April 1, 2011 — The economy is starting to show some additional signs of an expanding recovery, and one more resilient to external shocks. That said, many challenges to overcome still remain before we get to a “full recovery”, and if consumer moods are any indication, rising gasoline prices are starting to create some considerable headwinds.
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 six basis points (.06%) to finish the week at 5.17%. A key component of the first-time homebuyer market, FHA-backed 30-year fixed-rate mortgages increased by five basis points to land at 4.81%. 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) increased a full tenth-percentage point (.10%), beginning April at an average of 3.84%
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There are at least two facets of the economy still missing from the recovery. Of the two, the housing market is a much more intractable problem, since its solution depends upon the settling of a whole host of market-related issues, but at the same time is also dependent upon substantial and continual gains in job growth, which seems finally to be gaining some traction.
Layoffs have been abating for some time, and a monthly survey from outplacement firm Challenger, Gray and Christmas keeps tabs on how many announced job cuts occur during each period. In March, there were some 41,528 announced layoffs, with government workers accounting for just under half the total. Over the past three months, only 130,749 folks were slated to become separated from their employer, the lowest quarterly total in some 16 years. The figure suggests that everyone who could be let go during the downturn and early stages of the recovery already has been let go, so any increase in economic growth will necessarily require new hiring.
That’s been seen to a degree in the glacial decline in new unemployment filings. After setting a weekly peak in the mid-500,000 range last fall, (not to mention the 674,000 weekly crest during the recession) the trend has been a gently downward one with occasional upward fits and starts. For the week ending March 26, some 388,000 new applications for unemployment assistance were filed, and we continue to hold to the upper 300,000 range. We’ll need to see numbers closer to 300,000 weekly claims to know that hiring is getting fully underway, but the trend continues to be one of grinding improvement, regardless.
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 was a little acceleration in hiring in March. According to the Commerce Department, some 216,000 folks were added to payrolls during the month, the best monthly showing since the recovery began. With just a little improvement on February’s figure, it was hardly a blockbuster report, but was sufficient to trim the nation’s rate of unemployment to 8.8%, also the best figure of the recovery to date. It is interesting to note in the report that the labor force “participation rate” — folks of working age looking for a job — hasn’t budged over the past three months; it would normally be expected that a pickup in openings would draw more folks back into the workforce and actually drive up the unemployment rate. So far, that hasn’t happened. Perhaps the jobs being created are of insufficient quality as of yet to replace those lost, so folks are collecting their unemployment checks while biding their time waiting for a more suitable openings to occur.
One thing is certain, though: Each new job created does have far-ranging economic benefits, and even meager improvements in hiring add to the prospects for a strengthening recovery as we roll forward.
As we noted last week, consumer moods are again taking a bit of a beating, what with sharp spikes in food and energy costs eating up any income gains. The latest Consumer Confidence figure from the Conference Board for March bears this out yet again, as it sported a seven point decline to 63.4, talking us back to December 2010 levels in terms of optimism. Optimism about the future seems to be in short supply, but enthusiasm for the present period was improved. At the same time, the weekly Bloomberg Consumer Comfort Index rose by two points to minus 46.9 during the week ending March 27 and in now again mired solidly in the middle of a very weak range which has persisted since the onset of the recession several years ago.
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Spending by consumers picked up a little in February, gaining by 0.7% for the month. Since incomes only rose by 0.3% for the period, it stands to reason that the nation’s rate of savings would slip, and it did, easing to a still-strong 5.8%. At least some of the new spending is coming from new borrowing, with installment lending for things like car purchases leading the way in that department. Revolving balances resumed declining after an upward holiday blip, as write offs, tougher credit availability and spending restraint have become the order of the day.
Although the broad measure of factory orders did sport a 0.1% decline in February, the health of the nation’s manufacturing sector is very good, overall. There have been three consecutive months of strong to very strong activity and is reasonable to expect a slowing at times. More recently, though, local surveys of factory activity in the New York and Chicago areas reported high levels of action, while a regional survey in the Federal Reserve’s Kansas City district posted an all-time record high for March.
The wide-ranging survey from the Institute for Supply Management held mostly steady in very good territory during March. The 61.2 level of the trade association’s indicator was down just two tenths from February, with production gaining but orders and employment easing a little during the month. Of some concern are price pressures, with a significant majority of firms noting higher inbound costs, a trend which has been on the increase for a number of months now.
Spending on new construction backed down in February by 1.4%, driven backwards by a contraction in outlays for Residential projects and a lack of public works spending. A glut of homes on the market reduces the need to build any new ones, and cash-strapped local and state governments are unlikely to add much to the recovery for some time. The pattern here has shifted a little; the Sept-Oct-Nov period for 2010 all sported gains, while the Dec-Jan-Feb group all showed declines. Perhaps the onset of Spring will give us a new three-month positive trend, but the odds to seem to be against that at the moment.
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Sources: FRB, OTS, HSH Associates.
Mortgage rates are pushed higher by improving growth and especially improving inflation. A still-soft job market and weak housing markets act as a counterbalance to that upward pressure, while the events overseas do add degree of uncertainty to the outlook. As the glass begins to seem more likely to be half full than empty, the likelihood is that interest rates will tend to be somewhat higher on balance than lower. A stock market finding its footing is one expression of that as money moved more confidently into risk and away from safety.
Concerned about risk, the Federal Reserve and other regulators released for comment and feedback a paper to address financial risk. Ultimately this will include a definition of a Qualified Residential Mortgage, expected to be quite a risk-free item indeed, requiring borrowers to have a deep equity position, great credit while weighed against 1990s-level qualification ratios, among other risk-controlling features. Eventually, the QRM will be the only loan which can be bundled into securities with no loss reserves (”skin in the game”) held back by the issuer or originator. In theory, a narrow definition will expand the number of borrowers who fall outside the boundaries, and that audience should be large enough as to attract a response from lenders eager to lend money. However, it is by no means clear at this moment whether a more robust market for non-QRM mortgages will form, or if the market will go the other way, originating only (or mostly) QRM-level mortgages, sharply limiting the availability of credit to only the best possible borrowers. Commentary from the public and interested parties is open until June, if you have an opinion.
Also running to June is our new Two-Month Rate Forecast, which you should of course check out. That’s off into the future, but not too far off. Mortgage rates have firmed up a little bit over the past couple of weeks, as the economic spring continues to warm we might see a little more of that. At the moment, though underlying interest rates have leveled off, so we probably won’t see much movement if any next week. Oil passing $108/bbl does seem likely to presage an economic slowing at some point, though.
For an outlook which will take you though May, check 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.