HSH MarketTrends

Economy Improving, Rates Steady

March 2, 2012 — In a perfect recovery, economic growth would come in bursts above levels needed to foment a self-sustaining recovery without extraordinary supports. That’s not been the case with this recovery, at least to date, but perhaps those days are approaching more quickly than previously expected.

That’s not to make a claim that we are there yet, or that an even and steady gait is to be expected, or that supports will suddenly disappear,
only that forward momentum seems to be occurring, the kind which might help us power though whatever headwinds might come. They may yet prove considerable but for the moment don’t appear to be slowing us down much.

Some supports come in the form of Federal Reserve’s policies to keep long-term interest rates and mortgage rates low. Although rates did move a tad higher in the last couple of weeks, grinding just above record lows, they remain a powerful inducement to finance or refinance a home.

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 by three basis points (.03%) from last week, easing to an average 4.22%. The FRMI’s 15-year companion gave up just one basis point of last week’s rise to finish the weekly survey at an average 3.50%. Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages declined by a single hundredth of a percentage point to 3.85%, and the overall average for 5/1 Hybrid ARMs followed suit, falling one basis points to 3.01%.

See this week’s Statistical Release and Trend Graphs.

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Mortgage rates are only one component of the transaction, though. Fees and insurance costs of course play a role as well. Housing and Urban Development (HUD) announced this week an increase in FHA insurance premiums, starting April 1. The required fee to get into the FHA insurance pool is rising from 1% of the loan amount to 1.75%, and annual recurring premiums are rising by about 10% overall. The FHA is looking for any way possible to shore up its insurance pool, which has been decimated by losses from loans in the early years of the housing crisis, largely 2007-2009. While these are not huge increases, it does mean that it will be a little tougher for some borrowers to get cheap, low-downpayment loans. The move is also one means of pushing borrowers back toward private lenders, most notably “jumbo” borrowers, as those higher MI costs are a deterrent to using an FHA mortgage.

This week, Federal Reserve Chairman Ben Bernanke spoke before Congress in semiannual testimony on monetary policy. His assessment of present conditions was considerably more upbeat than at times over the last couple of years. The tenor of his remarks left an impression that perhaps the Fed’s expectation of keeping short-term interest rates low until late 2014 might not happen, and that the Fed might begin to adjust policy sooner than that. The Fed originally maintained that rates would be low “through mid-2013″, and that timeline might be more in play at the moment than when the Fed extended it back in January. It’s important to remember that the Fed outlook for rates is an expectation of where they think we’ll be, not a guarantee that we will be there. It’s also worth noting that “exceptionally low levels” for the Federal Funds rate doesn’t mean the will remain unchanged though that time.

The Fed’s latest survey of regional economic conditions — called the Beige Book for the color of its cover — again reported a “modest to moderate” pace of economic expansion in the six week period which ended mid-February. The report noted that “residential real estate activity increased modestly in most districts” and that some expectations of future home sales had moved higher. This was an improvement over the “very steady at low levels” noted in the January report.

Part of that improvement has been seen in improving home sales. Thin new home inventory levels have required at least some building over the last few months. While overall spending for construction projects slipped by 0.1% in January, that was due to a 1.5% decline in commercial projects and a 0.2% decline in public outlays. Spending for residential projects expanded by 1.8% for the month, the sixth consecutive month of rising spending for home building. After a several year period as a drag on growth, homebuilding seems to be making a more reliable contribution.

The sum of the nation’s output — Gross Domestic Product — rose by a better-than-expected 3% in the final quarter of 2011. The preliminary report on GDP saw growth ratcheted up by 0.2% for the period, and is a stout increase from the 1.8% seen in 3Q11. That boost should keep us moving in the first quarter of 2012, but some of the gain was probably related to purchases of certain goods so that businesses could receive more favorable tax handling. That is likely the reason for the 4% decline in durable goods orders for January. Orders had put in back-to-back strong months in November and December, a little unusual pattern compared to the see-saw of increases and decreases normally seen in this particular series of data. With a solid backdrop, the decline for January isn’t particularly concerning unless subsequent months are also weak.

