February 1, 2013 — Moderately good economic news continues to press mortgage rates higher, as investors both here and around the world move their money from safe-haven investments in bonds and into riskier assets such as equities. Major stock market indexes across the globe put in some of their best January gains in years, all coming at the expense of bonds, whose yields rise as investor demand wanes.
Even with its massive balance sheet expansion, the Federal Reserve’s program to keep interest and mortgage rates low constitutes only a portion of the market, so there are limits to the Fed’s ability to maintain rates at rock bottom levels.
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 climbed another ten basis points (0.10%) to 3.83%, its highest level since September 14, 2012. The FRMI’s 15-year companion increased by another eight basis points, landing at 3.10% for the week. FHA-backed 30-year FRMs rose by six hundredths of a percentage point (.06%), moving up to 3.42%, as inexpensive mortgage money remains readily available to credit- or equity-impaired borrowers. For a change, the overall average rate for 5/1 Hybrid ARMs wasn’t immune to the trend, rising by five basis points to 2.76%
See this week’s Statistical Release and Mortgage Trends Graphs.
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Frankly, if the economy doesn’t need cellar-level interest rates to function we are arguably better served in the long run without them. However, the chasing of better returns by investors is to be expected; in fact, it is one of the behaviors the Fed is hoping to see, since tying up money in concentrations of low-yield government-backed investments does little to spur economic growth. Better those funds should be spread out across the economy in hopes that they will be put to more productive use by others.
Meanwhile, the economy continues simmering at a fairly low level. The Federal Reserve concluded a two-day policy meeting with no change to interest rates or support programs, but the statement which accompanied the end of the meeting noted that “growth in economic activity paused in recent months, in large part due to weather-related disruptions and other transitory factors.” The Fed also noted that “…the Committee continues to see downside risks to the economic outlook.”
Whether transitory or not, the advance estimate of Gross Domestic Product growth bore out the Fed’s assessment, as GDP declined to a negative 0.14% pace in the final quarter of 2012, a sharp slump from a positive 3.1% rate in the third quarter. Much of the decline was attributed to a reduction in Federal spending in preparation for the “sequester” of automatic spending cuts (the part of the fiscal cliff deal which has not yet been worked out), and the effects of Superstorm Sandy. Still, that the private sector couldn’t budge the GDP needle points to a soft underlying economy, and suggests that when those cuts do finally kick in, growth may struggle to hang onto a 2% handle.
GDP growth is of course reliant on job growth, and vice-versa. It’s a bit of a chicken-or-the-egg conundrum; without more hiring, it will be hard for GDP to rise much, but without GDP rising much, it’s hard to expect stronger hiring. However, with a benchmark annual revision to the survey adding some 747,000 more jobs in 2012 than previously expected, the indication should be that a stronger economy is in the offing. That said, large upward revisions to hiring in November and December proved unsustainable when January rolled around, when just 157,000 new hires occurred. The unemployment rate bumped up a tenth to 7.9%, while the labor force participation rate remained at a poor 63.6%, barely above recent lows. The job market may be improved or even improving, but still only modestly and hardly in a straight upward line.
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 inquirehere.
That rather flat trend is largely reflected in layoff announcements and unemployment claims. The outplacement firm of Challenger, Gray and Christmas recorded 40,340 scheduled job cuts, up from 32,600 in December but still quite low. Weekly unemployment claims bounced some 38,000 higher during the week ending January 26, reverting back to trend after spending a couple of encouraging weeks down in the mid-330K range. Steady layoff activity is better than a rising pattern, but is a poor substitute for a strengthening job market, and one which won’t help move the economy forward.
The cost of keeping employees on the books remains muted, which will hopefully keep more folks on the payroll until the economy can gather a head of steam. The Employment Cost Index rose by 0.5% in the fourth quarter of 2012, up a tick from a 0.4% rise in the third. Wage growth was soft at just 0.3%, while benefits bumped 0.6% higher during the period. Overall, worker compensation is up by just 1.9% over the past year, with the 1.7% gain in wages over that time barely sufficient to keep pace with inflation.
Although not specifically from regular wages, Personal Incomes rose by a fat 2.6% in December, driven there by one-time bonus and dividend payments intended to get distributed before the change to tax policy from the fiscal cliff agreement kicked in, which actually happened January 2. Wages did move up by 0.6% for the month, and that on the heels of a 0.9% lift in November, probably all due to paying bonuses so to ensure that 2012 tax rates would apply. A smaller though similarly constructed rise in personal incomes happened in November, too. The rise in income didn’t foster a commensurate rise in outgo, as personal consumption expenditures rose only 0.2%. The nation’s rate of savings did flare higher to a robust 6.5%, but none of this would appear to be sustainable so the benefits are probably negligible to the broad economy.
