June 21, 2013 — So much for an early-week stall in the upward trend for mortgage rates. While the statement provided at the close of the Federal Reserve policy meeting didn’t suggest anything more than a somewhat rosier assessment of current and expected conditions, there was nothing more clear than Chairman Bernanke’s words at the press conference which followed:
“If the incoming data are broadly consistent with [the Fed's] forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7%, with solid economic growth supporting further job gains, a substantial improvement from the 8.1% unemployment rate that prevailed when the committee announced this program.”
An awful lot of “ifs”, to be sure, but the market got exactly the message it was fearing: the end is coming.
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 lifted by only five basis points (0.04%) to 4.19%, the smallest move of the recent uptrend. The FRMI’s 15-year companion added just two basis points to its average (0.02%), rising to 3.35% for the week. FHA-backed 30-year FRMs added another four basis points to move to an average rate of 3.81%, while the overall 5/1 Hybrid ARM moved upward by six hundredths of a percentage point (0.06%) to 2.91% for the week.
For bonds and mortgage rates, the effect of the Chairman’s remarks was both immediate and persistent, with a strong selloff driving yields on influential 10-year Treasuries to over 2.5% by late Friday. This dragged conforming 30-year fixed mortgage rates to daily highs not seen since August 2011.
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At one point in the press conference, when asked about the sharp back-up in interest rates over the last few weeks (which happened after the Chairman’s semi-annual economic testimony before Congress), the Chairman noted that “Well, we were a little puzzled about that.” How the Fed could be puzzled isn’t clear; Markets follow the Fed’s moves, and it the Fed is getting out of the bond-buying business at some point in the fairly near future, no one wants to be the last out the door, the last investor stuck with low-yielding paper no one wants to buy (except maybe the Fed itself).
The Chairman noted in his comments that housing was a “support to growth.” In the months ahead, we’ll see to what extent that the recovery in housing was dependent upon near-record low rates. From our view, if not enough to damage the recovery in housing, the increase in rates seems sufficient to at the very least distort the upward path for home sales and prices.
Of course, there have been some concerns expressed in recent months that some kind of “bubble” was again forming in residential real estate, with strong demand finding little available inventory (thus pumping up home prices). Although that may or may not be the case, depending upon where you live, the fact is plain: higher borrowing costs will temper demand to a degree, and that tempering of demand should serve to slow home price gains and sales to some degree.
We did see what is probably a rate-rise reaction in existing home sales in May. Rates started the month just a few basis points from all-time lows, bringing interested buyers into the market; later in the month, rates drove higher. This kind of a price signal often fosters action, and those people actively in the market no doubt pushed to get their deals done before rates moved even higher. Existing home sales ticked up to a 5.18 million annualized rate of sale, and prices rose again by double digits when compared against last year at this time. Supplies of available homes tightened a little to 5.1 months of available inventory.
In May, the median priced home sold was $208,000, according to the National Association of Realtors. Assuming a 20% down payment, a borrower who got a rock-bottom rate last month would see a monthly payment of about $746; with conforming 30-year rates now at 4.33% on Friday, that same mortgage will run about $826 each month, so a monthly payment now would be about about 11% higher than it was last month. With the rise, and all things being equal, a marginal borrower might be pushed back out of the market unless home prices were to back off a little.
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For June, members of the National Association of Home Builders reported their highest level of happiness since March 2006. The trade group’s Housing Market Indicator finally made it to the “expanding” side of the ledger for the first time since that spring, with strengthening in sales of single family homes, expectations for the six months to come and in the number of folks visiting sales offices. Mortgage rates had been on a multi-month decline though May, and with inventories of existing homes lean, perhaps more folks felt that having a new home built was a competitive option. We’ll see how the homebuilders moods and sales trends fare in the new rate environment as the summer moves along.
Housing starts moved 6.8% higher in May, so that might explain some of the June optimism expressed above. After a lackluster April, the gain pushed the annualized rate of construction initiation to 914,000 units, a solid but unspectacular figure. Starts of single-family homes barely budged, moving to a 599,000 number from April’s 597,000 one, so almost all of the gain came from multi-family starts. Although permits for future activity did ease to 974,000 units, that was a decline from a recovery-high level in April and is fairly strong.
At least one Fed governor expressed concerns about low inflation, which has been declining to levels rather below the Fed’s preference. Federal Reserve Bank of St. Louis President James Bullard said that should inflation keep falling he would prompt his colleagues to increase, not decrease, asset purchases to keep deflation from taking hold. However, Mr. Bernanke noted that some of the factors depressing prices seemed “transitory” and that inflation would probably firm up from too-low levels as the year went along.
