February 18, 2011 — Upward pressure for mortgage interest rates has been quite evident in the market over the past month as the average 30-year fixed-rate mortgage moved back to levels last seen back in May 2010. For this week at least, rates seem to have found a resting place from their upward climb.
HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — noted that the overall average rate for 30-year fixed-rate mortgages slipped by a single basis point, gently declining to an average 5.32%. Thirty-year fixed rate mortgages eligible for FHA backing, a key component of the first-time homebuyer market saw their average rate decrease to 4.95% for the week. Hybrid 5/1 ARMs, perhaps the most viable alternative to the traditional 30-year FRM rose by two basis points (0.02%) to close the period at 4.01%
Over a five-year period, a borrower with a $200,000 loan who chose a 5/1 product would save $12,978 in interest cost while retiring about $3,551 more of the outstanding balance of the loan compared to the 30-year FRMI. Of course, if market conditions should turn unfavorable at the end of the fixed-rate period, a borrower might give all that back (if not more) over time.
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The tenor of economic news continues to suggest a steadily improving economic climate. Minutes from the last Federal Reserve meeting a few weeks ago found that the Open Market Committee believed that “economic recovery was firming, though the expansion had not yet been sufficient to bring about a significant improvement in labor market conditions”; looking forward, the report noted that “the participants generally expressed greater confidence that the economic recovery would be sustained and would gradually strengthen over coming quarters.”
Although members of course discussed the inflation outlook, there was little sense of immediate concern about rising prices. Food and energy costs have been on the rise along with basic commodity prices, but there seems to be sufficient slack in the economy to keep these from producing a worrisome inflation spiral. However, as we’ve noted, the threat of deflation has fallen behind us, and there is an increasing risk that benign state of prices may do so before long.
Prices of goods brought to these shores rose by 1.5% in January, nearly double forecasts, and the last four-month string isn’t pretty, with a 1.5%, 1.2%, 1.6% and 1.1% cadence, respectively. For the latest figure, even removing the petroleum component left a fairly sharp 0.8% rise in prices — just a one-month flare, but worthy of consideration. Overall, prices for imports have climbed by 5.3% over the past year, but we’ve exported a little inflation of our own, with outbound goods rising by 1.2% last month (and 6.8% over the past 12).
Prices at the level upstream of consumers also put in a fair jump in January, with the Producer Price Index rising by 0.8% at the “headline” and 0.5% when the most volatile components (”core PPI”) have been removed. PPI has been firming at a more or less steady pace over the past six months and has now risen by a 3.7% clip over the past year, although the annual “core” rate is just 1.6% at present.
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 price pressures both evident and forming, how long before their impact is felt, and to what degree? The Consumer Price Index has been on a subdued track, so much so that the Fed still finds that there is plenty of space for prices to accelerate without detrimental effect. However, there is little doubt that there has been a pattern shift which began at about the mid-point of 2010, and with rates over the last two months (0.4% and 0.4%) about double those seen in the summer and early fall. Food and energy are almost solely to blame, but core CPI has also shifted from a flat pattern to one of minor but continual increases over the past few months.
Perhaps it’s too early to worry much about inflation, but it would appear that all the stimulus from here and around the globe has reflated at least certain assets, and a growing economy may produce a shift in inflation perceptions (driving interest rates higher) more quickly than any actual inflation occurs.
Admittedly, it will be hard to create a huge amount of inflation without the contribution of wage growth, which will require a much stronger labor market than exists today. Initial unemployment claims have been notching their way downward for the past couple of months, and even though there was a rise in new claims to 410,000 during the week ending February 12 we seem to be continuing on an improving bent, overall.
The housing market has well-known and wide-ranging economic benefits. It continues to be a drag on the economy, despite a near 15% increase in Housing Starts during January. All that gain came from the multi-family sector, where a gain of about 80,000 units was seen, while the much larger and far more important single-family market put in a small decline for the period. All in all, starts rose to an annualized 596,000 pace, but with competition from low-priced foreclosures and challenging financing conditions, there’s little reason for builders to add more inventory to the market. That was evident in the 10% decline in building permits, an expression of future activity, which eased back to a 562,000 annual rate.
Such a low level of activity makes the low readings of the Housing Market Index unsurprising. The National Association of Homebuilders index held in a fourth consecutive “unsweet 16″ pattern during February, even as the single-family sales meter rose by two ticks to 17 for the month. In the HMI, a reading of 50 would indicate a balanced market; readings below — and well below, such as these — indicate a builder market still mired in recession.
Consumer moods brightened a little during the week ending February 13. The weekly Consumer Comfort index has a new owner, with Bloomberg taking over the reins from ABC News and the Washington Post. The “new” Bloomberg CCI rose to minus 43 for the period, moving a little closer to the top of a more-than-a-yearlong range. New name, but same old bleak outlook we’ve become all too accustomed to since the recession came.
Retail Sales did move higher during January, but the 0.3% gain was rather smaller than was expected. After a pretty strong run which began last June, the pace of expansion was due for breather, and more than likely one happened in January due to repeated wicked winter weather. Declines in building materials, home furnishings, clothing and foodservice kept the small rise in check for the month, and as a result there may be some pent-up demand expressed in the next month or two.
According to the index of Leading Economic Indicators, growth should continue over the nest couple of months, but perhaps at a slightly slower rate, if the 0.1% rise in the indicator can be trusted. The LEI sported some fairly heady gains in December and January, and some of the falloff in activity here may also be related to weather. Regardless, we do presently seem to be on a pace about equivalent to the 3.2% GDP we saw in the 4th quarter of 2010, a very acceptable level of growth (if insufficient to improve the labor market very quickly).
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Sources: FRB, OTS, HSH Associates.
At least some of that growth will be coming from a solid factory sector. Two regional looks at manufacturing activity both strengthened in February, with the Philadelphia Fed’s local indicator jumping to a reading of 35.9, its best showing in over seven years. In the New York area, the Empire State Manufacturing index added four points to 15.9 for the month, continuing a four-month upward trend. The upward trend seen here does was also seen in the Industrial Production report for January, where manufacturing output rose while utility and mining output downshifted. While the overall percentage of factory floors in active use decline slightly (the first such dip in a while) manufacturing usage ticked a whisker higher for the month.
As we noted last week and no doubt will continue to note as we roll forward, there are many factors affecting the mortgage markets, from broker compensation concerns, risk retention rules, definitions of “qualified residential mortgages”, GSE reform, new LLPA and FHA insurance costs and the looming Consumer Finance Protection Bureau, just to name a few. In time, all these things will effect the availability and the price of credit, as well as than channels by which it is obtained. While that’s all in play, the twins of economic growth and inflation do hold at least some sway over the price of credit, and as the economy grows this late winter and spring, the prospects for higher rates does loom. That said, it’s worth observing that we may have already seen the bulk of the rise in the October-December run up in rates.
There are few things which would drive rates down appreciably at this point but a number which might cause upward pressure. For the moment, absent an employment report way above forecasts, we probably have simply found a new region for rates to wander around for a while.
It’s a market holiday week next week, as Monday features President’s Day. The four days which follow have a little bit of economic data due, including new and existing home sales, a GDP revision for the 4th quarter of 2010 and looks at consumer moods. There probably won’t be anything to move interest rates seriously contained in those reports, and rates are most likely to be pretty flat next week, just as we were this one.
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.