January 14, 2011 — After a late-year run-up at the end of 2010, mortgage rates have slid gently in the first couple of weeks of 2011, lending some cheer to those hoping to refinance or purchase a home this year.
An improving economy largely fostered that rise, but year-end investor positioning likely played a role as well. Now that we’ve passed the holiday and vacation season, there seems to be a growing realization that a mild recovery is the most likely to occur, even if it features a slightly faster rate of growth.
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 another seven basis points (.07%) this week, ending HSH.com’s national survey at 5.05%. FHA-backed offers, so crucial to first-time homebuyers and low-equity refinancers, decreased by another five basis points to 4.72%, while the overall average rate for 5/1 Hybrid ARMs moved downward by eight basis points (.08%) to 3.81%. The gap between long-term fixed rates and the most common hybrid ARM should makes them at least a consideration for homebuyers and refinancers with short time horizons. 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.
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The Federal Reserve’s report covering regional economic conditions, — called the Beige Book for the color of its cover — served to reinforce the mild recover characterization. “Economic activity continued to expand moderately from November through December” noted the Fed, citing growth in manufacturing, consumer spending and other key areas of the economy. Keeping the expansion tempered were soft real estate and labor markets and some challenges in the agricultural sector. Even though the recovery is continuing to expand to include more of the economy, we are probably only just now moving into a recovery which can self-sustain without extraordinary outside stimulus, such as the Fed’s own QE2 program, which has several months yet to run.
Faster job growth would certainly spur the economy forward, but the mild and rather disappointing December labor report last week was followed up by an unexpected spike in first-time unemployment claims during the week ending January 8. A declining pattern was broken by a 36,000 increase in initial claims, driving the number up to a more uncomfortable 445,000 for the week. Seasonal adjustment issues and weather-related delays in filing over the past couple of weeks are probably the cause of the spike, but more folks joining the unemployment rolls does serve to damp enthusiasm for a speedier economic recovery.
Optimism among consumers continues to run in a backing-and-filling pattern. The ABC News/Washington Post poll of Consumer Comfort broke into new post-recession territory during the week ending January 9, with its minus 40 the highest level in several years. Of course, that enthusiasm does seem a little at odds with the preliminary January report of Consumer Sentiment from the University of Michigan, where a decline in optimism was noted. Confounding expectations of an upward move, the UMich survey retreated by 1.8 points to stand at 72.7, about where it stood back in November. Since the decline was concentrated in current conditions, perhaps stormy weather and rising food and gasoline prices or maybe just winter blues caused the drop; we’ll find out come month’s end if it is just a blip in moods or a more lasting decline.
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.
Worries about deflation should be falling behind us, since there are slightly more price pressures evident in the economy. Prices of goods coming onto these shores increased by 1.1% in December, fast on the heels of a 1.5% rise in November. Import prices have increased by 4.8% over the past 12 months, with much of the increase due to petroleum products and basic commodities. Offsetting that was a 0.7% rise in goods destined for export, with the weaker dollar no doubt affecting the balance of incoming and outgoing pricing.
Despite the price increases, the nation’s imbalance of trade was just about unchanged during November. Exports and imports rose almost a like amount, leaving a $38.3 billion differential between imports and exports, just a tick lower than the $38.4B seen in October. That both exports and imports are rising concurrently is a good sign as far as promoting a durable recovery, as manufacturing’s role in the expansion has been expected to wane but does seem to have somewhat greater legs than expected.
That was seen in the December report covering Industrial Production. IP rose by a better-than-expected 0.8%, driven by sharply higher utility output enhanced by continuing cold and stormy weather. However, manufacturing did expand by 0.4% during the month, and mining output contributed a like amount. Perhaps more importantly, the percentage of factory floors in active use continues to trend higher, with the December figure of 76% utilized the highest of the recovery to date.
Final demand, driven largely by consumer spending, is improving, driving down stockpiles. That should be good news for future orders, which would tend to keep manufacturing humming along. Retail sales for December came in at a reasonable 0.6% gain, perhaps a little less than hoped but a six consecutive month of improvement. With the latest change to the tax code starting to kick in this month, those with jobs will find a few extra dollars in their paychecks, which should in turn foster some additional spending in the months ahead. Already it appears that the months-long continuation of demand was sufficient to cause a decline in inventory levels at the wholesale and retail levels in November, leaving some shelves void of popular items during the holiday shopping season. Only manufacturers boosted stockpiles in November, with the value of their holdings rising by 0.8%, where wholesalers and retailers sported mild declines.
If there are any remaining worries about deflation at the “macro” level, they are a lot harder to find when you get closer to where purchases occur. Producer prices rose by a stout 1.1% during December, a faster pace than was anticipated, driven higher by volatile food and energy costs. The “headline” rate of inflation at the producer level has climbed by 4.1% over the past year, while the “core” PPI rose by just 0.2% and 1.4% over that time.
Passing those costs onto consumer at a time of poor economic growth is difficult. During December, the Consumer Price Index did rise a little more quickly than forecasts, sporting a 0.5% increase over the period. Including December’s report, consumer prices have increase by a very soft 1.4% for 2010, with most of the price pressures coming from rising energy costs. Excluding them and food from the equation left just a 0.1% increase for the month, and a 0.6% 12-month increase.
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Sources: FRB, OTS, HSH Associates.
Both inflation and economic growth are likely to persist on a slight firming trend as 2011 progresses. Many forecasts for growth have been bumped higher, moving from the upper two percent range for GDP to a lower three percent one. That’s certainly an improvement, but not so strong that it should create much stronger price pressures or trim the ranks of the unemployed very quickly. Collectively, that’s good news for mortgage shoppers; as we mentioned here over the past couple of weeks, the run-up in interest rates did seem to have overshot the mark somewhat, at least relative to the amount of economic activity and inflation in the present environment. With this week’s easing of rates taking us back to early December levels, we have erased at least some of that overage.
Which brings us to next week. A Monday market holiday makes it only a four-day affair, with a light slate of significant economic news. We will get to see a few looks at how the housing market closed last year and impressions of how it is beginning this one through reports covering existing home sales, housing starts and builder sentiment. That will be joined by a couple of localized manufacturing reports, but with little else available, it seems reasonable that little change to rates should be expected, save perhaps a couple of basis point decline should the present trend hold.
Over the longer run, and just as we did for 2010, we’ve 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 that 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.