December 3, 2010 — Mortgage interest rates rose again this week, responding to a growing number of signals of an improving economy. Only a lackluster employment report for November kept them from increasing further.
The 10-year Treasury, a benchmark for fixed-rate mortgages, crested above 3% this week, and has risen by nearly a half-percentage point from November’s daily low. In fact, the yield is the highest since July, and mortgage rates are following right along. Some dreams of low-rate refinancing have come to an end, at least for the moment.
HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the average rate for 30-year fixed-rate mortgages moved eight basis points higher (.08%), ending HSH.com’s national survey at 4.86%, its highest value since early August. For low-downpayment homebuyers or refinancers with only a slight equity position, FHA-backed loans are available at an average rate of 4.52%, while the overall average rate for 5/1 Hybrid ARMs rose three basis points to 3.66% for the 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.
While the economic news was not universally solid this week, there have been on balance stronger reports than weaker for the past month or two now. Incoming November data was no exception, and each report makes it more likely that the expansion will remain durable and less likely to backslide into recession.
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As measured by the Conference Board, Consumer Confidence came in at a six-month high reading of 54.1 for November, besting expectations by a couple of points. While still low, there has been a steady improvement since Summer’s end, with the latest figure representing a particularly large jump. While no large gain was seen in the weekly ABC News/Washington Post poll of Consumer Sentiment, the indicator did move two notches higher to minus 45 for the week ending November 28.
Construction spending bounced 0.7% higher in October, led by a 2.5% increase in outlays for residential projects. Homebuilding was concentrated in multi-family units; single-family construction declined by 1.2%. Spending on public projects rose by 0.4%, probably lifted by some of the stimulus funds being spent for paving and road construction by strapped state and local governments. Commercial project spending declined by 0.7%, as that market continues to suffer from a glut of space and failing loans.
A couple of localized reports covering manufacturing lent some optimism that national surveys would show a resurgent manufacturing sector. Reports released by purchasing management trade associations in the New York and Chicago areas both found rising activity, with Chicago reporting its best showing since way back in April. While the large national report from the Institute for Supply Management failed to increase in November, the figure released was above forecasts and represented only a mild decline from October. The 56.2 level for November was just 0.3 below October and was a solid figure. In fact, four of the last six months have sported readings at about this level, which indicates a firm and expanding manufacturing base that should continue to contribute to the recovery.
Sales of new vehicles for November came in at 12.3 million, about the same as October, the best back-to-back months since 2008, and on the high side of expectations. The actual number of vehicles sold so far this year has already exceeded the total for all of last year, and while still below healthy or even normal levels, they have been on an improving bent for much of 2010.
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.
That said, Factory Orders for October were a bit of a disappointment, sliding by 0.9%. With the inventory rebuilding cycle maturing, regular reliable gains are probably fading behind us, replaced with a more common sawtooth pattern this index seems to favor. As such, the 0.9% decline came on the heels of an upwardly-revised 3 percent rise the month prior, and if the pattern can be trusted, a rise next month seems likely.
If the factory cycle’s strongest growth is fading behind us, the larger service sector of the economy needs to get going before long, if we hope to see a stronger economy than we presently are enduring. The ISM’s survey of non-manufacturing business helped lend some optimism that this is becoming the case, as the indicator for November revealed a third consecutive increase after an August dip. The reading of 55.0 was close to the year’s twin high marks of 55.4 (April, May); perhaps more important, the employment sub-index moved to its highest (if still meager) level of the expansion, a mark of 52.7 for the month. In both of the ISM surveys, any value over 50 denotes expansion, and the employment value has been wandering on either side of that breakeven point all year. After that backing-and-filling pattern, a break higher is a welcome occurrence.
A private-hiring indicator from the payroll firm ADP also fostered hopes that hiring was finally on the upswing, with some 93,000 hires in November. This was the best mark for this indicators in three years, and October’s figure was revised upwards as well.
Finding jobs, however, remains a challenge, indicators or no. The outplacement firm of Challenger, Gray and Christmas recorded some 48,711 announced layoffs in November, an uptick in a low and stable pattern seen since April. An uptick was also noted in the number of first time unemployment claims, which had been trending lower in recent weeks. The 436,000 new applications for benefits during the week ending November 27 represented a fair jump from the prior week’s 410,000. However, seasonal adjustments may have distorted the former or latter number, with the Thanksgiving holiday a component of the calculation. Even with the rise, though, the number of weekly claims is in still in a far more favorable range than prior months, and also served to increase speculation that Friday’s employment report might come in stronger than expected.
As these reports came to light, it goes without saying that forecasts for the November employment report were being ratcheted upward. When the report came out on Friday, it would be wrong to say that this optimism was crushed, but it certainly is fair to say that it was tempered. The November employment report reported just 39,000 new jobs created during the month, and a 0.2% increase in the nation’s unemployment rate, which now stands at 9.8%. Just 50,000 private hires took place, according to the report, so there’s not a great bit of regular labor market strength to be seen just yet. However, it is worth noting that the October number was revised higher to 172,000, and that the October and November numbers represent the first back-to-back gains in employment since the April-May period of this year. Even if meager, any job growth is far better than decline at this stage of the recovery.
Of course, continued economic expansion without any accompanying expansion in the labor force means folks must be working harder, and they are. The measure of worker productivity for the third quarter was revised higher to a gain of 2.3%, a four tenth of a percent rise over the last estimate. The rebound in output from the second quarter’s unexpected 1.8% decline was welcomed, but rising productivity means that fewer workers are needed to meet present production goals, at least until they reach the limits of their capabilities.
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With the increase in rates, it’s little surprise that applications for new mortgages have dropped sharply, particularly for refinancing. Given what seems to be the particularly strong interest rate sensitivity of this refinancing boomlet, refinancing activity will probably grind to a halt absent a new decline in rates. Despite the rise, rates remain at extraordinarily attractive levels, but there simply aren’t enough high-rate mortgages which can be successfully refinanced at these rates and in the context of today’s tight lending standards.
Still, perspective is important. Home purchases rely far less on rock bottom interest rates and far more on economic improvement and especially income and job growth. Those who wish for lower rates are, in a way, wishing economic misfortune on others. At this stage of the recovery, we should all be cheering even mildly better economic news, even if it does engender somewhat higher rates. Yes, fewer household balance sheets will be improved by refinancing, it’s true, but if that comes at the expense of more folks getting jobs, spending money and buying homes sooner rather than later, so be it.
Since mid-October, mortgage rates have risen about thirty basis points, a small take-back after a near year-long decline. The economy isn’t roaring yet by any means; the stock market is attracting some money formerly stashed in bonds for safety. Over the next couple of weeks, upside surprises notwithstanding, rates should steady and even have some space to ease a little. For next week, though, there does seem to yet be a little upward momentum, so slightly higher rates seem to be the most likely course.
Wondering how the mortgage market will fare before and after the holidays? You want to read our latest Two-Month Forecast.
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.