May 20, 2011 — Mortgage rates remain at the most favorable levels of the year, not that buyers are exactly flocking to snap up cut-price homes. With rates at these levels, refinance activity is picking up a little bit, though. The economy is exhibiting more signs of recent slowness and there doesn’t seek to be any new forward momentum forming.
In the midst of this, the Federal Reserve continues to ponder how it will act to manipulate monetary policy in the coming months and years.
HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages slipped back by a single basis point, landing at an average of 4.90%, a new 2011 low. FHA-backed 30-year fixed-rate mortgages are arguably driving whatever sales of homes to first-time homebuyers are occurring, and also give low-equity refinancers an option to pursue. Rates for these product slipped back by four basis points to finish the week at 4.51%. Given the wide differential in interest rates, at least some borrowers should be considering hybrid 5/1 ARMs; whose a five-year fixed periods now average just 3.52%, down two hundredths of a percentage point from last week. Certainly, there are savings to be had for borrowers willing to accept some future interest-rate risk.
Minutes from the April 26-27 Federal Reserve Open market Committee were released this week. At this meeting, there were involved discussions on how the Fed would eventually remove the extreme level of “policy accommodation” they have employed to spur the economy. At least one of Murphy’s Laws is “It is far easier to get into a thing than to get out it” and this is true for unusual monetary policy as well.
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While QE2 — the Fed’s program of purchasing an _additional_ $600 billion of Treasury debt — is coming to an end next month, it’s worth remembering that this was simply added onto other supports in place, such as the re-investment of money the Fed is earning on the Mortgage-Backed Securities and Treasuries it purchased in 2008 through 2010. Those funds are already being re-invested in Treasuries, providing a reasonable level of demand to help keep interest rates low.
But how to wind down these kinds of operations? The minutes of the meeting suggest that the Fed will start trimming these supports with an increase in the Federal Funds rate from today’s near-zero levels before embarking on sales or retirement of the assets they are holding. At some point, all the mortgages they hold will be returned into the private market, and sales are expected both structured and announced well in advance… and even then, the Fed will remains sensitive to conditions so as not to disturb the markets needlessly.
No decisions were made on the timing or ultimate methodology which will be utilized. The Fed will likely use combinations of paying interest in reserves, selling assets, principal reinvestment and manipulating the Federal Funds and Discount Rates to achieve its goals.
One thing seems fairly clear, though: Given the state of the economy, presently groaning under high food and gasoline prices, it is unlikely that anything more than the expiry of QE2 is coming anytime soon, unless inflation pressures begin to spread and deepen. It’s hard to say at this point, but the first change to policy isn’t likely to happen until later this year, at the earliest.
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.
Fresh economic data out this week served to reinforce the view that the slogging recovery would continue. Since a fair bit of the recovery has been driven by a strong factory sector, any cooling in indicators which track manufacturing need to be watched carefully, since at present, the consumer is not yet in a position to drive the recovery to any great degree.
Industrial Production decelerated in April, falling from a 0.4% increase in March to no change at all for the month. Manufacturing output eased by 0.4%, pulled back by a slower automobile sector still struggling with Japan-earthquake related supply issues. Mining concerns put out 0.8% more during the month, and utility production rose by 1.7% for the period. For only the second time since the recovery began, the percentage of factory floors in active use declined; the 0.1% dip in April isn’t much of a fall, but perhaps a levelling-off instead.
That’s to be hoped for, but there may be some additional slippage when we get to next month if other indicators prove true. Both the New York and Philadelphia Federal Reserve banks reported in this week with their May surveys, and activity in the Empire State slowed appreciably from a reading of 21.7 in April to 11.9 in May. Over in the Philly market, a much more pronounced downshift was seen, with their indicator slumping to a value of 3.9, just above breakeven and a sizable change from the 18.5 seen in April. The two surveys reported mixed inflation and employment trends, as well.
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Not mixed at all — completely unambiguous, actually — were the latest reports on housing; all were equally dismal. The National Association of Homebuilders index of member sentiment gave up a lone tick, falling from 17 to 16 for the May period. April’s value of 17 was the highest since last May, when sales were still being goosed by homebuyer tax credits so what little spark was seen a month ago has now been extinguished. That said, single-family sales did tick one notch higher, as did traffic levels, but indicators of future activity downshifted by two.
A less-spirited set of moods among homebuilders is to be expected, given the condition of the housing market. Housing Starts declined by better than 10% when comparing April to March, landing with a thud at a 523,000 annualized rate of initiation. The 5.1% fall in single-family starts was dwarfed by the 24% drop in multifamily starts. Building permits, an indicator of future activity, also slid to a 551,000 annualized pace and there are few signs of any impending boom in home building.
Mortgage delinquencies have leveled off, though, which is a signal that the worst of the mortgage crisis may be finally starting to pass us by. A combination of loans failing out of the system through foreclosure, loan modifications and timely refinances are combining to keep fewer loans from failing, but the rate of struggling homeowners remains very elevated and probably will for some time yet to come.
Of course, it is those homes falling into foreclosure which is serving to drive down prices. Since there is little unsated demand among borrowers who can qualify for loans, inventory levels remain high, sellers remain on the defensive and plenty of wanna-be homebuyers lack the confidence or the credentials to get into the game.
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That’s clearly seen in the latest report covering sales of Existing Homes, which were sold at an annualized rate of just 5.05 million (annualized) in April, down from an already sluggish pace of 5.09m for March. Prices were down by another 5% compared with the year ago period, and the decline of buyers in the market means there are now some 9.2 months of available inventory; about 5-6 months of supply is considered normal, and the excess supply will continue to pressure home prices downward.
Looking ahead doesn’t suggest fast any economic improvement, either. The Conference Board’s index of Leading Economic Indicators posted a 0.3% decline for April, its first fall in ten months. March’s was ratcheted upward, though to a 0.7% gain, possibly balancing out some of the fall. To the extent that the LEI forecasts future activity we might expect a slowing of the economy in the months just ahead, but more likely, the LEI is reflecting what was a fairly slow April all around.
April was certainly slow on the labor front, as well, when we saw a considerable upward flare in initial unemployment claims, which topped out at a high of 478,000 during the last week of the month. Since then, we’ve seen some steady improvement, and during the week ending May 14, only 409,000 new claims were filed at state windows. It is not yet clear us the record-setting flooding along the Mississippi river will push claims back up in the weeks ahead, but they would be temporary jobs displacements at worst.
Consumer moods soured a little more, according to Bloomberg. The Consumer Comfort Index moved back towards recession-level lows, with the indicator moving down by three points to minus 49 for the week ending May 15. So long as gasoline prices remain elevated and jobs scarce, moods probably will remain quite subdued.
Mortgage rates are low and favorable and affordability is great. Few folks seem to care, save some late-to-the-game refinancers. There doesn’t seem to be anything on the immediate horizon to drive them strongly in one way or the others, so we will probably see very little change in rates again next week.
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.
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