January 28, 2011 — Mortgage rates continue to hold fairly steady, holding to a relatively narrow range since winter rolled in. After a fall run-up which saw a 60+ basis point jump in the conforming 30-year fixed rate over an eight week period, the benchmark mortgage product has held in a 10-basis-point gap over the past seven weeks and seems likely to hang there for a while longer.
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 a single basis point, landing at an average 5.12% for the final week of January. FHA-backed 30-year FRMs, a considerable and crucial part of the first-time homebuying market, moved up by two basis points (.02) to finish the week at 4.77%. Borrowers looking for an alternative to the benchmark 30-year FRM might consider a 5/1 Hybrid ARM, which is available at an attractive 3.80%, down two basis points from last week.
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As the economy slowly heals, boosted to a degree by payroll-tax changes and government programs, interest rates in general and mortgage rates specifically may find some reason to begin an upward march. For the moment, the fragile and uneven state of the recovery should serve to keep things fairly stable, at least until mounting signs of entrenching growth begin to show. They aren’t apparent as of yet.
The Federal Reserve Open Market Committee met this week, and the statement which closed the end of their two-day affair was much the same as the last one. The economy is firming gradually, inflation remains below levels they would like to see, labor markets are still weak and the program of purchasing Treasury securities remains in force. It is unclear how much benefit the program is adding to growth, but having started down this path the Fed is unlikely to discontinue it earlier than its scheduled sunset by the end of the second quarter of 2011.
That said, growth may finally be reaching a level where a gradual but meaningful reduction in the unemployment rate may start to occur. In the fourth quarter of 2010, the nation’s Gross Domestic Product rose by a fair 3.2%, even as it was a little below some forecasts. At this rate, economic growth is probably sufficient to keep unemployment on a steady to slightly declining trajectory but faster growth will be needed to seriously drive down the unemployment rate in any useful time frame. Compared to 2009, annual GDP growth was 2.9% higher for the year, it’s first annual increase since 2007 and the fastest rate of growth since 2005.
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.
December closed on a high note for the Chicago Federal Reserve’s National Activity Indicator. This amalgam of some 85 economic indicators provides a reference point to reflect whether growth is growing above or below the economy’s natural rate, thought to be perhaps 2.8% GDP or so. With a value of +0.03 for the month, it was the best such reading since July an suggests that 2011 will be off to a much faster start than might have been expected a couple of months ago.
That said, a lack of significant improvement in the residential real estate market is keeping growth lower than that observed during other recoveries, as the fallout from the housing and financial markets is yet on-going. New Home Sales have been affected to a greater degree than existing homes, and closed the year on a weak but improving note. In December, an annualized 329,000 new homes moved though the market, a nice bounce from a near-record-low 280,000 sold in November. The actual number of remaining units built but yet unsold eased by 5,000 to 190,000, which is a 6.9 month supply at the present rate of sale. That inventory number has been tricking down very slowly, and probably represents the most difficult to sell properties; the rest of sales are likely those properties more in tune with today’s market realities.
Like the economy, consumer moods have increased to some degree, but don’t seem poised for any sort of immediate breakout. The high-frequency ABC News/Washington Post poll of Consumer Comfort touched recovery highs a few weeks ago, then stepped back. For the week ending January 23, the indicator shed another tick to minus 44, probably related to stormy weather and higher gasoline prices. Meanwhile, the Conference Board’s measure of Consumer Confidence bounced 7.3 points higher to a value of 60.6, the highest reading since May and only the third 60+ value since Spring of 2008. However, the University of Michigan’s survey of Consumer Sentiment eased by 0.3 points in its final January observation, closing the month at a 72.2 reading. While all of these indicators are above their recession lows, none of them has moved levels which reveal a growing belief in the prospects for the economy, so we seem destined to find little forward momentum, at least at the moment.
Perhaps moods will improve as the labor market heals. New unemployment claims had been running at levels suggesting that a more durable break below the 400,000 level was in the offing, but wicked winter weather seems to have mixed up the numbers. During the week ending January 22, some 454,000 new applications for benefits were filed, up from 403,000 the week prior. With stormy weather from the deep south right up to Maine over the past couple of weeks, it may be that some folks didn’t or couldn’t file in a timely fashion, or that projects are on hold pending better weather. We may have to wait a little to see how the trend is actually progressing.
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Sources: FRB, OTS, HSH Associates.
While orders for goods expected to last three or more years did decline by 2.5% in December, the dip was largely due to a falloff in aircraft orders. Even as that overall measure of durable goods orders did decline, “core” business-related spending did sport a rise of 1.4% for the month, so business investment continues to push the recovery forward, as does manufacturing. Two local Federal Reserve reports covering economic activity the Richmond and Kansas City districts both showed some deceleration from very high levels to still-solid ones. The KC Fed’s indicator slipped from 21 to 11 during January, while the Richmond Fed’s gauge eased from 25 to 18 over that period. Both are still powering forward, albeit with less momentum.
Labor market remain weak, meaning workers with jobs have little power to demand raises of any size. During the 4th quarter of 2010, the Employment Cost Index — perhaps the best measure of the cost of keeping an employee on the books — rose by 0.4%, with both wage and benefit costs rising a like amount. After a flare higher at times in 2010, both wages and benefits cost increased have cooled back to trend.
After last fall’s changeable market — preparing for the Fed’s program and trying to understand how it fits into the broader economic puzzle — the mortgage market was been waiting for some clarity on what may become of Fannie Mae and Freddie Mac. A study from the Treasury Department was due at month’s end but was kicked back a couple of weeks. Regardless of any recommendations, it is sure to spark a contentious debate about the future of mortgages and housing finance in this country for some time to come. Depending upon the direction of the discussion and who is doing the talking at any given moment, there may be some or no discernable effect on mortgage rates. What will have an effect are the new Fannie LLPA pricing adjustments we talked about in last week’s MarketTrends, which are already beginning to seep into the market for loans delivered to Fannie come April 1.
A full plate of economic news is due out next week, ranging from the ISM surveys of manufacturing and service trends, personal income and expenditures, vehicle sales and construction spending, not to mention the January employment report. We’ll also be perusing the latest Senior Loan Officer opinion survey to see if lending conditions are loosening (on balance, we believe that they are). We expect that mortgage rates will probably increase by a few basis points, perhaps a bit more if the ISM services indicator moves higher or job creation comes in hotter than forecasts.
If you’ve not yet seen it, 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.