June 28, 2013 — The aftermath of the Fed’s meeting and Mr. Bernanke’s press conference remarks continued to roil markets this week, but there are some indications that the “sell everything and run” panic has subsided.
Aside from markets growing somewhat more accustomed to the idea of having less Fed influence in the market at some point, the more relaxed stance was the result of the efforts of several Federal Reserve governors and regional bank presidents taking pains to note that the markets may be misinterpreting the Fed’s intentions. According to these folks, Fed policy hasn’t changed. Unfortunately, until proven otherwise by action, inaction or by contrary incoming data, it has.
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 leapt by forty three basis points (0.43%) to 4.62%, the highest average rate since August 2011. The FRMI’s 15-year companion added thirty eight basis points to its average (0.38%), rising to 3.73% for the week. FHA-backed 30-year FRMs rose by a whopping 49 basis points to move to an average rate of 4.30%, while the overall 5/1 Hybrid ARM moved added forty-three hundredths of a percentage point (0.43%) to 3.34% for the week.
Much has been made of late about the rise in both existing and new home sales and prices. However, the latest observations on sales are from May when mortgage rates were much lower, nearly pressing into new record territory at the beginning of the month. Also, home price gains, as measured by the widely-followed Case-Schiller index are from April.
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None of these figures reflect the changes in the market which have occurred since then, and certainly not the pronounced spike in rates of the last ten days. In May, those near-record-low rates drove buyers into the market; a bump in rates at the end of the month and even into early June saw them scrambling to get deals in place. As such, home sales were of course higher in May, and will probably be for June (perhaps to a lessened degree) when those figures are revealed at the end of July. However, it’s a reasonable expectation that, should rates hold near these levels, that the sharp upward trend for home sales will soften, perhaps considerably.
Sales of new homes did continue upward in May, rising to a 476,000 annualized pace. Inventories remained lean at 4.1 months of available supply, while the actual number of units available continues to slowly grow. Over the past 11 months, built-and-ready to sell stock has risen from 142,000 units to May’s 161,000 and both demand and supply are tracking one another pretty closely.
While gains in sales are encouraging, it bears remembering that even with the steady rise — and sales in May were some 29% above year-ago levels — that today’s annualized sales pace is about one-third of the peak level before the boom, and perhaps barely half of what a “normal” economy should be producing. Should it prove durable, the recent rise in interest rates may retard the recovery in housing markets to a degree.
That said, perhaps this is the goal. We have occasioned to wonder this week about the Fed’s intentions in their discussions about the future of QE. Consider, and noting that this is fully speculative on our part, that the Fed may have grown concerned about asset price inflation, most especially in home prices. These increases in value have been fomented by demand that the record low interest rates of QE3 have produced.
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At present, too much demand is being met by too little supply, and the imbalance may be causing more asset inflation that the Fed wants to see. If interest rates being held too low for too long by the Fed was a key part of the boom (as some contend), perhaps the Fed is wary of repeating the same mistake. If this is the case, and “asset allocation” has become unbalanced with too many resources being thrown at real estate, a rise in interest rates would tend to temper demand, and in turn, temper price increases. At the same time, this slowing of demand would allow inventory levels to nudge higher, especially for new homes, better balancing supply and demand.
Through its discussions, perhaps the Fed wants to see the change in demand that more “normal” rates might bring, all while maintaining the option to continue QE3 (or structure any tapering) over a longer time horizon as insurance. Again, this is purely speculation. It is also a fair bet the Fed did not actually intend to spike mortgage rates, at least not to present levels, which may cause more market disruption than was intended.
Another consideration is that perhaps the Fed is becoming uncomfortable with the speed with which MBS and Treasury purchases are adding to its balance sheet. As the economy improves, smaller budget deficits mean declining issuance of new Treasury securities; higher rates would tend to attract more investors seeking yield, so there might be fewer dollars needed from the Fed to maintain its influence. That’s much the same for mortgages, where a rise in rates that chills mortgage demand would tend to slow issuance of new MBS. Assuming constant investor demand, this would mean that the Fed could purchase somewhat less in terms of dollars but still retain the same or even increase its percentage-of-the-market influence on mortgage rates. All speculation, of course, but we will see soon enough.
