January 7, 2011 — The economy continues its trend of firming growth, but there are few indications that it is poised to rocket forward. After a late-fall and early-winter rise, mortgage rates have largely levelled off.
The impetus for the rise has been a warming economic tenor after a late-summer swoon. However, in order for interest rates to continue to rise — or even hold these levels — we need to see continued upward progress or growing inflation concerns, or both. At present, we don’t seem to have either of those conditions.
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 slipped back by seven basis points (.07%) during the first week of 2011, ending HSH.com’s national survey at 5.12%, the lowest average rate since early December. FHA-backed offers, so crucial to first-time homebuyers and low-equity refinancers, decreased by five basis points to start 2011 at 4.77%, better than a half-percentage point lower than they began 2010. The overall average rate for 5/1 Hybrid ARMs revisited a level seen two weeks ago with an average rate of 3.89%. 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.
There can be no doubt that the economic climate improved as we closed 2010. November’s data was of a better sort than was October’s and December’s reports are pointing to continued improvement, too. Interest rates spiked higher amid expectations of a considerably faster growth pattern, but that pattern has not yet emerged.
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That’s not to discount the latest set of figures, but even casual observers of the economy should be able to tell that we’re nowhere near healthy yet. Important facets of the economy, most notably housing and the jobs market, have yet to show any considerable signs of recovery — and that broad economic improvement probably cannot happen without their greater participation.
Of course, the folks at the Federal Reserve know this, too, and it probably underscores the need to continue their program of buying Treasury Securities to help foster additional economic growth. The minutes from the most recent FOMC meeting were released on Tuesday, and the staff report on current economic conditions noted quite clearly that “Activity in the housing market was still quite depressed” and that “Labor demand rose further in recent months, but unemployment stayed at a high level.”
Federal Reserve Chairman Ben Bernanke spoke before the Congress on Friday, and also noted that “the housing sector remains depressed, as the overhang of vacant houses continues to weigh heavily on both home prices and construction”. He also went on to say that “conditions in the labor market have improved only modestly at best” and “considerable time likely will be required before the unemployment rate has returned to a more normal level.”
Given this backdrop, and even with somewhat greater demand for credit coming from an improving business outlook, there doesn’t seem to be a lot of reason for interest rates to continue on any upward trajectory. It is true that they have moved up from what were arguably lower-that-they-should-have-been bottoms, but they have probably overshot the mark to some degree when weighed against the economic landscape.
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.
At the same time, better and warmer economic news does continue to provide a reason to keep rates from falling back to any real degree. That parade of data is starting to include December, but there is still some November data yet to digest, including Construction Spending, which moved 0.4% higher during the period, led by a third-consecutive positive month for outlays on residential projects and joined by some public-works spending as well, which was likely some residual stimulus money hitting the street. Even with the recent improvements, construction spending remains about 6% below the same period in 2009.
Sales of new vehicles continue to firm, according to AutoData. While still well below levels considered healthy, the 12.5 million (annualized) rate of sales was the highest of the recovery (excluding the CARS-fueled sales boost in 2009). Auto sales ended the year on a high note, and the recent extension of Bush-era tax rates and the minor payroll tax cut is expected to help sales move higher as we wend our way though 2011.
While producers led the economy out of the recession about six quarters ago, service-related businesses have been slow to join the effort. The Institute for Supply Management report covering manufacturing interests moved up to a very solid 57.0 during December, with production and orders both increasing. Unfortunately, the indicator which suggests more hiring backed off during the month, and commodity price pressures are starting to be noted, with the ‘prices paid’ subindex coming in at 72.5, a fairly high level. Manufacturing’s contribution to economic growth was expected to have begun to peter out by now, but stronger exports fueled by a weak dollar have helped keep the ball rolling, and that momentum should carry into 2011 for a while at least. Factory Orders in November rose by a better-than-expected 0.7%, which no doubt contributed to the improvement in the ISM figure for December.
