June 24, 2011 — The Federal Reserve Open Market Committee closed a two-day meeting on Wednesday, releasing updates to their economic projections for the future. While acknowledging an economy recovering “somewhat more slowly than the Committee had expected”, the Fed believes that at least some of the issues keeping the economy from moving forward are likely to prove transitory, and that signs of improvement will start to show later this year. Should the recent decline in oil and especially gasoline prices stick around for a while, this would eventually start to keep billions of dollars out of the gas tank and back in productive use across the economy, moving growth higher.
The program of purchasing $600B of Treasury obligations (QE2) will come to an end at month’s end with no extension or replacement. Fed Chairman Bernanke noted that he believed the program was important in that it helped stave off the potential for deflation and may have influenced borrowing costs lower for any number of audiences. Mortgage interest rates may have received some minor ancillary benefits in that regard.
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 was unchanged from last week, landing at an average of 4.77%. 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 products moved two basis points lower to close the week at 4.42%. Given the wide differential in interest rates, at least some borrowers should be considering hybrid 5/1 ARMs; whose five-year fixed periods now averages just 3.37%, down by just two hundredths of a percentage point from last week. A borrower with a $300,000 loan willing to accept the risk of higher future payments would save about $20,000 over the next five years.
Want to get Market Trends as soon as it’s published on Friday? Get it via email — subscribe here!
Mortgage rates have recently moved down to 2011 lows, and a little flare of refinancing activity has been going on as a result. Perhaps these low rates this will spark some home sales, which could use any lift they can get at this point. In May, existing homes sold at an annualized rate of 4.81 million units, the weakest reading since November 2010. The 3.8% decline was largely due to a falloff in sales in the Midwest and southern regions, but those may have been influenced by terrible storms and widespread flooding up and down the Mississippi and its tributaries during the month. With the slip in sales, inventory levels rose to 9.3 months; normal is perhaps a six-month supply.
Sales of new homes slipped a little more in May, easing to a 319,000 annualized rate of sale. Sales had been on a mild upswing, rising from 280,000 in February to 323,000 in April but there is obviously no momentum to be seen here. The leveling of demand also served to level off available supply at about six months. The new home market has been especially challenged over the last couple of years, as plenty of low-priced foreclosed homes — some only a few years old themselves — compete for buyers in a difficult market. However, with absolute supplies of built and ready-to-sell units still dwindling, construction spending on residential projects will start to contribute more to economic growth before too much longer.
How quickly that occurs depends upon the trajectory of economic growth; the latest reading of the Chicago Federal Reserve’s National Activity Index came in at -0.45 for June. This was actually an improvement relative to the -0.56 seen in May, but still points to an economy which is gaining no traction. The May and June readings were the first back-to-back negatives since October and November of last year. The NAI is an amalgam of some eighty-five economic indicators, and points to whether the economy is growing at, above or below its “potential”, believed to be about a annual GDP rate of 2.8% or thereabouts.
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.
While we won’t get a look at second quarter 2011 GDP until the end of next month, the final reading of GDP from the first quarter of 2011 was not much to write home about. The quarter’s 1.9% pace remains far below the rate needed to foster job growth, and while there have now been seven quarters on the positive side of the ledger, only the fourth quarter of 2009’s five percent rate could be considered to be robust. With little in the way of economic stimulus available, and the benefit of low interest rates limited to those who need to (and can qualify) to borrow money, we seem likely to have protracted and sub-par recovery.
Consumers would spend and perhaps even borrow for major purchases if the labor market was on an improving bent. For the week ending June 18, another 429,000 first-time applications for unemployment benefits were filed at state windows, a deterioration of 9,000 from last week.
Earlier this year, new claims were trending downward in a hopeful pattern, but that reversed in April and has been holding above the 400,000 mark ever since. We’ll need to see claims falling toward the 300,000 level to know the labor market recovery is solid.
HSH has put together some new content you should check out. If you haven’t been to HSH.com lately, you’ve missed seeing our new guides and videos to help both buyers and sellers prepare for today’s rough-and-tumble real estate market.
Next week, the Fed’s extraordinary program of purchasing $600 billion in Treasury debt (QE2) comes to a close. More discussions and plans for the Fed to wind down their massive holdings of mortgages and treasuries will come in time, but for the moment big shifts in one direction or another by the Fed are most unlikely. Also, after a rough-and-tumble couple of weeks in the stock markets, investors do seem to be peeking their heads out from under the covers; any significant improvement in the major stock indexes would come at the expense of Treasuries, driving interest rates a little higher then they have been of late.
The Fed does “expect the pace of the recovery to pick up over the coming quarters”, but Mr. Bernanke took pains to note that the interest rates the Fed controls would remain extraordinarily low for an “extended period of time.” When pressed about how long an extended period might be, he offered that this time frame generally encompasses two to three Federal Reserve meetings, but depends upon the outlook and incoming data. For the moment, we should expect no change to policy until November or even December at the earliest, and only then if things have improved a good bit.
Of course, the Fed will be watching carefully to see if there is any faltering from an already slow economic pace, and would never rule out additional stimulus if the need should arise. It was noted in the release that “The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.”
Visit the HSH Finance blog for daily updates, consumer tips, and other things you need to know.
And follow us on Twitter for even more need-to-know news!
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
|ARM indexes, APOR rates, Libor, usury ceilings, & more — all available from ARMindexes.com.
Email and webservice delivery are available.
Sources: FRB, OTS, HSH Associates.
While better times may be in front of us as we move past a soft patch in the recovery, we still have to plow though a fair pile of data covering this weak period. This will serve to temper any growing enthusiasm for at least the moment, and next week’s reports will continue to be fairly glum. As such, we expect little change to mortgage rates as we start the first full week of Summer.
For an outlook which will take you up until early August, have a look at our new 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.