March 16, 2012 — The Federal Reserve acknowledged this week what we’ve been championing for months: The economy is getting better. While their assessment suggests that the growth needles has moved by just a touch — from “modest” to “moderate”, it was enough to spark a strong move in interest rates, and underlying Treasury yields moved considerably higher by week’s end.
Mortgage rates of course will follow, but perhaps not to the same degree; rather the distance between benchmark Treasuries and mortgage rates (”spread”) will probably compress somewhat.
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 rose by just two basis points for the week and now stands at an average 4.24%. The FRMI’s 15-year companion rose by just one basis point (.01%) to finish at an average 3.50%. Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages rose just three basis points, climbing to 3.85%, while the overall average for 5/1 Hybrid ARMs increased by four hundredths of a percentage point, climbing back to 3.03% for the survey period.
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A reasonable proxy for the movement of mortgage rates — the yield on the 10-year Treasury — has hung at or below the two percent level for much of this year with a few exceptions. Those yields flared higher, rising nearly a third of a percentage point between Wednesday and Friday.
If unwelcome, the increase in mortgage rates should be minor, and no one should be surprised. A better economic climate almost always brings higher rates, and a lessening of the troubles in Europe from massive central bank assistance adds to the movement of money from safe havens to more risky assets, driving rates upward. There may also have been some lift from the news that a sizable majority of large banks passed their “stress tests” this week, buttressing the belief that things are getting better. In the statement which accompanied the close of their meeting, the Fed reiterated its present commitment to keep rates low until at least late 2014. We may start to see that time frame moved up if the more solid performance of the economy persists, but probably not for at least two meetings, if not more.
Despite recent improvements in construction and sales, the Fed took pains to say that “The housing sector remains depressed.” Obviously, part of that depression are homeowners who owe more on their mortgage than their home is presently worth. Even with HARP 2.0 finally getting underway, finally allowing some underwater homeowners a chance to refinance, the fact remains that these homeowners will be underwater for years to come.
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 question, then, is “until when”? That’s exactly what HSH’s new
KnowEquity Underwater Mortgage Calculator will reveal. Homeowners can plug in their original mortgage amount and start date, term and rate, and add the present value of their home. The calculator will then reveal how far underwater they are (both dollar amount and percentage) and provide the date when they will be back to a zero percent equity level. KnowEquity When also allows the homeowner to add prepayments and specify price appreciation to see how this shortens the time to get back in the black.
A separate calculator, KnowEquity How asks for the same information, but instead has the homeowner provide a desired date in the future when they want or need to have a specific level of equity — from zero, 10 or 20 percent or even the full original purchase price of their home — and then returns the combination of amortization, prepayment and market price appreciation needed to hit that goal.
Inflation is generally an unwelcome thing, although some inflation in home prices and wages would be a welcome change from where we’ve been in the past few years. In February, prices at the producer level rose by 0.4%, a bit of a spike when compared to 0.1% figure seen in January. That headline number was pressed higher by fuel costs, and excluding them and other volatile components produces a “core” rate for PPI, which rose at a more-muted 0.2% for the month. Over the past year, prices upstream of consumers has risen at a 3.4% “headline” rate, and 2.9% at the “core”.
Much the same news was seen in the Consumer Price Index for February. The CPI rose at a 0.4% clip for the month, goosed by rising gasoline costs, but the core measure expanded by just 0.1%. Over the past year, headline consumer prices are rising at a 2.9% clip, and 2.2% at the “core” level. The Fed has a more-or-less explicit inflation target of 2% for the core rate of inflation, and we have been near there for the past several months now.
Want to know the factors which will influence the housing and mortgage markets this year? You should check out HSH.com’s Outlook: 12 Questions for 2012 It covers everything from expected Fed policy to a long-range forecast for mortgage rates and lots more.
Given that we import far more goods than we export, the 0.4% increase in import prices may press both PPI and CPI a little higher in the months ahead. To be fair, import prices have risen by 5.5% over the past year, but remains on a declining trajectory after a fuel and commodity price spike in late 2010 and early 2011 is falling behind us. Of course, the recent run up in oil may be a signal that we can expect rising costs for those items again before too long. As far as exports go, prices also expanded by 0.4% during the month, but are only 1.5% higher over the past twelve months as our weak dollar keeps us from exporting much by way of inflation.
With Spring getting underway next week, it should be noted that the warm winter weather seems to have had some positive effects. Homebuilders got more opportunities to get projects underway, for example, and there appears to have been an effect on consumer purchases, too. Retail sales for February came in with a gain of 1.1%; a little less than half of that was due to pricier gasoline. The overall number was the highest since last September and may indicate that improved hiring since then is starting to have some positive effects.
After a spurt higher for a week, claims for new unemployment benefits slipped back to 351,000 during the week ending March 10. Improvements here seem to have leveled off a bit, with the last four or five weeks more or less in the same territory. After legging down from an upper 300K range to a middle 300K one, it wouldn’t be unreasonable to see a leveling off. While the economy has no doubt improved, businesses remain cautious as growth is only middling at the moment and there remains much uncertainty.
Industrial Production failed to gain any ground in February. The report for the month showed no gain where a 0.4% rise was expected. Manufacturing did expand during the month, a healthy sign, but utility output was flat (largely due to warmer weather) and mining activity shrank by 1.2% for the month. The lack of upward movement here doesn’t necessarily presage a slowing of the economy, but it would be better to see expansion across the board. Meanwhile, even as use of manufacturing floors continues a slow, steady climb, the percentage of total resources actually in use has leveled off over the past three months.
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|Current Adjustable Rate Mortgage (ARM) Indexes|
At least two local surveys of manufacturing strength point to continuing improvement. The Empire State survey from the New York Federal Reserve nudged 0.5 points higher in March to 20.2, its highest reading since June of 2010. Forecasters expected a decline. Over in the Philadelphia Federal Reserve’s district, their indicator of local economic health moved 2.3 points higher to a value of 12.5 for the month and has sported a steady climb since posting a 3.5 reading back in November.
As measured by the University of Michigan, Consumer Sentiment has generally been improving since last August. However, the trajectory of the improvement has leveled off since the beginning of 2012, and the preliminary reading for March suggests that outlooks may have turned a little darker. After finishing February at 75.3, the Sentiment index shed a full point in the initial March report; if it sticks for the whole month, it would be the first decline since last August. Perhaps rising gasoline prices and the increasingly fractious political scene is impacting attitudes to a greater degree. Since inflation expectations for the next year leapt during the month, its probably the former, although the latter doesn’t help moods much, either.
The higher-frequency Consumer Comfort Index from Bloomberg continued its march higher during the week ending March 11. The minus 33.7 value for the indicator extends it a little further into four-year-high territory even as it remains deeply negative. It has been about five years since we have seen the other side of zero for the CCI, but this indicator spent a lot of time in less negative territory for years before the recession hit. That being the case, we need to move to and hold in a minus 10 to minus 20 range to be considered “near normal”.
After a busy week this week, there’s a smaller bit of new economic data due out next week. That said, it’s housing, housing, housing. A fresh report from the National Association of Homebuilders is due, as are Housing Starts and Building Permits and reports covering sales of both existing and new homes. We should get a solid sense of whether recent gains (at least through February) are setting the stage for a Spring homebuying season. We believe that perhaps the first one in a number of years is likely to come, but we have been generally more optimistic than some.
Higher mortgage rates will greet those reports. We saw a little bump for the week this week, but there should be some more yet to show as we roll through next week. Best to figure on perhaps an additional eight to ten basis point rise in the average by the time the week is out.
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.