July 15, 2011 — As expected, mortgage interest rates eased back a little this week. At least some economic optimism was crushed by June’s weak employment report, driving home the point that the weak expansion may persist for a while longer yet.
While minutes from the last Federal Reserve Open Market Committee spelled out a blueprint for the Fed to begin removing the extraordinary support provided since the onset of the recession, comments by Fed Chairman Ben Bernanke seemed to suggest that the Fed was considering another round of quantitative easing. However, Mr. Bernanke clarified his remarks on Thursday and essentially that the Fed has no imminent plans for more support, but instead wants to observe the economy to see if stronger growth begins to form.
For now, at least, that’s a future consideration, and the economic climate is soft, at best. This in turn is good for potential homebuyers and refinancers.
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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 declined by eleven basis points, moving to an average of 4.77%. FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers, shed eight basis points to close the week at 4.44%. Given the wide differential in interest rates, at least some borrowers should be considering hybrid 5/1 ARMs. Those five-year fixed period now average just 3.39%, down eight 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.
Mr. Bernanke stirred the markets first by saying that “the possibility remains that the economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.” How the markets came to interpret this as any kind of immediate plan for stimulus is beyond us; the remarks are similar to those made any number of times and suggest that the Fed will do what it needs to do if conditions warrant. No Fed Chairman worth his weight would expressly tip his hand as to the intention of the Fed, no would he be likely to say that the Fed is prepared to stand idly by while the economy collapses.
Given the market reaction to his comments on Wednesday, he clarified on Thursday. “We are not prepared at this point to take further action,” said Mr. Bernanke. “We’d like to see if, in fact, the economy does pick up as we are expecting.” The Fed’s forecasts call for an acceleration of GDP from the present 1.8% to closer to 3% by year’s end.
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.
Here’s hoping the Fed is correct. There was a considerable loss of economic momentum during the Spring, given the catastrophe in Japan and all kinds of domestic weather-related business interruptions. The end of the Fed’s $600 billion bond-buying program may serve to intensify the slowness somewhat, and the debt-ceiling impasse is adding to nervousness. Add to that the fiscal troubles in Greece, monetary policy tightening in China and Irish debt downgraded to junk and it is clear that there is a fair mountain to climb over the next six-month period.
After pushing higher for months, inflation has stopped rising. Perhaps more important in creating the slowdown in the economy has been spiraling oil prices, pressing food and energy costs much higher and robbing billions in disposable income from the economy. The easing of oil prices has begun to filter into the everyday pocketbook of consumers, but purchasing power has only been partly restored at this point. Still-strong oil prices in May expanded the nation’s imbalance of trade, widening the gap to $50.2 billion as the dollar value of imports expanded while the value of our imports contracted somewhat.
That may re-trench somewhat in June. Prices of imported goods fell by 0.5% during the month, their first decline since June of last year, while export prices nudged upward by 0.1%. Even with the leveling, though, import costs are up by 13.6% over the past twelve months, while export prices have moved 9.9% upward to close some of the gap.
This recent falloff in price pressures is partially reflected in the Producer and Consumer Price indexes for June. The PPI — a measure of costs upstream of consumers — declined by 0.4% during the month at its “headline” reading. That top-line figure includes wildly-variable food and energy inputs and can be erratic; excluding them leases so-called “core” measures of inflation. In a reversal of the headline reading, core PPI rose by 0.3%, and these measures of prices have climbed 7% and 2.3% over the past year, respectively.
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The Consumer Price Index told much the same story. In June, headline CPI eased by 0.2%, but the core moved upward by 0.3%. Consumer inflation has climbed by 3.4% at the headline and 1.6% at the core over the past 12 months, and the core reading is trending its way toward the Fed’s implicit limit of 2%. The annual core CPI figure was the highest since December of 2009, and was as low as an annualized figure of 0.6% as recently as December of 2010. Given the upward trend for core prices — some of course still reflecting the insidious and pervasive effects of the earlier spike in energy costs — the Fed is right in expressing caution about adding any additional stimulus fuel to the fire at the moment.
Given the slowdown in hiring of the Spring and the higher level of layoffs during that time, it’s little wonder that consumers don’t much feel like shopping. Retail sales ticked just 0.1% higher during June, but that figure was dragged backward by sluggish auto sales and easing gasoline prices. Without them, a meager 0.2% increase was seen and gains were scattered around to various categories. Although claims for new unemployment benefits declined to 405,000 during the week ending July 9, the July 4 holiday and seasonal distortions related to auto-plant retooling are probably skewing the number to some degree. The trend has been somewhat higher than that, and regardless, we need to move closer to 300K than to 400K to be in a recovering labor market.
As noted in various surveys, the downturn in the spring certainly affected manufacturers. The latest to reflect the troubles was the New York Fed’s report which covers activity in the Empire State. While a recovery of sorts, the negative 3.8% reading for July was little better than June’s -7.8% and the slowdown is evident starting the third quarter of 2011. This cooling was also reflected in the report covering Industrial Production for June; the 0.2% gain came from higher mining and especially utility output as power demand to run air conditioners came in response to persistently hot weather over a large swath of the country. Manufacturing’s contribution to the increase was nil.
“Nil” might also be an apt description for the amount of enthusiasm consumers feel about their situations. The preliminary July survey of Consumer Sentiment from the University of Michigan Survey of Consumers found a 7.7-point drop in their indicator, confounding forecasts of a slight increase and what for the moment is the lowest figure in this series since March 2009. Expectation of inflation noted in the report eased off to some degree, but there is a decided lack of enthusiasm for both present conditions and even less for the near-term future. A troubled economy, poor job market, high gas prices and depressed property values are plenty to consider for most, but adding to the mess is the political wrangling over the debt ceiling, deficits and spending.
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On a higher-frequency note, the weekly Bloomberg Consumer Comfort Index moved a little higher in its dark multi-year range, rising to minus 43.9 during the week ending July 10, up from minus 45.5, and an identically poor reading as that seen two weeks ago.
As long as there are domestic and international troubles so fully in play, a sustained or sustainable rise in interest rates seems unlikely. Investor money is sloshing from hope (equities) to despair (bonds), with the see-saw tipping one way or the other, and generally to a greater degree than is warranted. Now seven quarters old (probably eight quarters, actually), the recovery clearly lacks much upward strength, but it does have at least some meager built-in momentum. Will the expected upturn come as the year progresses? Conditions seem to suggest that it is possible, provided energy prices remain level or retreat, and hiring picks up from the near standstill seen in June. Lower gasoline and food costs could unleash some billions into the economy as we move forward, and there are trillions of dollars being held out there waiting for some clarity as to the state of governments here and around the world. We should also not forget about the effects of changing regulations which govern markets, tax structures and unknown built-in costs from new government policies. Just as consumers are reluctant to spend, given uncertain times, businesses too are reluctant to spend given the uncertainties they face, including unknown final demand.
The welcome dip in mortgage rates this week halted the minor rise which really only lasted about a week. We are still a little above June bottoms, and will remain there next week, when mortgage rates will probably nudge up a couple of basis points.
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.