March 25, 2011 — Mortgage rates set a recovery peak in February, and the effects of higher mortgage rates on the stumbling housing market became all too clear this week when fresh home-sales figures were released. Since those peaks some six weeks ago, rates have moved somewhat lower, so perhaps March activity will be somewhat higher as a result. Here’s hoping that’s the case.
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 rose by three basis points (.03%) to finish the week at 5.11%. A key component of the first-time homebuyer market, FHA-backed 30-year fixed-rate mortgages increased by four basis points to land at 4.76%. ARMs are starting regain at least some favor in the market, and Hybrid 5/1 ARMs, perhaps the most preferred alternative to the traditional 30-year FRM (notably for jumbo buyers) bounced just two hundredths of a percentage point higher (.02%), ending the final week of March at an average of 3.74%
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Home sales had been marginally improving over the last few of months, as the hangover from last year’s tax credit induced buying binge began to fade away. However, tight financing markets with ultra-low rates last fall gave way to tight financing markets with considerably firmer rates this winter. Coupled with fairly wicked winter weather and in a market producing no sense of urgency on the part of potential homebuyers and the ingredients for a poor month all came into play.
Sales of existing homes, the largest portion of the market, declined by 9.6% during the month, sliding to an annualized rate of 4.88 million, the softest pace since last November. With the falloff in sales, and with plenty of inventory still coming into the market from foreclosures and such, there are now 8.6 months of supply available at the present rate of sale, up from a closer-to-normal 7.5 months in February.
The construction and sale of new homes is an economic engine, driving industries from lumber to transportation and many trades along the way. At best, this engine was at a slow idle in February, when just 250,000 new homes were sold, the lowest annualized level since such records began in 1963… when there were something on the order of 100 million fewer Americans to buy homes. The number of built but unsold homes remained stead during the month, with builders still holding onto 195,000 units just waiting to move, and at the present rate of sale, that’s enough stock to last some 8.9 months. It does seem that this engine will be a long time coming up to speed, which may not well into next year, even if we do see the throttle open a little more in the months ahead.
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.
The economic recovery could use a little more of a push. While we are no doubt in a seventh quarter of the recovery at the moment, all of these periods strung together show a mild recovery at best. The final reading of Gross Domestic Product for the fourth quarter of 2010 came in at 3.1%, a figure revised upward by 0.3% from the prior estimate. While any upward revision is welcome, it still leaves the recovery with little momentum coming into the first quarter of 2011, and information available to date suggests that we will only be near or perhaps slightly above that pace. Orders for durable goods eased by 0.9% in February, but that slip came after a 3.6% gain in January, and backing and filling is not uncommon in this particular series of data. Nonetheless, the decline isn’t especially welcome, especially when you consider that the proxy for business-related spending declined by 1.3% for the month, and expanding these outlays are crucial to broadening the recovery. Other measures of activity like the March indicator from the Richmond Federal Reserve do point to a slowing of activity but only slightly and also from very high levels.
The Chicago Federal Reserve distills some 85 economic numbers into an indicator called the National Activity Index. In turn, the NAI suggests whether the economy is growing at, above or below its “potential”, thought to be a GDP figure of about 2.8% or so. “Potential” is a level where growth does not throw off any significant inflation, and in February, the NAI came in at -0.04, a value which indicates growth is about at a par level. A stronger economy would help drive down the level of joblessness at a much faster pace, which in turn would improve the economy at a faster pace, but we do seem likely to remain in a protracted period of only grudging job growth. At last measure, just over 190,000 jobs were created in February, a figure which will probably be replicated for March. We’ll see when the report comes next Friday.
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At the very least, layoffs are gradually declining, if in an uneven fashion. During the week ending March 19, some 382,000 new applications for unemployment assistance were filed, which ranks among the lowest numbers seen this year. But not losing your job can only go so far to promote optimism, and with tragedy, war, new military actions and a punk economy it’s hard to keep up a brave face. In that regard, consumers have not; oil at $100+/bbl, gasoline prices which seem certain to climb to new record levels at some point this Spring and escalating food prices have trimmed spirits to a real degree.
One such measure, the University of Michigan Survey of Consumer Sentiment, shed a whopping ten points in March, slumping to a reading of 67.5 for the month, the lowest such reading since last October. Concerns about the future were the biggest component of the decline, but more immediate worries contributed as well. That was much the case with the weekly Bloomberg Consumer Comfort Index, which ran to recovery highs not all that long ago, only to retreat toward recession lows, putting in a value of minus 48.5 during the week ending March 21.
Without a strengthening economy, without a robust job market and without much enthusiasm about the present or future, it’s going to be very hard for the housing market to stage a strong recovery. At the same time, the construct of the mortgage market itself is under heavy fire, with almost no facet of the stream of funds from capital markets to the consumer under some form of change, scrutiny or revolution. Since there are so many things to consider, we wrote a working outline which give a rundown of the most prominent issues and concerns about the market, and how they are all likely to lead to higher costs and reduced availability of credit over time.
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Sources: FRB, OTS, HSH Associates.
The stock market has staged a bit of a recovery this week, and of course that comes at the expense of bonds, whose interest rate in turn influences mortgage rates. The trend turned higher as the week progressed, with the yield on the benchmark 10-year Treasury touching its highest daily level in several weeks. Rates moved higher this week compared to last, and it would seem likely that, absent a new disaster (Euro-zone finances, anyone?) that rates are going to tick higher again next week, probably by about the same amount as this one.
For an outlook which will take you up until early April, have a look at our 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.