May 24, 2013 — Mortgage rates bounced higher this week, as minutes from the Federal Reserve’s last meeting and an answer to a Senator’s question by Federal Reserve Chairman Bernanke roiled the markets, causing a selloff in both stocks and bonds, with the latter subsequently lifting mortgage rates. In the end, really, nothing has changed very much.
Minutes of the Fed’s April 30-May 1 meeting exposed a willingness on the part of some FOMC members to consider winding down QE3 before too much more time has passed, possibly even as early as next month, provided the economy is producing enough growth to warrant such a change. Mr. Bernanke’s answer to a question about the timing of the beginning of a reduction in purchases of MBS and Treasuries seemed to suggest that September might be a more likely point.
With some uncertainty poured over the market, stocks and bonds both sold off, and mortgage rates moved closer to 2013 highs, just a few short weeks after hitting 2013 lows. Still, they are well anchored and remain near record lows.
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 eight basis points (0.07%) to 3.83%; the FRMI’s 15-year companion also managed a seven basis point lift (0.07%) to 3.05% for the week. FHA-backed 30-year FRMs followed suit with a full tenth of a percent increase of their own, climbing to an average rate of 3.46%, while the most popular ARM — the 5/1 Hybrid — remained closest to its all-time record lows with just another two hundredths of a percentage point (0.02%) upward bump to 2.63% for the week.
See this week’s Statistical Release and Mortgage Trends Graphs.
Want to get Market Trends as soon as it’s published on Friday? Get it via email — subscribe here!
It may be that Mr. Bernanke’s remark wasn’t as off-the-cuff as it seemed, but instead intended to diffuse some expected reaction to the June timing that was intimated in the minutes. Perhaps it was to test the markets for a reaction; there was nothing in the Chairman’s prepared remarks before Congress to suggest any imminent change in Fed policy, and he even cautioned about the adverse effects of any near-term change. As well, in both recent statements and again in his testimony, Mr. Bernanke has noted that the Fed is “prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate…” and the Fed has continued to express concerns about the headwinds of federal fiscal tightening and the recessions/slow economies of our major trading partners.
There certainly seems nothing in the present economic, employment or inflation data to suggest that it’s time to end Fed stimulus, and certainly not in just a few weeks’ time. If the economy puts in a good summer, could such a process be initiated? Possibly, but the odds don’t strongly favor it at this point. That said, even when it becomes time, the process will be a gradual one — and may not be conducted in a linear fashion. For example, if trimming MBS purchases causes mortgage rates to rise which in turn stalls the housing recovery, the Fed would likely reverse course, at least for a time.
There is no doubt that economic conditions are improved when compared to last year or the crisis years before that. Millions more Americans have jobs; according to the Fed survey of Senior Loan Officers, banks have slowly begun to lend again; home prices have risen, filling in equity shortages, and household balance sheets have been improved by mortgage refinancing (both traditional and HARP) and loan modifications.
If HSH’s weekly MarketTrends newsletter is the only way you know HSH, you need to
come back and check out HSH.com from time to time. You’ll find new and changing content on a regular basis, unique calculators, useful insight, articles and mortgage resources unlike anywhere else on the web.
It’s worth noting that for the most part, the price of money isn’t and hasn’t been the issue at hand. Interest rates are certainly low enough, at least for many important forms of borrowing. Arguably, it’s the availability of money — ongoing tight underwriting standards for business and consumer loans alike — that has kept the economy from moving more strongly forward. Strained bank balance sheets, swirling regulatory and regular financial punishments for then-acceptable past behaviors have made banks wary of opening the credit spigots (rightfully so) and they remain pretty tight still. However, the SLO survey revealed that some loosening is finally beginning to happen, and that alone may give the Fed some reason to consider starting a tapering process.
That said, even if the tapering saw a change in policy of a reduction of $10 billion at each meeting, for example, it would take a full year for the wind down to occur. If started later this year, a conclusion would come in late 2014 at the earliest, and we would still have a Federal Funds Rate near zero percent to provide stimulus.
Would the Fed like to get out of the extraordinary support game? No doubt they do, and as quickly as possible. At some point, this process will begin, and probably before the end of 2013, should no new economic issues emerge. However, the footing of the recovery remains tenuous; it was only a few short months ago we had a GDP reading of below one percent, and even the 2.5 percent present rate is roughly equivalent to treading water.
As far as the economic news goes, well, there continues to be nothing suggesting an economy breaking out of a dull pace. Even if improving modestly, two of the brightest spots are pretty flat, and are two areas perhaps most strongly influenced by the Fed’s programs.
HSH.com has a great variety of calculators for homeowners and homebuyers alike. From refinancing, prepaying, figuring out when you’ll no longer be underwater to deciding if it’s the right time to buy a home, our unique tools and tips can make your financial life easier. See our entire selection of calculators for all your mortgage management needs!
Sales of existing homes nudged upward by 0.6% in April, creeping to a 4.97 million (annualized) rate of sale. This rate is actually little changed from those seen in each of the last six monthly reports, so the pattern is moving sideways as opposed to upwards. The tightness in inventories did ease a little, rising to 5.2 months of available supply, the largest figure since last October. Prices are still holding double-digit gains when compared to last year at this time, and this has more or less been the case since last October as well.