If the Fed is to be swayed in to action or inaction by incoming data we may see QE and zero-bound short-term interest rates for some time to come. The latest reading on first quarter 2013 GDP growth was a downgrade from prior estimates, and the 1.8 percent growth rate suggests the need for more stimulus, not less. Estimates of GDP growth for the second quarter are probably a little higher than this, perhaps 2.4% or so, but this would still be below levels needed to trim unemployment very quickly. In the report, the Fed’s preferred measure of prices — “core personal consumption expenditures” — rose by just 1.3 percent during the period, so the only inflation to be seen in the early portion of this year comes in the form of stock and home prices.
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Reducing unemployment is of course among the Fed’s goals, and the job market is no doubt improved, relative to last year. However, an unemployment rate of 7.6% and stubbornly high new unemployment claims figures don’t point to robust employment prospects. During the week ending June 22, another 346,000 new applications for benefits were filed, solidly in the middle of the range they’ve held all year. Job gains have been fair but unspectacular, averaging around the 170,000 mark over the past year. The June employment report comes next Friday, and we expect to see about this number again, give or take a little.
If anything, the economy seems to have somewhat less momentum than it did in the first quarter of the year. The latest National Activity Index from the Chicago Federal Reserve points this out, since there have been two negative numbers to begin the second quarter. To be fair, there were also two negatives in the first quarter; these bookended a positive value in February, but we did only achieve a GDP of 1.8% during the period. In the latest report, the NAI held a value of -0.30 in May, which was a slight improvement from April’s -0.52 reading. The indicator has been negative for four of the first five months of this year, and suggests that the economy continues to grow below its potential, thought to be a GDP of 2.6% or thereabouts.
Orders for durable goods did rise by 3.6% during May, goosed by strong orders for aircraft. Excluding transportation items, orders still rose by 0.7% and a subset of orders for business-related items gained by 1.1%. That should provide a little cheer for the nation’s manufacturers, who have seen condition deteriorate over the past few months. To that end, the activity indicator from a Chicago-area purchasing manager’s group shed almost all the gains it showed in May, returning to near flatline in June. This suggests that Monday’s national ISM survey might barely hold breakeven, too. The rest of the news about manufacturing health was mixed, too, with regional activity reports from the Richmond and Kansas City Federal Reserve Banks heading in opposite directions during June. Richmond’s gauge show its highest reading since December 2012, while the KC Fed’s barometer slipped back under the zero mark after spending just one of the last nine months above it.
Consumers remain largely undaunted despite the ongoing challenges. This may be because personal incomes firmed up a bit of late, rising by 0.5% in May, the fastest gain since February, with wages rising by 0.3% for the month. Money went out the door a little more slowly, as personal consumption rose by just 0.3% for the month. More income and less outgo means that savings perked up a little, with the nation’s rate of savings inching up to 3.2 percent for the month. Of course, along with incomes, rising stock prices, firming home values and little inflation are no doubt all contributing to better moods.
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This was reflected in the latest reading of Consumer Comfort from Bloomberg. The CCI moved to minus 28.3 for the week ending June 23, the highest reading of the recovery and the strongest since January 2008. As well, the measure of Consumer Confidence from the Conference Board moved 7.1 points higher to 81.4 for June and has added nearly 20 points since March. In addition, Consumer Sentiment for June held at solid levels, according to the University of Michigan survey, easing just 0.4 from May but at about five year highs.
Mortgage borrowers have had a rough time of it over the past few weeks and especially the past few days. It has been some time since we had a one-point or more rise in rates over a fairly short period, let alone a near half-percentage point rise over just a few days. Although there are few market players who remain that might remember such swings, and not that anyone likely cares, but over the long history of HSH we have seen a number of these kinds of spikes. Although no longer commonplace, wide and sizable swings in rates were seen often enough back in the 1980s, for example, and at rates which were multiples of today’s cheap credit.
After popping strongly higher on 6/20, 6/21 and 6/24, mortgage rates moderated as the week progressed, improving by more than 20 basis points from Monday’s 4.63% daily conforming 30-year FRM to Friday’s 4.42%. Although markets remain tense and wary, mortgage rates seem poised to slip backwards as we move into next week. Failing an outsized improvement in the ISM manufacturing (seems unlikely) or service business reports (possible) on Monday and Wednesday respectively, that leaves us with only the June employment report as a concern for rates.
At present, we expect a 12 to 15 basis point decline next week in HSH’s FRMI, a trim off the top of this week’s rise. As with last week, you might check hsh.com for daily updates next week to see how things are going.
For a 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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