April 27, 2012 — By a whisker, mortgage interest rates eased to new record low levels this week, as neither the economy nor the Federal Reserve gave any indication that there is a reason for them to rise at the moment. The economic climate has turned considerably more mixed over the last two months, with rather more signs of deceleration than acceleration. It may be only a pause, but it is possible that modest growth may be all we can expect for a while to come yet. To be fair, the new record for rates is just a single basis point lower than the old, and there was little move at all this week.
As they have been, rock-bottom mortgage rates continue to do what they can to support the housing industry and improve household finances, but there are limits to how much support they can provide.
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 eased by two basis points (0.02%) for the week, and at 4.17%, now stands just a single tick below its record low. The FRMI’s 15-year companion shed three basis points (.03%), also moving just below former record lows. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages dropped by another lone basis point to 3.80%, a fresh low-water mark, while the overall average for 5/1 Hybrid ARMs lost two hundredth of a percentage point, landing at an average 2.97% for the survey period, its lowest level ever.
See this week’s Statistical Release and Trend Graphs.
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The Federal Reserve Open Market Committee met this week to discuss the economy and decide whether any present policies should be changed. No changes were expected, and none came; the only new light shed as a result of the meeting is that at least two more Fed Governors moved up their forecasts of when the first changes to the Federal Funds rate will occur. Formerly, there were two outliers who believed that 2016 might bring the first such move, but they seem to have now shifted into the 2015 camp, and others slid from the 2015 to the 2014 group. Since the Fed has stated on more than one occasion that it expects to keep rates low well into 2014, this came as only a mild surprise at best.
The Fed’s Operation Twist comes to a close in just about nine weeks’ time, but there was nothing in the statement which closed the meeting (nor in Fed Chairman Bernanke’s subsequent press conference) to indicate that the program would be replaced, allowed to expire or extended, but only that the Fed stands ready to change policy if needed and as suggested by incoming data. As the warm start to 2012 has faded somewhat, that suggestion has moved from “less is needed” earlier this year to now somewhat more is warranted. Although the Fed will not tip its hand anytime soon, we more fully explore the Fed’s choices in the latest two-month forecast.
We know that sales of homes have been better this year than last. That said, they are still rather weak, and of late, have begun to soften up a little bit. This change may or may not be due to the unusually warm winter moving some purchases up to January and February, but there was some slowing seen in March. Sales of new homes finished the month at an annualized pace of 328,000, down from an upwardly-revised 353,000 in February. With the dip this month, we have settled back to about January levels, but the actual number of units built and ready for sale continued its steady decline. At 144,000 homes, it is the lowest level since records were kept, and represents a 5.3 month supply, a little tighter than what is considered normal.
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.
Those tight supplies means that as demand returns new construction must occur to meet that need. This is a good thing, but there remains an open question as to when strong and recurring demand will come, given the soft state of the economy. According to the initial report on Gross Domestic Product, the economy grew at just a 2.2% rate in the first quarter of 2012, down from a 3% rate in the last quarter of 2011. While there’s nothing wrong with a 2.2% rate for GDP, it is insufficient to drive down unemployment and foster the kind of environment where people want or need to purchase homes. Mortgage rates may be great, and affordability may be outstanding, but there are finite number of potential homebuyers in this rather still-tentative recovery.
Reflective of the slowing in the first quarter is an increase in initial unemployment claims. After a more-or-less downward drift though the first three months of the year, initial claims settled in the low 360,000 range. Then came April, and we flared about 25,000 claims higher than that and have held at this new level for three weeks now, with the week ending April 21 standing at 388,000 new claims for assistance. This change in pattern calls into question the strength of the labor market, which managed only 120,000 new hires in March. If the weekly claims numbers are any indication, we may struggle to attain even that modest level when the April employment report comes next Friday.
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At least the cost of adding a new employee onto the books is holding fairly steady. The Employment Cost Index rose by 0.4% in the fourth quarter of 2011, below expectations and a smaller increase than seen in the third quarter. The indicator includes both the cost of salary and benefit costs; wages improved by 0.5% for the month, and are 1.7% above year-ago levels and gently rising. Benefit costs were also up by 0.5%, but the 2.7% annualized rate of increase is actually on a downward path at the moment.
There was little in the other new data to suggest the forming of any kind of strong counter to the slower pace of growth. The Chicago Federal Reserve’s National Activity Index, an amalgam of some 85 economic indicators, moved to a minus 0.29 value for March after sporting a much firmer +0.07 in February. The NAI reflects an economy growing above or below its “potential”, believed to be about a 2.8% GDP. The slip into negative territory continues a four-month slide and looks to leave us at about a 2% growth rate or less, should the trend persist.
Orders for goods intended to last longer than three years shrank by 4.2% in March. The decline in durable goods orders was driven downward by a sharp decline in orders for new aircraft, but even excluding them left a 1.1% decline. Business-related ordering was also less, slipping by 0.8% for the month. While orders for durable goods are often erratic, expanding one month then contracting the next, two of the last three months have featured unusually sharp declines.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Two regional outlooks of manufacturing health were a mixed bag. In the Richmond Federal Reserve district, their indicator of health doubled to a reading of 14 in April. Sub-indicators for employment and orders both moved higher, and activity has been pretty solid here for the last four to five months. That’s less the case in the Kansas City region, where there has been a steady decline in activity since a recent peak was seen in February. The last four values have read 7, 13, 9, and finally 3 for April, so the pattern of weakening is pretty clear. In the district, new orders slumped, but employment held steady for the month.
Consumer moods remain tepid at best. The Bloomberg Consumer Comfort Index fell by a sizable 4.8 points in the week ending April 22, ending a multi-week string of holding at about four-year highs. The slippage returns us to levels last reported for the week of March 4. Other lower-frequency measures of happiness were about flat; the Conference Board’s survey of Consumer Confidence came in at a 69.2 mark for April, down 0.3 from March and essentially steady since February. The final review of Consumer Sentiment from the University of Michigan survey nudged 0.2 points higher to 76.4 for the month, but the upward trend here stalled back in January and has barely moved since. Although moods and attitudes are no doubt better than they were last year, there’s little here to suggest any imminent outbreak of the kind of happiness which might see wallets opening. At best, cautious optimism rules the day.
The calendar turns to May next week. As always, the first week of the month brings a slew of fresh data. Of note is a new Senior Loan Officer Opinion survey from the Fed, which will probably detail modestly easing lending conditions for businesses and possibly some in residential lending, too. Sales of new cars, the latest ISM indexes, income, spending and productivity reports all precede the employment report. For many of these, the April data seems likely to be just a little better than March was, but not enough to drive interest rates strongly in an upward direction. If the data is not much better (or not as good), some pressure on the Fed to “do something” is likely to start to grow.
Mortgage rates should be fairly flat again next week.
For an longer-range outlook for rates and the economy, one which will take you up until late June, have a look at our new Two-Month Forecast.
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