February 25, 2011 — Political turmoil in the middle east has presented a opportunity for homebuyers and refinancers to grab slightly lower rates. Rates have eased off by about an eighth-percentage point over the past two weeks.
That improvement is largely related to a flight-to-safety buy of Treasury bonds. Yields on ten-year US Treasuries (which influence fixed mortgage rates) have dropped by perhaps 20 basis points or so ove that time, dragging mortgage rates in the same direction, if to a lesser degree.
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 eased by nine basis points (.09%), ending the last full week of February at an average 5.23%. A key component of the first-time homebuyer market, FHA-backed 30-year fixed-rate mortgages decreased by eleven basis points to 4.84% for the week. Hybrid 5/1 ARMs, usually the most viable alternative to the traditional 30-year FRM shed a full tenth percentage point (0.10%) to close the period at 3.91%
As long as the US remains the place to stash cash when these global events occur, at least some benefit will accrue to American mortgage seekers. However, these events and any benefits are of unpredictable duration, so folks actively engaged in the mortgage process would do well to move quickly to lock in rates and secure transactions.
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In this case, there are other repercussions, too. Oil prices have spiked considerably, and if $100/bbl oil hangs around for any period of time, all the money generated by the temporary decrease in payroll taxes (and then some) will disappear into the gas tank at best, or foster higher inflation at worst. If nothing else, those funds were expected to spur additional economic growth, but if they must be spent in a narrowly concentrated fashion, economic growth will suffer to some degree.
The economy is growing, but not exactly roaring. The second estimate of Gross Domestic Product for the 4th quarter of 2010 featured a downgrade from the original 3.2% estimate. While forecasts called for a one-tenth increase, a four-tenth decrease to 2.8% was reported. January and February economic reports do suggest a more recent pickup in activity, but we won’t see even the first estimate for 1Q11 GDP until late April. That said, the Chicago Federal Reserve’s National Activity Index (an amalgam of some 85 economic indicators) sported a reading of -0.16 in January, suggesting the economy grew a little below potential during the month. “Potential” is thought to be about 2.8% GDP, where the economy can comfortably remain without throwing off much inflationary pressure.
More recent economic improvement is starting to be reflected in the various measures of consumer moods. All of the popular measures have returned to early 2008 levels and look to be gaining traction of late. The Conference Board’s measure of Consumer Confidence rang in at 70.4 in February, mostly on the strength of future expectations, while the University of Michigan survey of Consumer Sentiment nudged up to 77.5, the highest figure since January 2008. Both bested forecasts by a fair margin. Even the higher-frequency Bloomberg Consumer Comfort index popped up to minus 39.2, its best showing since April 2008 for the week ending February 20. How these outlooks will react when gasoline prices power past $3.50 or $4 per gallon will remain to be seen, but provided the economy keeps improving and start to add jobs more quickly the effects will be lessened. While hiring is still soft, it has been heading in the right direction, and forecasts for February’s employment report are calling for perhaps 250,000 new hires during the period. While we may not hit that figure, it is likely that January’s meager gain will be moved upwards from the 36,000 initially reported.
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.
New unemployment claims are again shifting downward, with “just” 391,000 applications for benefits filed during the week ending February 19. Fewer workers being laid off is a key to keeping the recovery going, while getting more off the unemployment rolls is key to stronger growth, and even incremental changes here can accrue wide-ranging benefits.
Ultimately, one of those benefits will be a recovering housing market. However, even as we deal with the effects of yesterday’s broken market — the latest proposals for doing so includes penalizing lenders for foreclosure foibles, disbanding HAMP and other items — we need to continue to pay attention to the changes coming into the market and those planned for the fairly near future.
Presently, there are many unanswered questions, including whether the broker model can survive without compensation in the form of Yield Spread Premiums, what the definition of a Qualified Residential Mortgage is (and the risks and costs of holding those outside the definition), we have to ponder GSE reform and plan for a new regulatory regime coming into play before long.
All of these factors (and a host of others) are unlikely to make access to credit easier or the price of credit cheaper, and disruptions to well-understood business models may linger for an extended period. That being the case, even if the labor market does improve substantially and quickly, there may not be an improvement in the housing market of like size or speed.
Existing homes, the largest component of the market, managed to put in a 2.7% increase in sales during January. The 5.36 million (annualized) rate of sale was a little better than forecasts but remains at a low level even with a 5.6% improvement over last year. The rise in sales did drag inventory levels down a little bit with about 7.6 months of supply available at the present rate of sale. With a considerable number of foreclosures still in the pipeline, it is expected that inventory will rise again when the spring selling season comes, joined by homes pulled off the market during the harsh winter season.
New Home Sales continue to suffer from multiple issues, primarily competition from less-expensive foreclosures and tight financing conditions for new building projects. New homes were sold at an annualized rate of 284,000 during January, rather below forecasts and among the weakest numbers to date. The number of homes completed and on the market ticked 1000 lower to 188,000 units and continues to close in on a level for available stock last seen in 1967. These are probably homes in the most difficult markets, or otherwise the least desirable or hardest to move, such as those in unfinished developments or far from amenities. With the slower pace of sale, the available months of supply ticked back upward, so there would seem to continue to be little reason to expect a robust home construction market anytime soon. As demand does re-develop, its a reasonable certainty that builder will remain cautious for a long while about adding too much “spec” building to the inventory.
The manufacturing sector of the economy continues to display strength, as a weak dollar and the strengthening global economy is helping to keep factories humming. Durable goods orders rose by 2.7% in January, powered by expensive transportation-related orders (think planes and trains, etc). However, business-related spending continued a fits and starts pattern, slumping during the month. Regardless, it was the first positive headline figure since last September, and durable goods orders tend to be erratic.
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Other signals from regional manufacturing surveys held out the promise of a strengthening recovery. Both the Richmond and Kansas City Federal Reserve reported surging activity their districts in February, with the KC Fed’s reading of 19 tying an all-time high, which the Richmond Fed notched an eight-point gain to 25. Both reports sported increases in employment indicators and are hopeful signs for additional improvement in the labor markets as we move deeper into 2011.
At least for this week (as well as the last couple) unrest elsewhere has overcome positive economic news here. To be fair, there are few indicators that the economy is gaining momentum an unmanageable clip, or that inflation concerns have begun to disrupt prices or markets to any great degree. It comes down to a question of balance: will rising prices upset inflation expectations, allowing higher prices to foment? Will the Fed continue to maintain a posture that allows for higher prices to permeate the broader economy or will they start to move from highly accommodative policy sooner rather than later? Will the nature of these price hikes (in energy, especially) ultimately act as a brake on economic growth, with higher near-term prices giving way to slower price increases later? At this point, it’s hard to know.
One thing is true, though: Relative to where we are, in terms of mortgages and real estate markets, the path behind us is a mess and the path forward uncertain. As we work though this unclear transition, markets may or may not react in predictable ways or even ways they have in the past given similar circumstances. Uncertainty creates risk, and risk usually creates higher interest rates, not lower.
Next week, we get both end-of-the-month and important first-of-the-month reports. Employment (Friday) is the biggie, but we’ll see the influence of the twin ISM reports, worker productivity, the latest Beige book and more. It would be best to plan for a pretty good group of numbers altogether, and a slight rise in mortgage interest rates from this week’s levels.
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.