January 4, 2013 — The first week of the new year brought perhaps half a deal on resolving the “fiscal cliff”, but many hard choices and fights are yet to come. The deadline for the spending “sequester” — automatic cuts in government outlays — was kicked down the road by two months, when there will also be a battle over raising the nation’s debt limit.
Stock markets cheered the news of a deal, and if yields are any indication, money that had been parked in Treasuries to get out of the way of the cliff deadline powered out of those safe havens into stocks, lifting interest rates in their wake. Fixed mortgage rates especially track Treasury yields, and are firming at the moment. Any unwanted rise in yields and rates, of course, can now be offset by the purchasing power of the Federal Reserve, since Operation Twist ended on Monday, and the latest QE kicked in with the turn of the calendar. Some $85 billion per month of MBS and Treasuries will be bought to help keep interest rates low and stable for the foreseeable future.
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 three basis points (0.03%) to 3.68%, returning to levels last seen in early November (although only a tenth-percentage point above historic lows). The FRMI’s 15-year companion increased by a single basis point, holding nearly steady with an average rate of 2.97% for the week. FHA-backed 30-year FRMs gained by four hundredths of a percentage point (.04%), climbing to a nine-week high of 3.32%, with inexpensive mortgage money remaining available to credit- or equity-impaired borrowers. Also, the overall average rate for 5/1 Hybrid ARMs declined by a single basis point, retreating back to 3.70%
See this week’s Statistical Release and Trend Graphs.
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The fiscal deal in place did accomplish a few items of value to the nation’s homeowners, though. The Debt Forgiveness Act of 2007 was extended for another year, so homeowners lucky enough to secure a loan modification which included principal reduction, a short-sale or an underwater deed-in-lieu transaction won’t find the tax man looking for a non-existent cut of the “gift” from lender to borrower. As the short-sale issue is likely to be with us for years to come, the break should probably be permanently extended.
Private Mortgage Insurance is once again tax-deductible, which is a good thing since the cost of insuring loans with less than a 20% equity stake has risen considerably. More increases, notably in the FHA program, can be expected as 2013 rolls forward. Deductibility for MI premiums had been an on-again, off-again concept the past couple of years and still has not been made permanent.
The mortgage interest deduction remained untouched, for now. At some point, it is reasonable to expect that changes will come to the present $1 million limit in some form or another. Our guess is that some link to the conforming loan limit is what will come. For now, no change.
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.
Minutes from the last Federal Reserve meeting in December were released. Although the decision to begin a new round of “asset purchases” (Fed parlance for “buying more Treasury debt”) came from the meeting, there seemed little consensus on when such a program might end. The minutes suggest that a working majority of FOMC participants view the program as running throughout 2013, but others suggested that sooner might be appropriate. We remain fairly distant from the newly-instituted Fed milestones for unemployment (6.5%) and inflation (approximately 2.5%) before it will begin to change policy, so there seems little danger that the Fed’s new program of buying Treasuries will end anytime soon. That there might be an end to the program before forever did seem to surprise the markets a little and may have contributed to the selloff in Treasuries as the week came to an end.
For its part, the economy keeps grinding along, failing to produce much strength or falter to any great degree. That is perhaps no better evidenced than in the monthly employment report for December, when 155,000 new hires occurred, a figure on par with expectations and continuing a firm (if muted) pattern. In revisions, November’s gains were moved upward by 15,000 jobs, but so was the unemployment rate, which was nudged up a tenth percentage point to 7.8%, a level it held in December. The size of the workforce held firm during the month as well. For all of 2012, about 1.8 million jobs were created, little changed from the final 2011 figure.
The nation’s manufacturing sector is another case-in-point of moderation. The Institute for Supply Management’s gauge has vacillated over and under (or held close to) its breakeven threshold of 50 for the past seven months, and December’s reading moved the mark to 50.7, a rise of 1.2 points. This was sufficient to get us back into expanding territory after Sandy’s effects in November, but is still softer than October or September values. It is possible that some activity, held back by concerns over changes to tax policy, will be expressed in January but there is no way to know how much of any curtailment might emerge in coming months. As the broadest measure of Factory Orders was unchanged in November, it is hoped that some held-back demand will materialize.
What will the coming year bring for mortgages, housing and more? You’ll want to read HSH’s
“10 Thoughts for ‘13″. Check it out today!
Stronger, though, was the service sector of the US economy. The ISM report covering non-manufacturing businesses moved more strongly into growth mode, putting up a 1.4-point rise to a value of 56.1 for the month, its highest reading since March 2012. The employment sub-component of the report was most encouraging, as an outsized six point rise was noted even as other portions of the survey sported only mild gains.
Sales of new vehicles held pretty firm in December. AutoData reported that an annualized 15.4 million units were moved during the month, down just a tick from November. The auto industry is benefiting from a fortuitous point in the replacement cycle as an aging fleet of cars and trucks needs to be exchanged, and that should continue for a while yet, with hopes sales may improve further when the economy picks up steam.
Spending on construction projects lifted the economy in 2012, with housing generally leading the way. That continued to be the case in November, although a 0.3% decline in total outlays was noted. As has often been the case, a rise in residential projects (+0.4%) was dragged backward by a decline in commercial (-0.7%) or public (-0.7%) spending, with the pull of both sufficient this time to put the headline number below par. The overall decline was the first since March. More spending on construction projects is to be expected in coming months as billions of dollars in reconstruction of devastated communities and infrastructure begins to flow to areas impacted by Sandy.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
The labor market remains in tenuous recovery mode, but at least announced job cuts have diminished. The outplacement firm of Challenger, Gray and Christmas reports that just 32,556 announced layoffs occurred in December, down from over 57,000 in November. It was the lowest monthly figure since August, and 2012 had the lowest cumulative number since 1997. Businesses leaned themselves out considerably when the economy broke several years ago, so there are arguably fewer workers who can be trimmed from payrolls. Of course, businesses have also been slow to add workers, keeping unemployment rolls high.
New claims for unemployment benefits bounced higher in the closing days of 2012, with 372,000 first-time applications for benefits filed during the week ending December 29. That was a 10,000 rise over the previous week’s revised number, but is nearly a mirror bookend of December’s opening figure. Like hiring, firing remains in a lackluster pattern, holding mostly steady at muted levels.
The latest look at consumer moods didn’t detect any burst of holiday cheer, but a one-point gain in the weekly Bloomberg Consumer Comfort Index was sufficient to move the needs to minus 31.8, good enough for second highest of 2012 and the recovery to date. While still a far cry from pre-recession days, it is encouraging that consumer spirits can hold a plateau despite facing so many economic challenges.
With the economic climate fairly firm, with Federal Reserve policy now fully in place and with a tax deal done, markets are left to sort out what it all means as we move into 2013. Supportive Fed policies should help move the economy forward as we wend our way into the year, while new burdens on certain taxpayers will tend to trim the economic sails somewhat. Regardless, the economy faces plenty of headwinds. Mortgage rates are being lifted by what is arguably more optimism than is warranted at the moment, given the issues at hand, but the momentum seems to be slightly upward at present.
That is expected to continue into next week. Rates are likely to see another mild rise, numbering in perhaps a handful of basis points, but there is no reason at present to expect any huge change.
For an longer-range outlook for rates and the economy, one which will take you up to early mid-January, have a look at our new Two-Month Forecast.