The dip in the Institute for Supply Management’s report on manufacturing health does bear a little attention, though. The indicator slipped by 1.7 points to land at 52.4 for February, setting it back to levels more commonly seen last summer and fall. While still in reasonably solid territory, the figure was dragged backward by an easing in new orders and a softening in employment components. Those still remain positive, although less so in the latest month. The ISM’s report covering the largest component of the economy (non-manufacturing businesses) is due next week.

Hitting a one-year high was the indicator for activity in the Richmond Federal Reserve district. The eight point rise to a reading of 20 says that manufacturing is gaining strength in the region, with orders and employment both pushing higher in the Fifth District.

Orders may again move higher if present trends in vehicle sales persist. In February, AutoData reported that new cars and trucks sold at an annualized 15.1 million rate, the highest such figure in four years and a jump of one million annualized over last month. Difficulty getting supply after last year’s tsunami disaster in Japan set back auto sales, but they have now been on a pretty steady upward trajectory since last June. That bodes well for any number of wide-ranging businesses connected to the various supply chains which produce autos and trucks and brightens the hiring picture somewhat.

The employment report for February is due next Friday. If present trends in unemployment benefits are any indication and can be trusted, we should see perhaps 200,000 new jobs created during the month and a steady unemployment rate at 8.3%. New claims for benefits appear to have settled at a new level in the 350,000 range, and the week ending February 26 found 351,000 new applications filed at state windows. We will need continued gains in hiring and spending if we hope to move from economic recovery to actual expansion.

Some gains in income and spending were seen in January. Personal incomes rose a little less than expected, gaining by 0.3% for the month, but personal consumption expenditures rose by just 0.2%. Usually, that balance of activity will see the nation’s rate of saving rise, but if managed to slip by 0.1% to a 4.6% rate instead. Consumers have dipped into their savings at times during the recovery, but the present level remains pretty solid.

Our Statistical Release features charts and graphs for 11 products, including Hybrid ARMs. Our state-by-state statistics are now here. Current Adjustable Rate Mortgage (ARM) Indexes Index For the Week Ending Previous Year Feb 24 Jan 27 Feb 25 6-Mo. TCM 0.14% 0.07% 0.16% 1-Yr. TCM 0.17% 0.12% 0.27% 3-Yr. TCM 0.43% 0.35% 1.23% 5-Yr. TCM 0.89% 0.84% 2.18% FHFB NMCR 4.25% 4.15% 4.58% SAIF 11th Dist. COF 1.224% 1.221% 1.508% HSH Nat’l Avg. Offer Rate 4.25% 4.28% 5.23%

Solidifying, too, are consumer moods. As measured by the Conference Board, Consumer Confidence rose by over nine points in February, landing at a one-year high value of 70.8 for the month. On a higher frequency note, the weekly Bloomberg Consumer Comfort Index had stormed to recovery highs last week, but eased off by 0.4 points during the week ending February 26. Still, there can be no doubt that the warming economic climate has started to be reflected in consumer attitudes, even if that yet have a long road to travel to regain pre-recession levels.

While we believe that interest rates will firm somewhat as we head toward Spring — see our latest two-month forecast for that — it is more likely to be a modest grind higher rather than a leap, at least at this stage of the game. While Mr. Bernanke expects that the inflation caused by rising gasoline prices will be transient, that doesn’t mean it won’t foster more of a slowdown in the economy than he thinks. Economic growth began rising last year when prices began falling, and the strongest growth took place when the lowest prices were in place. If the rise causes economic drag as we wend toward Summer that would tend to lengthen the period of rates being able to hold at or near these low levels.

In looking at a closer time period like next week, we think that there will continue to be a little more upward pressure on mortgage rates than downward. A two to three basis point rise might occur, perhaps a bit more if the ISM or employment report surprises to the upside.

For an longer-range outlook for rates and the economy, one which will take you up until mid-April, have a look at our new Two-Month Forecast.

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