May 31, 2013 — In the present climate, each item of good economic news is being celebrated by stock markets, a polar opposite to the patterns seen in early spring, when they were largely downplayed. The question is, have things really changed? Despite all of the domestic and global challenges, has the economy really come to an inflection point where it no longer needs extraordinary monetary policy to support it, and where the Fed would feel comfortable removing it? If so, where is the compelling accumulation of evidence?
Mortgage and other interest rates moved up sharply over the past week, seemingly on little more than optimism that we’ve reached some kind of self-sustaining level, and markets reacted as though the Fed has already begun or even finished the “tapering” process of removing QE3. It hasn’t, and even though there are suggestions that they will at some point, there’s no indication that this process is ready to start.
While much has been made of the sharp run-up in rates over the past month, it should be noted that there was a lot of cheering when rates nudged below the 4 percent mark on the way down. Now that we are again approaching the 4 percent mark, it needs to be said that this is still far closer to record lows than not.
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 stormed ahead by eighteen basis points (0.18%) to 4.01%, its first foray over the 4 percent mark since the week ending June 1, 2012. As well, the FRMI’s 15-year companion put up a sixteen basis point (0.16%) rise to 3.21% for the week. FHA-backed 30-year FRMs leapt by 18 basis points to jump to an average rate of 3.64%, while the most popular ARM — the 5/1 Hybrid — moved the least amount of the bunch, with just a seven hundredths of a percentage point (0.07%) upward bump to 2.70% 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!
Is the rise in rates sufficient to quell refinancing? Yes, to a fair degree. Refi waves and booms require several components; first, a period of “high” interest rates over perhaps several years followed by a period where rates are perhaps 1 percent (or better, more) below the rates available in the initial period. That’s enough to get the ball rolling, but to expand the market for refinancing, rates need to continue to decline, so that more borrowers find opportunities to shed old loans for new.
Once rates have stopped declining (and to be fair, even with the spring’s swoon, the lowest rates were seen at the end of 2012, so we have been rangebound at best), the pool of available refinancers begins to become sated as the window for profitable refinancing stops widening. When rates eventually do rise, marginal borrowers (for example, those with an interest rate break of less than one percentage point) may head to the sidelines and hope for another opportunity — that is, hope for rates to decline again. As such, demand is diminished, excepting those homeowners for whom a 4 percent rate makes their transaction work. If rates hold at 4 percent, that available pool becomes sated over time, too, if it hasn’t been already as rates declined. Homeowners looking to replace old mortgages are of course sensitive to even small moves in interest rates; as an example, applications for refinancing have declined in each of the last three weeks as rates rose, according to the Mortgage Bankers Association.
That’s much less the case for homebuying, where a given interest rate is only one component of the transaction. The interest rate of the loan does influence the size of the mortgage the borrower can obtain, but being able to qualify to obtain financing is even more so. Potential homeowners needs to have any number of other factors in place at the same time, including the confidence to buy a home, finding a home they like enough to buy, at a price they can afford and other considerations.
Interest rates have not been a problem for some time, and won’t be, even with the nascent rise. Overcoming tight underwriting standards remains a challenge for potential borrowers, but as the economy gets better (more folks have jobs/incomes and savings are rebuilt, debt loads get pared, etc.) more folks can successfully overcome these hurdles. Just as firming home prices haven’t seriously dented affordability so far, a slight rise in interest rates doesn’t either. It might crimp demand at the absolute margins, but shouldn’t have much overall effect.
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.
Will rates continue to rise? Given their propensity of late to bounce higher on good news, it could happen. A couple of important first-week-of-the-month reports will have a lot to say in that regard, especially the May employment report next Friday, the ISM surveys on Monday and Wednesday and the Fed’s Beige Book. There have been few indications of late that any of these will be blockbusters.
However, if the most recent readings of consumer moods are any indication, we might just have a pretty solid employment report.
Measures of consumer attitudes have either been holding near recovery highs, or have recently popped there; aside from rising stock markets and firming home prices, it could be that moods are being improved by more people finding work. As measured by the Conference Board, Consumer Confidence rose by 7.2 points in May to a recovery high reading of 76.2, reclaiming all the ground it lost after November’s elections and then some. The weekly Bloomberg index of Consumer Comfort has been hovering near post-recession-high territory for the past month or more, and those barometers have been joined by a surge in the University of Michigan survey of Consumer Sentiment, which powered ahead by 8.5 points in May, closing at a 84.5 mark for the month, its highest reading since July of 2007.
The second review of first quarter 2013 Gross Domestic Product failed to show much upward economic momentum; in fact, the revised GDP report was trimmed by a tenth percentage point to show a 2.4% growth rate for the period. However, it is certainly possible that economic activity picked up a little in April as well as May and that growth is on the upswing, but there is still only slight evidence of that.
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!
Claims for new unemployment benefits can be a good indicator of how the economy is performing. After a dip to recovery lows at the end of April, weekly jobless claims have returned to a place solidly in the middle of recent ranges, which have a top of 363K and a bottom of 327K. During the week ending May 25, some 354,000 new applications for benefits were placed, up 10K from the week prior, so even if hiring has firmed during the month, firings appear to be holding fairly firm, too.
The economy might be powered by the consumer spending, but with personal incomes barely growing, any upward momentum may have to come from refinance savings or stock market gains. In April, Personal Incomes were unchanged from March and have slid each of the past two months; wage growth also featured no gains during the month and has also cooled. Without fresh cash to spend, there was a little retrenchment in consumer spending, which eased by 0.2% for the period, that decline largely the result of falling gasoline prices. Overall, incomes and spending are only grinding forward at a 2.8% annual rate, and both of those figures are generally lower than readings seen over the past six months or so. If both incomes and outgoes are falling, it will be hard for the economy to gain much traction.
Although reports covering manufacturing have been mostly lackluster at best this year, the latest report from a Chicago-area purchasing manager trade group showed a sizable leap from April to May. The group’s indicator added 9.7 points, rising from a receding 49 in April to 58.7 in May, a striking recovery. The bounce returned the indicator closer to (and a little above) levels seen earlier this year. To the extent that it foretells the national ISM report due next week, we might expect to see a little pickup in factory activity. At the same time, readings from local Federal Reserve districts haven’t been encouraging, such as the Richmond Fed’s gauge, which did move upward in May, but only to a less-negative reading.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Call us skeptics, but we are finding it hard to see many indications that the economy is moving ahead so quickly that the Fed will jump out of the market abruptly, or reasons why bond investors have dumped their holdings, driving yields and rates higher. It is true that the end of the Fed’s programs will come, and that may even start sooner than later, but is is also true with them firmly in place that we’ve only achieved modest growth at best and have no inflation to show for it, either. It used to be that “Sell in May and go away” was the mantra of the stock market; give the mostly upward path this month for equity prices, perhaps it now pertains to bonds, too.
Next week will be telling. Good news will push rates higher, and even mediocre news might not cause any meaningful fall in rates. About the only things which would cause that would be soothing words from the Federal Reserve, something to the effect that the QE programs have no near-term expiry, or a bout of truly poor economic news (which would suggest much the same). As such, it looks as though that we’ll be looking at mid-3 percent conforming 30-year fixed rates in the rearview mirror. Is it possible the rise in rates has overshot the mark, given the modest economy and lack of inflation? Yes, it is, but the seesaw has tipped from one side to the other, and that’s we’re likely to find ourselves for at least a little while.
For next week, mortgage rates seem poised to rise again. Depending upon the incoming data, it could be a mild rise of another 6-8 basis points or another leap higher of perhaps double that.
For an longer-range outlook for rates and the economy, one which will take you up until early August, 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.