Sales of newly-built homes did put in a 2.3 percent rise in April when compared to March. A smaller but important cousin to the existing home market, some 454,000 (annualized) units were moved by builders during the month. The increase in sales meant that inventory levels remained very tight at just 4.1 months of available stock; at the moment, there are about 156,000 built and ready to be sold units available, the highest figure of the recovery so far, if only 12,000 units above all-time record low levels. Prices here are firmer, too, moving 6.3% higher on a month-to-month basis (and about 15 percent above year-ago levels).
Less than stellar news was presented by the Chicago Federal Reserve’s National Activity Index. The NAI report showed an economy operating below its potential in April, with the minus 0.53 reading suggesting perhaps a two percent GDP rate or thereabouts. After a nice 0.63 pop in February, it was a second consecutive negative reading, and the third of the four months of 2013 to date, so there’s no upward momentum (and perhaps some slowing) in the economy as we moved into the second quarter.
After a upward blip, new claims for unemployment benefits settled back. A outsized 363,000 rate of claims during the week ending May 11 gave way to a 340,000 clip during the week of the 18th, with initial claims falling back closer to the average level of the last month or so. Without continued gains in employment, it’s hard to see how we can expecte growth to continue to expand, let alone fuel more home sales.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Consumer moods have been mostly flat, according to the weekly Bloomberg Consumer Comfort Index. The CCI did sport a small improvement during the week ending May 19, but the 0.8-point rise to minus 29.4 continues a tight pattern which has held for about seven weeks now. That these values are near recovery highs is encouraging, but we still remain considerably below more optimistic levels seen before the onset of the recession some years ago, so the recovery remains incomplete.
Some recovery was actually seen in a local Federal Reserve report. After a string of seven consecutive negatives, the Kansas City Federal Reserve Bank’s tool for measuring local business activity crept over the breakeven line, landing at a plus 2 for May. Orders picked up a little at concerns in the district, but there were no gains in hiring planned as a result.
Orders for durable goods — planes, trains, automobiles, appliances and other items with an operating life of three years or longer — rose by 3.3% in April, about double the expected rate. That is good news, as is the 1.2% rise in outlays by businesses. A fair bit of the gain was for pricey transportation items, but leaving them out of the calculation still left a nice 1.3% rise. For the most part, orders for durables have run in a familiar backing-and-filling, negative-then-positive pattern for the last six months, but there has been no sustained upward traction.
In the end, what has changed so much that the Fed would suddenly look to run to the exit? Nothing. The economy remains in a muted pattern at best, with serious obstacles preventing a easy shift to a higher gear. Will this change? At some point, yes, as will Federal Reserve policy. However, without robust economic growth, quickly falling unemployment or a hot flare of inflation, that point remains in the future… and when it comes, it will merely be the beginning of what is likely to be a protracted process of getting back to normal monetary policy.
For next week, a holiday-shortened one, mortgage rates will be higher, perhaps reaching the highest point of 2013 (not that we’re all that far from it at the moment). Best to figure on another 6-8 basis point rise, and a thin calendar of data doesn’t suggest much to temper any increase, sans an downward update to first quarter GDP.
If the index of Leading Economic Indicators report can be trusted, we may see some increase in activity as we move closer to summer. The Conference Board’s tool showed a 0.6% rise in April, its strongest monthly gain in more than a year’s time. April was no doubt a better month than was March (minus 0.2) but the few May numbers we’ve seen so far haven’t suggested that any acceleration in growth is happening.
Consumer moods seem confused. The preliminary reading for the University of Michigan survey bounced 7.3 points higher to 83.7, the indicator’s highest level in about six years, as assessments of both current and expected conditions rose sharply. That said, there was a modest deterioration noted in the weekly Bloomberg Consumer Comfort Index, which shed 0.7 points to ease to minus 30.2 for the week ending May 12. Even with the decline, the CCI indicator is handing around recovery highs, but shows no signs of bounding higher as the UMich indicator did.
Collectively, what do we have? Low and falling inflation. A soft and perhaps weakening manufacturing sector. A labor market which seems to be having as many setbacks as advances, and a housing market which is better than a few years ago but a long way still from full health. We have a Fed which is committed to keeping its foot on the throttle, at least for a while yet, and an economy which is grinding its way slowly forward. How equity markets can be so cheerful in such an environment is puzzling, but it is worth noting that the US is the best (perhaps only) investment game in town at the moment, as there are few places to put cash that will produce any kind of return.
As long as enthusiasm for stocks persists, we are likely to continue to see mortgage rates holding above record or even recent lows. However, until there are clear signs that the economy is accelerating, unemployment is steadily falling or prices are regularly rising there is little reason to expect that the Fed will change course anytime soon. Collectively, this should keep us tethered at very low levels even as we experience fits and starts of good and bad news driving rates up and down. We had a run up in mortgage rates in the mid and late winter and a mostly downward run since then. For the moment, we are headed back upward, but this upcycle may not even reach the 2013 highs of March.
That said, we do expect another 3-4 basis point rise in rates next week.
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.
Still underwater in your mortgage despite rising home prices? Want to know when that will come to an end? Check out our KnowEquity Underwater Mortgage Calculators, and learn exactly when you will no longer have a mortgage greater than the value of your home.