The production, manufacture and building of things in general is a strong positive for the economy, and there is thankfully some of that to be seen. Orders for durable goods rose by 4.6% in December, pressed there by gains in transportation orders (planes, trains and automobiles), but even taking them out left a 1.3% gain. A lot of washers, dryers, stoves, refrigerators and more were lost during Sandy, and there should be some continuing lift as replacements are acquired. Business-related spending added to the total, too, rising by 0.2% for the month.
What will 2013 year bring for mortgages, housing and more? You’ll want to read HSH’s
“10 Thoughts for ‘13″. Check it out today!
Construction Spending powered ahead by 0.9% in December, with residential construction again leading the parade. The 2.2% rise in outlays for homes meant that spending rose almost 24% for new single-family housing compared to 2011, and home improvement spending is also rising. Spending for commercial projects rose by 1.8% for the month, and is 7.6% higher than the same period a year ago, but public outlays continue to be a drag, putting in a fourth consecutive month of decline (and five of the last six) with a 1.4% slip during the month. State governments are still struggling to find funds to make repairs and improvements to infrastructure.
Although a tad lower than December, auto sales held at a solid 15.3 million annualized rate in January, according to AutoData. That should help keep factories and associated suppliers moving forward as we move into 2013, with much of the gains attributed to sales of domestically-produced vehicles.
Perhaps that was the impetus for the unexpected rise in the Institute for Supply Management survey covering manufacturing activity. The indicator has been holding at about a breakeven level or just a little better or worse since June 2012, but the 53.1 value of the ISM indicator for January was the strongest since last May. Forecasts called for perhaps a 0.3 point increase, so the 2.9 point gain was far more than expected. Orders, production and employment indicators all moved upward, into (or further into) positive territory.
Solid auto sales, rising durable goods orders and gains in factory strength are all very good signs that the -0.14 GDP will be an anomaly, and possible even revised away as we move deeper into 2013. However, it occurs to us that, just as at times last year when the markets could see no news as good news, that we are presently in a bit of a reversal, where good news is embraced (perhaps harder than it should be) while bad news is discounted. Make no mistake about it, there are plenty of challenges which are yet to be faced in the weeks and months ahead, even as we are encouraged by the bits of warm economic sunshine as they come.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Consumers appear as rather confused as to how to feel. As measured by the Conference Board, Consumer Confidence plunged in January, sliding by 8.1 points to 58.6 for the month. Both present and future assessments declined, the value for January was the lowest recorded since November 2011 and continues a three-month slump. Meanwhile, the University of Michigan Survey of Consumer Sentiment traveled in the other direction, climbing by 0.9 points to land at 73.8 for the month. Perhaps this survey captures more of the dividends and bonuses crowd noted in the personal income discussion above. Regardless, the weekly Bloomberg Consumer Comfort Index was unambiguous, putting in a fourth consecutive decline to minus 37.5 for the week ending January 26. The pinch of smaller paychecks due to the expiration of the payroll tax holiday is being seen here, and word is that gasoline prices are already starting their Spring march upward… and it is barely February. As such, we’d expect moods to sour some more before things get better.
There doesn’t appear to be much grave concern over the rise in mortgage rates. That’s good, since there shouldn’t be. Interest rates rise and fall all the time as investors wander from one end of the see-saw to the other. If the typical pattern plays out, the fairly mad rush to stocks in January will peter out, some funds will go back to be parked in bonds, and interest rates will ease again. This is normal, even welcome behavior from a broad standpoint, with these forays into risk much healthier expressions than is fearfully stashing money in a virtual mattress. It also should be noted that rising rates can also temper demands for funds (mortgages especially) and as pipelines thin out, lenders tend to price more aggressively to attract business again.
Borrowers should always keep in mind that the most dire of economic situations brings the lowest interest rates, and if we are enjoying even the perception of better growth that rates should be expected to move off bottoms as they have. In the present situation, they have moved upward mildly, but not enough yet to crash the refinance market nor even scratch the purchase market.
They may have a little lift yet to go next week, but it seems to us that we may just hold pretty flat overall.
For an longer-range outlook for rates and the economy, one which will take you up until late March, have a look at our new Two-Month Forecast.