April 22, 2011 — There’s little motivation for potential homebuyers to jump into the fray at the moment, so they aren’t. Affordability conditions are really quite good; mortgage rates are low and steady at the moment, home prices are down and there are lots of properties to choose from. Still, absent competition from other buyers or urged on by ever-escalating prices, would be homebuyers continue to stay away from the market.
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 declined by nine basis points (.09%) to slide to 5.09% A key component of the first-time homebuyer market, FHA-backed 30-year fixed-rate mortgages fell by a like amount, slipping backward to 4.74% for the week. Although there are of course future concerns, at least some borrowers should be considering hybrid 5/1 ARMs, which have an attractive initial interest rate averaging 3.71% this week, down almost an eighth percentage point from last week’s closing average.
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The poor housing climate is one of the factors keeping the recovery from gaining much traction. There are many jobs created by a robust housing market which have simply not been created yet and probably wont be for some time yet to come. In fact, even some jobs those “created or saved” during the beneficial interest rate environment are starting to disappear, with about 3,400 mortgage-related jobs disappearing from Bank of America and Wells Fargo in the past month. Simply, refinancing activity cooled considerably, and there has been no surge in home sales to support them.
The news in that regard doesn’t promise to get much better. With a push-me, pull-you tug of war in the markets between slower growth (and lower rates) and rising inflation (and rising rates) factions, mortgage rates have come to a virtual standstill at a place which leaves them only marginally attractive from a refinancing standpoint. Of course, something on the order of 25% of the homes which might benefit from a refinance are underwater and won’t be participating anytime soon, and there are probably millions of other folks who cannot qualify for a refinance from job losses and other life events.
That weak job market is also serving to keep folks wary of making any plunge into new debts, let alone the sizable commitment a home and mortgage will be. It’s little wonder, then that at realty offices and builder showrooms it is quite the silent Spring, a period of which we are nearing the halfway point.
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 latest sentiment index from the National Association of Home Builders reveals this quite clearly. A reading of 16 was reported for April, down a since tick from March. The single-family sales component showed the same one-point move to 16 from 17, the six-month optimism indicator slipped from 26 to 23 during the month, and traffic remains non-existent. Given that this is a “diffusion” index, with a breakeven point of 50, we continue to stand at a level barely above the worst of the recession and there is virtually no suggestion of imminent upward movement. Data on sales of new homes for March come next week.
The lack of enthusiasm came despite an uptick of sorts to Housing Starts in March. After a truly dismal February, starts did rebound a little bit, rising by 7.2% during the month. Single-family initiations and multifamily both showed a little positive rise, but aside from a few flares higher, the trend remains subdued at best. In March, about 549,000 new units (annualized) got under way. Permits for new building, a hopeful forward-looking indicator, did sport an 11% rise for the month, nudging their way if to 549,000 (annualized) for the period. Aside from a single month (Dec 10) this was the highest figure in a year’s time.
Well, if no one is interested in new homes, surely they must be snapping up low prices existing homes, right? Wrong. In March, existing home sales did move a little bit higher after a weak February, but the 5.10 million annualized rate of sale was nothing to get excited about. Compared to this time last year’s tax-credit fueled push, sales are down by 6.3% but have mostly recovered the depths of the plummet which came at the end of the offer. Inventory levels of available but unsold homes stands at 8.4 months, little changed from last month. It is noted that there may be some number of additional months available in “shadow inventory”, homes which were on the market and pulled off, foreclosures in process and other such “distressed” properties.
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Home sales generally do require people to have jobs, and while layoffs have certainly declined from their peaks they remain stubbornly high. At the same time, businesses have sufficient concerns about the development of demand that they are only hiring at a snail’s pace (albeit better in the last couple months). For the second week in a row, new unemployment claims held above the 400,000 mark; at 403,000 during the week ending April 16, it would appear that this month is shaping up to be a weaker one than the past couple. It is possible that claims are being pushed higher by disruptions in the supply chains, related to the earthquake and tsunami in Japan; if so, they may be slower than they already are to return to the gentle downward slope they have spend much of 2011 on.
The effect of the supply chain trouble seem to have it local manufacturing in the Federal Reserve’s Philadelphia district. Their indicator of activity plunged from a March reading of 43.4, which was the highest reading since the early 1980s, to a more-pedestrian 18.5 for April. While still healthy, it isn’t a level which can promote continuing strong job growth, but it is worth noting that the inflation indicator in the report did ease somewhat, so the slowing of growth may serve to cool some inflationary pressures in input costs in turn.
But things may turn better in the future, if the index of Leading Economic Indicators can be believed. A 0.4% gain in the indicator was seen in the latest report covering March; while this was a decline from a very strong February, it did represent the ninth consecutive increase and does indicate an economy with at least a little forward momentum. Gains over that time have been more erratic than smooth, but improvements are always welcomed. If the LEI is on its game, we should expect continuing growth in GDP in the months just ahead, but the index may be a better mirror of current trends than a crystal ball for the future. We’ll get the first look at first quarter 2011 GDP next week.
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As measured by the weekly Bloomberg Consumer Comfort Index, consumer moods remained mired in the same bleak territory they’ve held since the onset of the recession. The reading for the week ending April 17 was minus 42.6, slightly improved from the prior week’s -43.0 level. Still, moods measured by this tool have wandered between minus 53 and minus 39 for a couple of years now, wandering from really lousy to somewhat less lousy. Other measures have largely done the same, exhibiting little consistent upward traction for very long.
There’s no easy solution or answer except time. For housing, another tax credit or other measures would certainly goose demand, borrowing demand from 2012 into 2011 just as 2010 borrowed some from this year. Even if benefits could be demonstrated, it’s a moot point in times of records deficits and new fiscal prudence. Job growth needs to continue to grind forward, with each new hire driving spending to promote other hiring, and economic recovery needs to broaden and deepen to reach enough people as to produce the kinds of confidence needed to make expensive forward-looking commitments.
The Federal Reserve meets next week to ponder the state of the economy, whether there are indeed inflationary concerns which need addressing, and for the first time perhaps, how the end of QE2 is likely to play out. We’ll not get any change to policy and none is warranted, but we’ll probably get an expression of concern about price pressures.
Aside from the Fed, a busy week of data is on tap. Amid signs of a little bit of cooling in the economy, mortgage rates managed to ease up a little bit this week and we have retreated from recent peaks. Rates are actually closer to their 2011 bottom than the top, but we’ve only managed to wander in a 30 basis point range over the past 16 weeks and we’re pretty solidly in the middle at the moment. Rates should be pretty flat next week, but there might be an increase of a couple of basis points if the data is more solid than it has been recently, of if the Fed statement contains more concern about inflation than they’ve recently expressed.
For an outlook which will take you though May, check out our latest Two-Month Forecast.
There’s a lot going on in mortgage markets this spring and beyond. If you missed it, we wrote an outline to get you up to speed. Take a minute and read HSH’s 2011 Mortgage Market Swirl.
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.