February 26, 2010 — While the inventory-led “technical” economic recovery pushed the latest revision of the nation’s Gross Domestic Product to a robust 5.9% increase in the fourth quarter of 2009, more than a few signs this week pointed to a much more muted pace of growth.
Although it would be hard to find any group who might cheer on stumbling economic growth, would-be homebuyers and refinancers do benefit to some degree as a weak trajectory means continued low — and possibly falling — interest rates in the days ahead.
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This week, the overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI shed a lone basis point (.01%), ending HSH.com’s survey week at 5.40%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s Hybrid 5/1 ARM counterpart remained unchanged during the latest survey cycle, closing the survey week at 4.58%.
Some of the underpinnings of the nascent recovery have turned from solidifying to suddenly shaky. The Conference Board’s report on Consumer Confidence for February showed an unexpected drop, and a large one at that. The 46.0 reading for February represented more than a 10-point decline, indicating a serious souring of moods over the past four weeks. Both “present” and “expected conditions” readings declined. Oddly enough, the measure of folks who thought they might buy a home actually rose to a level not seen since last August.
Here’s hoping they show up soon. Sales of New Homes dropped to a new low of 309,000 (annualized) in January. This is the lowest rate of the cycle so far, and an indicator of very little demand despite low interest rates and lower prices. For the first time in over a year, the number of units built and ready to to be sold actually increased, so what little new construction activity exists is more than required. Some 234,000 brand new housing units — itself a low number — wait to be moved, but probably represent some of the least desirable properties. In this way, new home sales may be low simply because few desirable homes are being built ‘on spec,’ and potential buyers have already seen what remains and aren’t interested. Cautious builders aren’t likely to start many such spec projects, what with still difficult market conditions, and buyers seem wary of committing to having new homes built for them. The unanswerable question is “If you build it, will they come?”
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One could make the claim that new home sales are suffering from competition from low-priced existing stock, what with foreclosures and such keeping inventory high and prices falling. What then to make of the drop in existing home sales in January, which slumped back to just a 5.05 million (annualized) rate of sale? Declines were evident in all regions of the country; median prices for the homes that were sold declined, and the softer sales pace saw inventories balloon back up to 7.8 months of supply available.
Certainly it’s possible that wicked winter weather kept home shoppers from venturing out, as storm after storm has made its way across the country this winter. It’s also likely that the November 2009 original expiry of the homebuyer tax credit advanced some demand from the already-slow winter months into that month’s sales figure (which, for existing, were cycle highs). Whatever the reason, let’s hope that with the coming of Spring that we actually have a ‘traditional’ homebuying season this year.
Although interest rates were only mildly higher of late, there was a falloff in mortgage applications, according to the MBAA. The Fed’s surprise move to the discount rate may have spooked some borrowers into thinking that all interest rates were kicked higher. Regular readers know that not only is that not the case, but also that the Fed doesn’t control mortgage rates directly (some present conditions excluded). If you don’t know what influences do affect home-loan rates, you should read What Moves Mortgage Rates.
Of course, we would be more likely to have a stronger homebuying season if the labor market were improving. While it seemed the case for a while that layoffs were slowly diminishing, February has proven to be a more difficult month in that regard. During the week ending February 20, some 496,000 new requests for assistance were filed, an increase of 22,000 over the prior week. The fact that the range has again neared 500,000 –and is moving in the wrong direction — is a source of concern, and may be the impetus for the downturn in consumer confidence noted above, which may be more sensitive to job conditions than to other measures.
Those include the University of Michigan survey of Consumer Sentiment. While its final reading for February was below January, it downshifted only mildly, sliding from 74.4 to 73.6 during the month. Another (though higher frequency) measure is the weekly ABC News/Washington Post survey of Consumer Comfort, which has wandered in a range for months now, backing and filling. After starting the year at the top of the range, it has settled back more toward the bottom of late, with the -50 reading for the week ending Feb 21 just four ticks above all-time lows.
Outside of all this, the production-led recovery seemingly continues. Local measures of factory activity in the Richmond and Kansas City Federal Reserve districts both found themselves in positive territory in February, with the KC Fed moving deeper into the black while the Richmond region bounced over flatline to land on the plus side of the ledger for the month. As well, two local purchasing manager groups — one in Chicago, the other in New York — both saw considerable gains in the activity levels of their member firms.
Orders for Durable Goods looked solid at the headline, sporting a gaudy 3% increase for January. Looking beneath the veneer, though, revealed a much darker picture, since all the gains were due to transportation, mostly civilian aircraft orders. “Core” orders for durable goods, a proxy for business-related spending, actually declined by 2.9% for the month, bringing into question the durability and breadth of the recovery.
We do have a recovery, and one growing at an “above-trend” clip, according to the latest National Activity Index from the Chicago Federal Reserve. A measure which blends over 80 economic indicators, the NAI moved to +0.02 during January, the second nudge into over the breakeven line in the past three months. In January of 2009, by contrast, the index was a bleak -4.03, so the recovery has been progressing at a slow if at times unsteady pace.
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Sources: FRB, OTS, HSH Associates.
There was a sizable downdraft in underlying interest rates as this week progressed. In recent weeks, the influential 10-year Treasury moved to the top of its recent range, sporting yields of about 3.80%. That was the case on Monday, but by Friday an abrupt turnabout had occurred related to both the data discussed above and Fed Chairman Ben Bernanke’s semi-annual report on monetary policy to Congress. At that hearing, the Chairman reiterated that rates would remain low for a while longer yet and that the economy is still rather fragile. Some of his remarks this week also suggested that the Congress consider some spending restraint, lest the deficit become even more unwieldy and making monetary policy more of a challenge than it already is (a situation expressed in last week’s Market Trends).
It’s hard to believe that March is fast upon us. The new month will bring a cascade of first-week-of-the-month data next week, including the latest ISM surveys, Construction Spending, the Beige Book, Productivity, Consumer Credit and the all-important Employment Report for February. Given current trends, it seems likely that manufacturing-related stuff should be stronger, consumer and labor weaker (steady at best) and that mortgage rates will follow the decline in yields this week. Figure a handful of basis point decline for the average 30-year fixed-rate by week’s end.
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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 this year.
Our latest two-month forecast offers our predictions for the immediate future.
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