Service-related concerns are starting to add to the economic conversation. The ISM’s non-manufacturing index rose to 57.1 during December, its highest level in more than four years. New orders powered ahead during month, and point to a recovery that, while still fragile, is beginning to show signs of being self-sustaining. Businesses remain wary of adding employees just yet, though, and the employment indicator moved to just barely above flatline during the month, but was positive for a fifth month out of the last six. The improvements in the largest sector of the economy seem real, yet still tenuous. Each ISM series uses a breakeven point of 50 to indicate expansion or contraction.
With each new job created — or each old job not destroyed — we build the foundation of a more robust recovery. The outplacement firm of Challenger, Gray and Christmas recorded just 32,004 announced layoffs in December, the lowest level since before the recession, and the cumulative total of announced layoffs in 2010 was 60% below 2009, so signs are starting to emerge that layoffs are coming to an end, so more hiring can’t be all that far into the future.
Weekly unemployment claims data bear this out to some degree. After slipping below the important 400,000 mark due to year-end seasonal distortions, initial claims figures moved back closer to recent trends, coming in at 409,000 during the week ending January 1. Even discounting the year-end, holiday-week dip, the trend has been on a clear declining path for months even as the figure remains elevated. Before the recession, weekly figures closer to 300,000 or below were pretty commonplace, but we do seem to have finally turned the corner toward measurable improvement.
The payroll concern ADP roiled markets on Wednesday when it reported a net private sector gain in jobs of nearly 300,000, and bond yields and mortgage rates both spiked higher for a time. Expectations for Friday’s December employment report were ratcheted higher, and some discussion about the need for the Fed to complete its QEII program is the labor market was strengthening made the rounds.
On Friday, then, there was a little disappointment when the Labor Department noted that just 103,000 new jobs were created during the month. The prior two months were moved upward by a total of 71,000 hires, and discounting the census-led bump (and subsequent decline) the pattern over the last three months is the best since before the recession got underway. The improvement in hiring is encouraging, but yet still mild.
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A more curious note was that the unemployment rate fell by four tenths of a percent to 9.4%. This figure is determined by the household survey, where folks are counted as unemployed if they are looking for work (but not included if they have given up). The decline is probably a combination of factors: it is possible that some people found jobs at firms which aren’t included in the establishment survey, coupled with some folks have stopped looking for jobs which aren’t there and even some seasonal adjustments to the figures. The decline is of course welcome, but the size of the change does seem suspiciously large.
An improving economy is starting to see somewhat more borrowing by consumers. While revolving credit balances continue to decline, installment borrowing, used largely for autos and such, has begun to move higher. In November, consumer borrowing balances expanded by $1.3 billion, a downshift from the $7B seen in November. It was the first time in a long time that there have been consecutive positive numbers seen in consumer borrowing, and the gain came as installment debt rose by $5.6B for the month. Credit cards usage continues on a yet-unbroken downward trend, with another $4.2B retired during the month. Some of the decline in revolving usage since the recession began has been due to lower usage by consumers and some due to lenders charging off debt which isn’t ever going to be repaid.
Surveys of consumer finances have been pointing to lowered expectations for income growth, and that along with other factors will continue to keep outlooks dark. The weekly ABC News/Washington Post poll of Consumer Comfort slipped back another tick to minus 45 for the week ending January 2. Just a few weeks ago, a spate of optimism moved the indicator up to 2010 highs, but rising gasoline prices and post-holiday blues seem to have dampened spirits somewhat.
Mortgage rates appears to have found a new range in which to wander, awaiting clues to push them more strongly in one direction or the other. Given the increasing number of positive reports, upward is the more likely direction of the two, but there is little reason to expect much of that in light of the challenges which yet face the economy. As such, we don’t expect much change in mortgage rates for next week.
Over the longer run, and just as we did for 2010, we have written a year-long overview for mortgages and housing markets for 2011. While there are any number of unseen items which will affect any forecast, we’ve boiled it down to the eight items we think will have the greatest impact during the year. You can check it out here.
Wondering how the mortgage market will fare before February comes? Check out HSH.com’s 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.