March 29, 2013 — Mortgage rates have been higher in 2013 than the end of 2012, largely driven there by growing optimism about the prospects for the economy, and a Federal Reserve pumping cash into the market, boosting asset prices, especially stocks. With a choice to keep money in ultra-safe investments like Treasuries which yield almost nothing or jump into stocks, which are up about 9 percent this year, at least some investors have opted for stocks. That shift in demand from safety in search of returns has firmed interest rates.
For interest rates overall and mortgage rates in particular to continue to move higher, we’ll need to see continued economic improvement. While that does seem the most likely path at the moment, there are some signs of a forming pause in activity and the upward path for interest rates.
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 one basis point (0.01%) to 3.82%. The FRMI’s 15-year companion was unchanged at 3.05% for the week. FHA-backed 30-year FRMs managed a decline of only one basis point (0.01%), drifting to an average rate of 3.39%, and the overall average rate for 5/1 Hybrid ARMs increased by one hundredths of a percentage point, landing at an average 2.67%, just two basis points above all-time lows.
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Although all signs point to stronger growth in the first quarter of 2013, where Gross Domestic Product (GDP) is expected to return to a 2 percent plus level, the final reading of GDP for the fourth quarter of 2012 suggests we have a long way to go to regain even that meager level. During the final period of 2012, GDP rose by just 0.4 percent. While a second consecutive upward revision from the original estimate of a decline, it was a far weaker period than was the third quarter, where a 3.1 percent figure was achieved.
The tax increases and end of payroll tax holiday as part of the “fiscal cliff” resolution and the sequestration of government spending now in place makes it that much harder for the economy to grow more quickly. However, important components of the economy are much improved when compared to the last couple of years and should provide at least some upward push for growth. We’ll not see the first measure of GDP for the first quarter for another month yet, but indications point to improvement.
Housing is to be counted among those signals for stronger growth. While sales of new homes did slide by 4.6% in February, they landed at a 411,000 annualized rate, a figure which can be counted among the best of the recovery to date. Actual inventory levels of built-but-yet-unsold homes rose to 152,000 units, a still-tight 4.4 month supply. After bottoming last year, available inventory is now about 9,000 units above bottom, but the pace of sales has been stronger, driving new construction upward. Compared to this time last year, sales of new homes are up by 12.3 percent, and the traditional spring homebuying season is nearly upon us.
When compared against January’s negative figure, February’s value of the Chicago Federal Reserve’s National Activity Indicator (NAI) looks fairly strong. The amalgam of some 85 economic indicators was curtailed by the fiscal cliff mess and slumped to a value of minus 0.49 at the time. February sported a strong reversal, with the indicator posting a positive 0.44 for the month. In the NAI, a zero point zero figure would indicate that the economy is growing at its potential, estimated to be a GDP of about 2.6 percent or so, so the shift seen was from below-par growth in January to above par in February.
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.
But can that upward trek continue? Other data available for February and especially that for March suggest a more mixed pattern, at best. Orders for durable goods did power ahead by 4.6 percent in February, the strongest gain since last September, but all on the strength of aircraft orders. Leaving out those and other transportation-related items left a 0.5 percent decline for the month, and orders reflecting business-related spending slumped by 2.7 percent.
Measures of regional manufacturing activity from two Federal Reserve Banks failed to find much happening. The Kansas City Federal Reserve bank’s gauge moved from minus 10 in February to a lesser minus five in March, and so was improved of a sort. Over in the Richmond district, their yardstick slipped from a reading of 6 in February to one of 3 in March, so some cooling from an already tepid pattern was seen.
A regional purchasing manager’s trade group out of Chicago has a measuring tool similar to that used by the Institute for Supply Management. While the ISM reports for March aren’t due until [day], we hope that they collectively show more vigor than the regional group’s report did. The Chicago ISM showed a marked slowdown from February to March, with the value of their indicator sliding by a sharp 6.4 points for the month. Despite the slowdown, the value is still stronger than those seen at the end of 2012, but may suggest that there is less economic momentum as we move into the second quarter of 2013. The national ISM survey will help provide needed clarity next week.
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Unemployment claims have recently been pointing to an improving job market, but seem to have stumbled in the week ending March 23, as a new 357,000 applications for benefits were placed at state windows. Claims for the prior week were increased, too, and we have returned to levels of mid-February, casting a little doubt that the March employment report will be much stronger than those we’ve seen in the last couple of months.
One thing that doesn’t seem to be adding much strength is consumer perceptions of their situations, however measured. The weekly Bloomberg Consumer Comfort Index hit a 2013 peak a few weeks ago, but has fallen from those lofty levels of late. For the week ending March 24, the CCI slipped to a reading of minus 34.4, a 0.5-point easing from the week prior, leaving the indicator at a level akin to that seen in early February, so a fair bit of enthusiasm has been erased in the last two weeks.
Also, the report from the Conference Board covering Consumer Confidence for March sported a sharp decline, as this measure of moods lost 8.3 points, dropping the indicator to 59.7, nearly as low as the fiscal-cliff induced swoon in January. Almost all of the decline here came from the expectations portion of the program, so it would appear that the tax increases and spending sequester continues to weigh on consumer minds.
Despite widespread expectations that the University of Michigan Survey of Consumer Sentiment would decline sharply, the survey showed an increase of 1 point to 78.6 from the month prior. After the initial reading was down 5.8 points to 71.8, moods must have shifted later in the month, likely influenced by fleeting inflation expectations.
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Aside from more jobs, nothing would do more for consumer moods than a few more dollars in their pockets. After a steep drop in January, there was a mild recovery in Personal Incomes in February. The 1.1% boost in February beat out a forecast for a gain of 0.7%. The savings rate was up 2.6% from January, suggesting that consumers are building up spendable dollars, which may help the economy later on.
Along with the mix-and-match data of late, the “on-again, off-again, on-again” arrangement of a bailout for Cyprus banks continues to give investors pause. Influential yields on ten-year US Treasuries were down a little over the last week, and so mortgage rates are largely holding fast in present territory. That might change a little if fresh data starts to show more economic expansion happening; the parade of new first-week-of-the-month data starts week with the ISM’s manufacturing and service business indexes, auto sales, construction spending, consumer credit usage and the all-important employment report for March.
Without a Cypriot banking event to keep moving rates downward, and with record highs for the stock market beckoning, we think that mortgage rates are somewhat more likely to rise next week than fall by the time the week is through. To move them much, though, we’ll need to see a litany of both stronger economic news and some indication that the Fed’s asset-purchase programs are likely to change. Our new forecast discusses this in greater detail.
For an longer-range outlook for rates and the economy, one which will take you up until late May, have a look at our new Two-Month Forecast.