening of layoffs will begin to improve consumer spirits. The weekly ABC News/Washington Post poll of Consumer Comfort declined another notch during the week ending November 14, with the minus 47 figure closer to the bottom of 2010’s range than the top of it. Other indicators of moods are in fairly flat patterns as well.
After a long decline, mortgage rates have nudged higher. It’s worth noting that conforming rates have risen the most, strongly influenced by the Federal government’s cost of money as they are. ARM rates especially if they can be funded by ultra-cheap deposits, will be less influenced by changes in the price of Treasury obligations and should move in a softer fashion.
Mortgage rates have firmed, but seem to have leveled. We expect them to remain firm next week, which has a holiday-shortened calendar packed with fresh data. Home Sales, FOMC minutes, GDP revision and more are featured. Even subtly better news might nudge them a little higher.
One way to keep refinancing activity moving forward is to help underwater borrowers refinance. How? Have a look at our idea — read about HSH.com’s Value Gap Refinance idea, and be sure to let us know what you think.
Looking down the road toward tomorrow? Take a look at our latest Two-Month Forecast.
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