January 29, 2010 — As expected, the recent slide in mortgage rates came to a soft halt this week. The economic picture seems to have brightened to some degree, and there were plenty of non-economic items to keep the attention of market participants.
This week, the overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI rose by a single basis point (0.01%) to 5.42%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. It also has a Hybrid 5/1 ARM counterpart, which shed six basis points during the latest survey cycle, landing at 4.59% for the week. Conforming 30-year fixed mortgage rates eased by a couple of basis points while jumbos moved a like amount upward.
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After a contentious process, Ben Bernanke was re-confirmed as Chairman of the Federal Reserve by a 70-30 vote. While there was an uncertain period over the last couple of weeks during which some doubted that he would keep the position — and the ‘yea’ vote was lighter than it has been for previous Fed-chairman votes — Bernanke did prevail. Still, given the less-than-enthusiastic response by Congress, he may have a challenging road ahead in trying to keep “reformers” at bay while simultaneously trying to exit various support programs and steer the economy away from inflationary trouble. It’s going to be a difficult time for the Fed, as threats to its independence seem certain to grow in the months ahead. Before too long, the Fed will need to turn its focus from trying to support financial markets to one more concerned about inflation.
Dates for the expiry of a number of supports came at the close of the Federal Reserve Open Market Committee meeting this week. Noting that “economic activity has continued to strengthen and that the deterioration in the labor market is abating,” the Fed reiterated that its MBS purchase program will be completed as scheduled on March 31, 2010. They also announced that the TSLF, PDFC, CPFF and ABCP programs will end on February 1 as previously announced; that only two more auctions of cash will be available through its Term Auctions Facility; and that the TALF will end later this year, too. Collectively, this is phase one of the “exit strategy” for the Fed, which will then turn to managing its bloated balance sheet, cautiously raising interest rates, and figuring out how conducting monetary policy will be affected by its decision to pay interest on bank reserves parked with the Fed. That’s expected to keep too much money from sloshing into the system, which could make any inflation troubles worse. That’s still off in the future, thankfully.
President Obama gave his first State of the Union address this week. One item which stood out in our mind was his promise that “This year, we’ll step up refinancings so that homeowners can move into more affordable mortgages.” Given that a sizable number of folks already refinanced this year into mortgage rates at near-50-year lows, and that mortgage rates are both expected and likely to rise as support programs wane and the economy strengthens, we wonder just how this is to be accomplished. Perhaps we were slightly off the mark when we suggested that the debt and loss limits removed from Fannie Mae and Freddie Mac were to promote more loan modifications. Is there some form of new GSE-led refinance program in the works? We’ll have to see what develops.
With regard to loan mods, there was a change to the HAMP program this week which should improve the percentage of loans which are failing to make it from temporary to permanent modification status. Instead of a “sign up and send the docs later” approach — which has resulted in a huge fallout rate — a borrower who seeks a loan mod will now have to provide needed docs at the time of initiation. As a result, fewer borrowers who have no hope of getting a permanent mod will be entered into the program, but the ones that do are more likely to succeed. Of course, it also means that more potential Deed-in-Lieu, Short-Sale and Foreclosure transactions will start to happen that much sooner, too.
Daily FRMI rates are available on HSH.com.
Check out our weekly Statistical Release here (and archives here).
Home sales fell off sharply in December. New Home Sales shrank to just a 342,000 annualized rate of sale during the month. Some of the decline here could be laid at the feet of the off-again, on-again nature of the tax credit, or even seasonal issues, but the fact is that the numbers are really quite lousy. The number of months of inventory available at the present rate of sale moved back upward to 8.1 months, although the median price of a home sold during the month did firm somewhat. As well, the actual number of units built and ready to go continued to decline, and now stands at just 231,000 units available, the smallest number of the recession/recovery to date.
Existing Home Sales, a much larger portion of the market, suffered much the same fate. After a tax-credit-caused goose two months ago, the pace of sales return back to trend in December, declining by 16% to land at a 5.45 million (annualized) rate of sale. As with new homes, inventory levels bounced up (to 7.2 months) and prices firmed a bit. For existing home inventories and prices, there are some concerns that the “shadow inventory” of HAMP-delayed foreclosures and bank-owned REO will start to hit the market before long; such a situation would again pressure home prices downward, as would any increase in mortgage rates.
