December 24, 2010 — A holiday-shortened trading week and a few signs that the economy isn’t rocketing forward served to stop the six-week rise in mortgage rates, which has pushed key home loans rates to about five month highs.
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 eased back just a little, shedding three basis points (.03%) to end HSH.com’s national survey at 5.15%. Conforming 30-year FRMs also declined by a like amount. FHA-backed offers, so crucial to first-time homebuyers and low-equity refinancers, declined by a line basis point to end the holiday-shortened week at 4.78%, while the overall average rate for 5/1 Hybrid ARMs rose by a like amount to land at 3.89% for the week. HSH.com’s FRMI and other public data series includes rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so cover much of the mortgage-borrowing public.
Warmer economic growth has been largely to blame for the increase in rates during the fall, but this increase has been exacerbated to a degree by the Federal Reserve’s stimulus program, some post-election improvement in moods and a tax compromise which lends some certainty (and a little boost) to the outlook as we roll into 2011.
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While the economy is moving forward at a measured clip, there are few signals that it is powering ahead so forcefully that interest rates should rise much further than they already have, and they may have even overshot the mark, which is typical.
The eighty-five economic indicators packed into the Chicago Federal Reserve’s National Activity Index are a pretty good barometer to determine if the economy is growing above or below trend, thought to be about a Gross Domestic Product value of about 2.8% or so. In November, the heart of the fourth quarter, the indicator backslid from minus 28 in October to minus 46, indicating that the economy isn’t adding much momentum. It also suggests that the present quarter of growth may get no closer to a overheating figure than did the third quarter.
The final review for third quarter GDP showed that the economy grew at a 2.6% annual rate, a slight uptick from the previous reading of 2.5% growth. Some forecasts called for GDP to come in closer to 3% for the period, but there apparently were enough headwinds to help the number more subdued than that. Growth in the fourth quarter at times has seemed that it is on a stronger trend than what we saw in the third, but perhaps only mildly so. The first readings for 4Q10 GDP come at the end of next month, and by then we’ll have a complete picture of December to add to the equation.
Home sales have been a drag on the economy for several years now, and the latest numbers seem to continue the trend, if somewhat less so. Existing Home Sales moved 5.6% higher in November to a 4.68 million (annualized) pace. We continue to move away from the tax-credit-fueled distortions of last year and this year and may be starting to finally see the actual level of demand available in this marketplace. Due to those distortions, sales for the month came in about 28% below 2009 levels, when there was a rush to get deals done before a tax credit expiration (which was ultimately extended until April of this year).
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.
With a soft economy and plenty of competition from low-priced foreclosure inventory, it’s to be expected that sales of more-expensive new homes continue to bounce along the bottom. Even a 5.5% rise in sales during November left actual sales at an annualized rate of 290,000 for the month, a figure which ranks among the worst numbers since records began in 1963. The minor rise in sales did draw inventory levels down a little to a still-elevated 8.2 months, and the number of units on the market built and ready for sale tracked below the 200,000 mark. With so few units available, and those probably the least desirable units at that, new homebuilding will need to start to happen before too long, and may provide a stronger contribution to the economy in 2011.
The production-led recovery is starting to downshift a little, even as the service sector of the economy grinds forward. Orders for durable goods (items designed to have a three- or more-year replacement cycle) declines by 1.3% in November, about triple the expected falloff. Transportation – planes, trucks, etc – accounted for the decline, and leaving them out of the calculation, a 2.4% increase was noted, including a 2.6% rise in business-related spending. Since durable goods orders had slipped by 3.1% in October, it seems pretty clear that the factory sector has slowed considerably from the pace set earlier in the recovery, when inventory rebuilding pumped up the numbers.
The weekly ABC News/Washington Post poll of Consumer Comfort moved to a year-high-tying minus 41 during the week ending December 19, and we stand a real chance to finish the year on a high note, even if this indicator continues to remain at a pretty sorry level. Still, any improvement is still an improvement, and we hope to see more as 2011 gets underway.
Other measures of consumer moods are improving, too. The final December observation of Consumer Sentiment from the University of Michigan rose by 2.9 points to 74.5 for the month. While the value wasn’t the high water mark for the year — that would be June’s 76.0 figure — there has been almost a complete recover from a summer swoon which saw the indicator drop by over eight points at one point. Consumers are still a long way from happy, but at least moving in the right direction at the moment.
New claims for unemployment benefits came in at 420,000 for the week ending December 18, down 3,000 from the week prior. With just a week to go, it seems unlikely that we will crack the 400,000 level in 2010, but the trend has been gradually downward for much of the past few months.With the economy showing signs of just a little more strength over the past quarter, we should break that barrier just a show while into the new year is the present trend holds.
Of course, fewer people getting laid off is an important component to keeping the economy growing, since jobs produce income and income produces spending, powering the economy forward. In November, Personal Incomes rose by 0.3%, a little better than was expected, but wage growth was a meager 0.1% after a 0.5% rise in October. The rest of the increase is due to transfer payments of one form or another, from unemployment benefits on down the line. Still, money did flow into households, and flowed right back out again, with personal expenditures rising by 0.4% for the month. More outgo than income means that savings are harder to come by, and the nation’s rate of savings eased back to 5.3% for the month.
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Sources: FRB, OTS, HSH Associates.
Mortgage rates and housing markets matter somewhat less than do holidays this time of year. Next week’s a holiday-shortened one as well, with a fairly light calendar of economic data due out. The leveling of interest rates for this week should largely turn into a two-week affair by the time next week rolls around, and we expect little change if any in mortgage rates.
For all of us at HSH, here’s wishing you and yours the brightest of holidays and the happiest of new years. All the best to you in 2011!
Wondering how the mortgage market will fare before and after the holidays? You want to read our latest Two-Month Forecast. Coming soon: HSH.com’s 2011 Outlook for the mortgage and housing markets. Don’t miss it!
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.