February 4, 2011 — Depending upon where you are in the country, a little furry prognosticator may or may not have give you hope for an early Spring. In either case, the promise of a milder tomorrow remains just a hope at this point, and we must deal with present conditions, regardless.
Much is the case with the economy. Certain hopeful signs and promises are or have been emerging, but the best days lie ahead for at least the moment. Interest rates have been known to bounce in fits and starts in such a climate; the suggestion of tomorrow’s improvement is a component of the rally in stocks and the corresponding rise in mortgage rates over the past couple of months.
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 another five basis points, holding now at an average 5.17%. FHA-backed 30-year FRMs, a considerable and crucial part of the first-time homebuying market, moved up by two more basis points (.02%) to finish the week at 4.79%. Borrowers looking for an alternative to the benchmark 30-year FRM might consider a 5/1 Hybrid ARM, which is available at an relatively inexpensive 3.83% for the first five years, up three basis points from last week.
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Like the snows which enveloped a wide swath of the country this week, we have been seeing over time an accumulation of improving economic news, some of which suggests that the economic gears are starting to become more fully engaged, with a more robust recovery set to bloom before too much more time has passed.
The Institute for Supply Management’s twin surveys of manufacturing and service-related businesses is a case in point. The ISM manufacturing series has be solidly positive for a good while now, as an inventory rebuilding cycle and improving export climate have powered us out of recession. The most recent value for January was 60.8, well above forecasts and the highest figure since 2004, so the factory portion of the economy is humming along nicely, with gains in orders, production and employment. Improving factory activity in January was no doubt a result of a 0.2% rise in Factory Orders for December, a gain rather better than expected, with business-related spending rising by 1.9% during the month, according to the Census Bureau.
Until early 2010, that wasn’t the case with the larger service-oriented portion of the economy. Cracking into positive territory just 12 months ago, then spending months in a period of fairly muted growth, the non-manufacturing part of the economy is starting to show some muscle. In January, this particular indicator came in at 59.4, it’s highest value since 2005 and a fifth consecutive increase. While orders also rose nicely, perhaps more important was that the employment sub-index has finally begun to accelerate beyond the treading-water pattern which covered much of the early part of 2010.
Both indicators taken together suggest that at least better days are indeed coming, and perhaps sooner than some forecasts expect. However, majorities in both survey reported rising prices, which may or may not make it into final costs.
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.
That’s not to say that it will be smooth sailing from here going forward, or that no economic challenges remain to be overcome. Despite the promise of more jobs, only 36,000 new hires took place in January, according to the latest report from the Labor Department. Perhaps four times that number was expected, but the severe winter weather over the past month has played havoc with both the initial unemployment claims numbers and seemingly with the employment report, too. Continuing a recent erratic pattern, initial jobless claims dipped back to 415,000 during the week ending January 29, a drop of 39,000 and arguably closer to where the trend has been. In a odd twist, though, the Labor Dept. noted that the unemployment rate slipped by four tenths of a percent, to a flat 9% as a sizable number of folks stopped looking for work.
In the so-called household survey, you are essentially asked: “Do you have a job?” If the answer is “no”, there is a subsequent question: “Are you looking for work?” If the answer is “yes”, you are counted unemployed. If “no”, you aren’t.
At this time, it is reasonable to expect either an upward revision to new hires and/or a sizable (and perhaps above forecast) number of new hires in the next month or two. At the same time, is is reasonable to expect that initial claims will find a more true pattern when folks can reliably get to their local unemployment office.
Those with jobs are being asked to push more out the door and are complying. Worker Productivity rose by 2.6% in the fourth quarter of 2010, a solid gain and up by 0.2% from the 3rd quarter, but below those seen earlier in the year. Hourly compensation went up by 1.9% for the period, which means that the cost of labor per unit produced declined by 0.6%. That decline helps insure profits, or more likely is being used to help offset rising raw materials costs.
With or without having a job, personal incomes rose by 0.4% in December. Wages increased by 0.3%, while “transfer payments” in the form of government supports and such provided the rest of the gain. With the change to Social Security withholding putting a few more dollars in each paycheck, some additional spending should occur, provided rising gasoline prices don’t eat all of it up. Personal outlays increased by 0.7%, driving down the savings rate a little to 5.3%. Over the past year, incomes have risen by 3.8% while outgo climbed by 4.1%, all without much in the way consumers taking on new debt.
Even as revolving credit balances shrink, some increases in installment debt were noted in the closing months of 2010, largely due to improving auto sales. In that regard, 2010 ended on a high note, with AutoData reporting an annualized 12.6 million new cars and trucks hitting the street in December, up about 100,000 units from November. The sales pace remains below that which is believe to be profitable and sustainable for the industry, but is well above the catastrophe levels of below 10 million annualized seen during the depths of the recession.
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Sources: FRB, OTS, HSH Associates.
With tight lending conditions still in place, adding new debt continues to be more of a challenge than it was a few years ago. However, standards are continuing to loosen, at least from the top down. The latest Senior Loan Officer opinion survey revealed a continuation of a now five-quarter trend of easing standards for large Commercial & Industrial borrowers. More liquid lending conditions haven’t yet trickled down to consumers to any great degree, where standards for residential mortgages remained largely unchanged at firm levels for the past four quarters. With Fannie, Freddie and FHA underwriting standards dominating the terms of mortgage lending, there won’t be much loosening reported here unless or until these firms make changes. With GSE reform just coming into view, it would be unlikely to see that happen anytime soon.
Of course, tight lending standards, fiscal crises and rough-and-tumble market conditions make it unsurprising to see a decline in Construction Spending. The 2.5% decline in outlays for December was across the board, driven down by a 4.1% decline in residential outlays, a 0.5% slip in commercial spending and a 2.8% did in public works projects. The housing market remains a trouble spot for the economy, there is ample commercial space virtually everywhere, and state and local governments are in a retrenchment mode with ARRA (”stimulus”) funds starting to run dry.
The highest-frequency gauge of consumer moods flared back near the highest levels of the recovery to date. The weekly ABC News/Washington Post poll of Consumer Comfort rose by three ticks to minus 41 during the week ending January 30, and along with other indicators point to an improving outlook as we close out the last six (or fewer, or more) weeks of winter.
Housing will eventually join the fray, but probably not for a while, and will likely be greeted with mortgage rates approaching what might be considered normal, somewhere around an average 6% for 30-year conforming loan rates. However, there are probably many months to go before that comes to pass. In the meanwhile an improving economy is making investors more interested in riskier investments with greater potential (i.e. the stock market) at the expense of safe-haven ones. As such, stock prices are rising and bond yields are following, and mortgage rates follow bond yields to a greater or lesser degree.
That should be the case as we wander into next week, with mortgage rates expected to move a little higher, probably a handful of basis points, perhaps as much as ten. For an outlook which will take you up until early April, have a look at our new Two-Month Forecast.
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.
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.