We’ll need to wait to see how that plays out, but for the moment, the latest Consumer Price Index found just a 0.1% upward blip in costs during May. With that mild lift, headline inflation is running at just a 1.4% annual rate. “Core” inflation, stripped of food and energy items to hopefully reveal a clearer picture of cost pressures, moved up by 0.2% for the month, and has a cumulative 12-month rise of just 1.7%. Both measures have generally been in a declining pattern over the last few months.
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There was a June revival in two local reports on manufacturing. The New York Federal Reserve Bank’s Empire State manufacturing survey saw its indicator move from minus 1.4 in May to a positive 7.8 in June, the strongest reading since March. However, the details in the report, which showed declines in orders, inventories and employment conditions didn’t seem to suggest the kind of strength the headline number would indicate. Less puzzling was the report from the Philadelphia Federal Reserve, where the 17.7-point rise in their headline indicator was backed up by strong gains in orders and improvement in employment metrics. If manufacturing can find some traction in the face of slow growth overseas and a pretty soft economy here, we may well overcome the “headwinds” of the January fiscal agreement of higher taxes and the federal spending sequestration.
That would come as 2013 rolls along, of course. As far as a look ahead goes, the index of Leading Economic Indicators from the Conference Board did move 0.1% higher in May, but that was a retreat from a 0.8% rise in April. If anything, the mild reading suggests little forward momentum after somewhat stronger readings at the end of last year and in at least three of the first five months of 2013. An imprecise forecasting tool, the LEI may better reflect conditions in the month in which the data was gathered.
Strengthening labor markets are among the key issues the Fed will need to see to decide when, and how quickly, to begin to take its foot off the monetary accelerator. While no change to short-term interest rates should be expected before the unemployment rate approaches 6.5%, Mr. Bernanke noted that a 7% “threshold” was an important milestone and suggested that QE3 might best be mostly wound down when we cross that marker. With unemployment still at 7.6%, the size of the labor pool diminished and with new claims for unemployment benefits steady, there is presently little suggestion that we’ll be headed that way any time soon, but there still are six months to go in 2013 to bear out the Fed’s forecast. For the moment, though, claims for unemployment benefits continue to hold in the middle of recent ranges, with another 354,000 new applications for benefits filed during the week ending June 16.
Consumer moods did tick higher during the week ending June 16, with the Bloomberg Consumer Comfort Index moving up my 1.9 points to minus 29.4 for the week. We will need to see how consumers feel about the higher interest rates generated this by the Fed action this week, not to mention the considerable sell-off in stocks. We might see some of that in next week’s report, or even in the final June reading for Consumer Sentiment, due out Friday.
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|Current Adjustable Rate Mortgage (ARM) Indexes|
So there we have it. We will have an end to QE, with the tapering likely to begin later this year, if the Fed’s expectations come true. Frankly, their ability for forecast economic growth hasn’t been all that good to date, so there is reason to doubt that QE will disappear very quickly. At the same time, it is to be expected that trimming the program will happen regardless; All we are left with is the velocity of the reductions to ponder. If tapering began in September, and was to be eliminated by mid-year as Mr. Bernanke noted, that would put on a pace to see about reductions of an average of about $9 billion per month, give or take a little.
But would these levels actually constitute declining support? It should be noted that with federal budget deficits falling, there will likely be fewer newly-issued Treasuries to purchase in the market; with mortgage originations easing (and now likely to fall further) there will be fewer new MBS to acquire from Fannie or Freddie. As such, with smaller amounts to absorb from their native issuers, the Fed would remain strongly active in the market, at least on a percentage of the market basis. Also, should they run short of their needs, as far as we are aware, there is nothing that prevents the Fed from purchasing assets from the open market, so investors might still find a ready place to dispose of low-yielding assets if needed.
We will need to carefully evaluate just how much distortion the rise in rates causes in the housing market and to consumer attitudes. If the Fed is now more truly dependent upon incoming data than it had been, we could find even more volatile weeks ahead. The period leading up to the next Fed meeting at the end of July should prove interesting, too.
Mortgage rates don’t appear to have finished increasing just yet, and the mild rise in the figures above are masking some strong upward momentum. As we noted, Friday’s 30-year conforming average of 4.33% was the highest daily value since the end of August 2011, and we are starting next week with a considerable upward bias. The available data due out, including that from the Chicago Fed, an update of GDP, sales of new homes in May and more seems unlikely to do much to temper the increase. The four basis point rise this week will give way to perhaps a 20-basis point increase or more by the time June comes to a close next week.
You might check hsh.com for daily updates next week to see how things are going.
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.
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