Of course, home sales will improve as the economy gets firmer footing. The first look at fourth-quarter 2009 GDP surprised to the upside, ringing in at a stout 5.7% increase. After a long period of slashing stockpiles, inventory rebuilding accounted for more than half the gain, making it unlikely that the strong headline growth number will be repeated. Consumption, a measure the strength of final demand in the economy, actually eased somewhat from the third to fourth quarter, so there doesn’t seem to be a great bit of momentum just yet. Still, the move from strongly negative to positive is a welcome sign, and encouraging. It’s worth noting that a near like sized decline (minus-5.4%) was seen in the fourth quarter of 2008, a strong contrast to where we are at the moment.
It seemed to us that some of the strength of the manufacturing-led recovery was lost in December and we noted as much over the past few weeks. The National Activity Indicator, an amalgam of some 85 economic indicators from the Chicago Fed, slipped back slightly to -0.61 in December after standing at -0.39 in November. With a “par” value of zero, the indicator suggests how close the economy is to growing at its potential or normal rate (believed to be just shy of 3% GDP). By this measure, the economy is growing at a modest clip, outsized GDP report or not.
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Sources: FRB, OTS, HSH Associates.
Durable goods orders rose by a less-than-expected 0.3% in December, but January’s regional reports covering factory health in New York and the midwest both pointed upward, and fairly solidly, according to two purchasing manager’s groups. Gains were also seen in the Kansas City Federal Reserve district, where its indicator rebounded in January, but the Richmond Fed’s gauge remained slightly negative for the month. The recovery is remains uneven, but improvements are starting to become more widespread.
As they expand, job growth will eventually follow, but probably at a very subdued pace. Weekly unemployment claims did manage a dip during the week ending January 23, slipping by 12,000 applications to land at 470,000 for the week. Improvements here have been grudging, at best, and there’s quite a way to go before we even reach balance between layoffs and hiring. As we move toward spring, the growing economy and a spate of hiring for the Census will surely improve these numbers, but until then, the weak labor market will persist.
That weak market is good for at least one thing: tempering inflation pressures. The total cost of keeping an employee on the books rose by just 0.5% in the fourth quarter of 2009, a smidgen higher than in the third quarter. The Employment Cost Index, which accounts for benefits and wage changes, found that employee pay grew by just 1.5% over the past four quarters, but benefit costs rose by just 1.6%, too. The 0.5% rise in wages was the largest gain since a like rise in Q408, so perhaps income growth is starting to get underway again.
If nothing else, consumer moods seem to be firming. The final reading for the University of Michigan’s survey of Consumer Sentiment came in at 74.4, the highest reading in about two years. A less-gaudy number was seen by the Conference Board’s measure of Consumer Confidence; still, at a 55.9 mark, it was the best showing since September of 2008. The higher-frequency weekly ABC News/Washington Post poll of Consumer Comfort remains mired in its recent range, though, sporting a -48 reading for the week ending January 24.
While mortgage rates didn’t appear to want to do anything much this week, there is a slew of first-week-of-the-month data on tap, including the all-important monthly employment report. If the economy is growing, and if hiring does begin to show, the Federal Reserve will start to become more likely to consider raising interest rates, with all the consequences that will entail. Given the deep hole we’re trying to climb out of, the Fed may hold their fire for some time even after that process gets underway, but the market will be certain to express their concerns long before that. It’s worth noting that at least one Fed Governor expressed a preference for higher rates at this week’s meeting, a signal that rates may be changing before too long.
A pile of data out next week will reveal lending conditions, employment prospects, auto sales, productivity reports and lots more. We expect another slight increase in rates for next week, with the collective tenor of the reports a positive one.
It’s never too late to look ahead. If you’ve got a couple of minutes, you should check out our 2010 Outlook for Mortgage Markets and Rates. It covers what we think are the ten most important considerations for the market next year.
Our latest two-month forecast offers our predictions for the immediate future.
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