December 17, 2010 — Fading fears of a double-dip recession, tax deals which may foster additional economic growth and a deflation threat which is falling behind us are all conspiring to push mortgage rates to better than five-month highs.
Already slowed in a usual holiday lull, refinancing activity has plummeted in the past few weeks. Even with the rise, there can be no doubt that interest rates remain both low and favorable. However, at a 5% level — one we’ve seen numerous times over the past year — there is virtually no pent-up demand for refinancing. As such, the 5% level is a refi-killer.
HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages increased by twenty-three basis points higher (.23%), ending HSH.com’s national survey at 5.18%, the highest figure since the week ending June 4.
Important to perhaps the largest swath of the housing market, conforming 30-year FRMs have jumped to 4.93% for the week, but did close Thursday at 5.09% before settling back on Friday. FHA-backed offers, so crucial to first-time homebuyers and low-equity refinancers, have climbed to an average rate of 4.79%. The overall average rate for 5/1 Hybrid ARMs rose 15 basis points to 3.88% for the week. HSH.com’s FRMI includes 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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Five percent 30-year fixed-rate mortgages shouldn’t be a housing market killer, though. Unlike refinancing, the decision to purchase a home has many other components than interest rate, and those other conditions remain the greater obstacle to improvement than any 5% interest rate might present.
Housing Starts moved 3.9% higher in November, rising off truly awful October levels. The 555,000 (annualized) new homes begun still ranks among the lowest levels of the year, even if single-family activity did manage a gain. Permits for future activity declined even more than starts increased, with the 4% decline leaving an annualized pace of 530,000 in its wake.
Faced with these figures, it’s little wonder that the nation’s homebuilders remain troubled. On Wednesday, the National Association of Homebuilders released its activity index for December, and the reading of 16 it showed for the period was unchanged from November, and about on par with October’s figure as well. Given the competition from a glut of foreclosed properties in the market, the building of new homes will probably not contribute much to the economy for some time yet to come.
The Federal Reserve met this week to consider the economy and its role in spurring economic growth. The statement which closed their final get-together of 2010 contained much of the same language as others seen this year, but we noticed that the Fed took pains to say that it “decided to continue” its QEII program of purchasing Treasury Securities. The inclusion of such language does seem to set the stage to allow the Fed to cut short or modify the program as economic conditions warrant, but expectations at the moment are they that will complete all $600 billion of buys on schedule my mid-2011.
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.
Given what seems to be a steadying recovery, it is an open question whether the economy will need such additional stimulus over time. President Obama signed an extension of the Bush-era tax rates for the next two years which also included a 2% reduction in payroll taxes, which should collectively put millions of additional disposable dollars in the hard where they will do the most good: taxpayers. Here’s hoping that rising gasoline and food prices in 2011 don’t wipe out the windfall.
Some of the cash will likely make it’s way to other purchases, though, further boosting retail sales, which rose by 0.8% in November. Sales have firmed notably in the last four months, perhaps an expression of growing confidence about present prospects. In looking at the components outside of autos and gasoline sales, those which have gained the most over that period seem more concentrated in the “needs” rather than “wants”, including clothing, sporting goods, general and non-store retailers. Perhaps the recent gains are akin to a consumer “replacement” cycle, where old goods have simply become worn out and must be replaced? Hard to say, but we wonder if some of the recent gains are dictated more by necessity than desire.
Although low, inflation is still with us, and outright deflation outside consideration at this point. The Producer Price Index rose by 0.8% in November, it’s largest increase since March and a continuation of a much firmer pattern than that seen over the last couple of years. Over the past year, headline prices for goods upstream of the consumer have increased by 3.5%, but only about 1.3% when food and energy are not considered. That annualized “core” rate of PPI has been perking along at a fairly level and steady pace for months now.
Prices at the consumer level were considerably more subdued than those seen in the PPI. In November, headline CPI rose a just a 0.1% clip, and at just a 1.1% annualized pace. “Core” CPI moved ahead by the same amount, and prices outside of food and energy have changed at just a 0.7% annualized pace over the past 12 months. The Fed has been trying to foster a bit more inflation, and along with a growing world economy, commodities, metals and oil have all responded with price increases over the past few months. Ultimately, as the economy gains momentum and domestic demand firms, prices will begin to rise.
The economy is growing, with the manufacturing sector slowly being joined by the service sector. Thankfully, there are still some gains being noted in the production side of the economy. The Philadelphia Federal Reserve’s local indicator of activity bounced to a reading of 24.3 in December, its highest level of the year. While that peak move wasn’t joined by the increase seen in the New York Fed’s localized survey, there was an appreciable rebound noted, as this indicator rose from -11.1 in November to +10.6 in December. It is encouraging that there is still so much strength to be seen in this portion of the economy, since service-related businesses have been slow on the uptake.
Reflecting these manufacturing improvements, Industrial Production moved ahead by 0.4% in November, led by increases in utility output, thanks to a continuing spate of cold and stormy weather. Manufacturing added to the gain for a fifth straight month, and the amount of factory floors in active use ticked a little higher again, climbing back over the 75% mark for the third time this year, and is now at its highest level of the recovery. We still have a long way to go to reach pre-recession levels, but seem to be on a long, slow upturn.
If the index of Leading Economic Indicators can be trusted, that upturn should be able to continue for a while longer yet, at least. The LEI rose by a nice 1.1% in November, it’s strongest showing since March. While the LEI probably better reflects the present economic climate, it is purported to forecast growth or decline for as much as the next six-month period. If this is the case, a stronger recovery should be in the offing as we begin 2011.
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If that turns out to be the case, we should expect to see a continuing decline in new unemployment claims, a signal that growth is accelerating to the point where fewer and fewer folks are losing their jobs. For the week ending December 11, 420,000 new initial claims for benefits were filed at state unemployment offices, and we seem likely to finish the year on a relative high note in this regard. Though unlikely, it is not out of the realm of possibility that we might be able to achieve a “three handle” (below 400K) in jobless claims before the year comes to a close. That would be great news.
It would also be great news if we saw some additional optimism show. The ABC News/Washington Post poll of Consumer Comfort increased to minus 43 during the week ending December 12, and is within striking distance of the 2010 high of minus 41. Reported comfort levels have been on the increase since we passed the elections last month, and perhaps the settling of the tax uncertainty will also lend some confidence, too.
In recent weeks, we’ve written about how it’s important to retain perspective about increases in mortgage rates. Not all that long ago, a five percent 30-year FRM was little more than a pipe dream which ultimately became a reality. This week, in looking though some old newspaper and magazine clips from the 1980s and 1990s, it struck us how accustomed (addicted?) to low interest rates we’ve become as time has gone on. Other refinance booms and opportunities have come and gone, and most of them have featured interest rates above (and sometimes well above) these levels. Unbelievable rates have given way to “only” fantastic ones, and this is the price we pay for finally exiting a terrible economic period, once which continues for far too many.
Mortgage rates and financial markets take a back set to the holidays next week. In case we don’t get another chance, we’d like to wish all of our readers, clients and supporters the happiest of holidays and a fantastic new year. If you care, and some might, rates are probably done rising for the moment, at least.
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.