November 24, 2010 — For the most part, mortgage rates leveled off this week after a minor bump put us back to “only” fantastic September levels. The most recent economic news, though, shines a rosier light on the economy, and if economic improvement is actually gathering steam, mortgage rates are less likely to move lower to any great degree, barring any new widespread crisis.
After a fourteen-basis point jump during the week ending November 19, HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — revealed that the average rate for 30-year fixed-rate mortgages moved just two basis points higher (.02%), ending HSH.com’s national survey at 4.78%. For low-downpayment homebuyers or refinancers with only a slight equity position, FHA-backed loans are available at an unchanged average rate of 4.43%, while the overall average rate for 5/1 Hybrid ARMs was 3.63% for holiday-shortened week. 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.
An upward revision to third quarter GDP led off the week. The second estimate of growth during the period was improved to an annual rate of 2.5%, a considerable improvement over both the initial estimate and the meager 1.7% clip of the second quarter. The third quarter of course ended almost eight weeks ago, and all indications are that somewhat stronger growth has been taking hold in the fourth quarter, lending hope that a more self-sustaining recovery will get a toehold. These improvements come even before there are any measurable effects of the Fed’s latest gambit to spur economic growth, which kicked in earlier this month.
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According to the minutes of the Fed’s last meeting, “the incoming data indicated that output and employment were continuing to increase, but only slowly. Progress toward the Committee’s dual objectives of maximum employment and price stability was described as disappointingly slow.” This led to their decision to attempt to further support the economy by purchasing up to $600 billion in new Treasury securities by the end of the second quarter of 2011, and this in addition to the reinvestment of proceeds from other holdings which had reached maturity. That decision has proven to be controversial, with concerns expressed about everything from its effectiveness in boosting the economy to potential effects on inflation down the road from here. In essence, the committee judged that doing nothing was potentially more costly than doing something, and the program was established. Over the next seven months, we’ll see if it helped or was even needed, but it may be a long while before we see what affect on inflation occurred. Also, the Fed held an unscheduled interim meeting on October 15 where participants considered the relative merits of various communication strategies, discussion of the adoption of formal inflation targets and more. No decisions were made at that time.
If economic growth is rising, and GDP climbs to the mid-3% range, the Fed’s program may be scaled back, since there will be less need for it at that point. However, we won’t even see the first GDP estimate of this quarter until the end of January, and even if solid, the Fed would probably wait until at least an estimate of the first quarter of 2011 became available before making any changes, which wouldn’t come until the calendar is almost turned to May.
In surveys conducted by two regional Federal Reserve banks, economic improvement was seen. The Richmond Fed’s local report found a value of 9 for the month of November, continuing an upward trend after a minus 2 reading in September. Rebounding stoutly was the Kansas City’s indicator, jumping to a value of 21 for the month, the best since April, with new orders ringing in at a pace not seen in five years. It would appear that the summer weakness is fading behind us, but how future demand will fare is unclear now that the post-recession inventory rebuilding cycle is maturing.
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.
The Chicago Fed puts out an indicator which tracks broader economic currents. Their National Activity Indicator covers some 85 different bits of economic data, and aggregates them into a number which references the expansion or contraction of the economy against a “natural” rate of growth, thought to be about a 2.8% GDP level. The NAI in October was reported to be at -0.28, just a little bit below the breakeven of 0.00, and an improvement from the -0.58 noted in September, and so the fourth quarter began on an improving bent.
All that being the case, orders for Durable Goods have returned to their more or less normal erratic pattern, rising one month then falling the next. The 3.3% decline in orders in October followed a gain of 5% in September, which followed a backing-and-filling arrangement in the two months prior to that. Very strong gains one month have often been met with one or two subsequent months of decline, so it would not be surprising to see another slight decline in November’s number when it comes.
Personal Incomes climbed by 0.5% in October, a fair gain. Wages grew by 0.6%, their best showing since May. Over the past 12 months, overall incomes have gained by 4.1% and have been on an upswing for the past five months now. Personal consumption expenditures rose by 0.4% for the month; the 3.6% annualized increase is about where we’ve been all year, give or take a little. That spending is holding its own is an encouraging sign, given troubled labor markets and continued declines in consumer borrowing. Spending cash seems to be the order of the day, and the faster it comes into consumer hands, the faster the economy will likely perk, even if consumers continue to tuck funds away at a rapid pace. The nation’s rate of savings stood a 5.7% for the month, holding fast to a tight pattern.
There’s nothing good to be said about the housing market, which in the words of the Fed, continues to be “depressed”. Sales of existing homes sported a slight decline in October, slipping to a 4.43 million (annualized) rate of sale, down from 4.53m in September. Inventories of unsold homes remained at a high level, and prices were pretty flat, down less than 1% compared with the same period in 2009. Sales of new homes fared somewhat worse, putting in the second lowest number yet of the recession/recovery; the 283,000 annualized rate of sale was only surpassed by a 275,000 bottom in August. Worse, the rate of absorbing readily-available inventory has come to a standstill, as just 1,000 built and ready-to-go units were moved last month. Some 202,000 remain, a nearly lineman supply at the present run rate.
Consumer moods improved quite a bit in the last half of November, at least by the measure of Consumer Sentiment from the University of Michigan. The 71.6 reading added 2.1 points to October’s final figure, and of the two components which make up the survey, present conditions gained a nice 5.5 points for the month. Perhaps the UMich survey is more affected by labor market conditions, or reflects growing optimism after the fray of the elections has quieted. No such gain has been seen in the weekly ABC News/Washington Post poll of Consumer Comfort, which held at minus 47 for the week ending November 21, unchanged from a week prior.
Perhaps the Sentiment indicator is more heavily influenced by labor market conditions. Weekly unemployment claims numbers have been in perhaps their best pattern since the beginnings of 2010, and this week improved on that trend even further. During the week ending November 20, 407,000 new applications for benefits were filed, the lowest such weekly figure since July of 2008, if it holds. Hitting the 400,000 mark and trending below it would be a welcome sign for sustaining and strengthening the recovery, and perhaps some additional improvement will come in the weeks ahead, as businesses begin to get a clearer sense of how the tax and regulatory picture will change with the incoming Congress.
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Sources: FRB, OTS, HSH Associates.
With the warming of the economic data, mortgage rates don’t really have much reason to decline. At the moment, even mildly improving fundamentals suggest firmer interest rates are to be expected, but there’s no reason for them to move upward by very much in this climate, either. It seems to us that a lot is riding on the next employment report, due next Friday. If the pattern of layoffs is any indication, hiring may be picking up a little more than expected, particularly in private employment, which added 159,000 people to payrolls last month. If the report comes on the stronger side, mortgage and interest rates in general will have some space to rise. Until then, and if not, we may simply have found a new level to hang around at as we wait for true faster economic growth.
As you gather with family and friends for the holiday, please take a minute to consider and give thanks for those in our armed services, far away from their loved ones, who serve all of us at great distance and at great personal cost.
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.
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