July 26, 2013 — Mortgage rates eased again this week, trimming a little more off the top of the more than one percentage point rise in rates seen between May and mid-July. While any decline is of course welcomed by potential homebuyers and refinancers, these dips in rates show no signed of being durable.
With this being the case, these are chances for those actively in the market to grab a slightly lower rate, but are hardly enough to start any kind of new stampede of fence-sitting potential purchasers into the market.
While the rise in rates has predictably crushed refinancing activity, the effects are not nearly as pronounced in the homebuying market, but there are and will be effects from both the rise in rates and the firming of home prices this spring and summer. Although it will be a couple of months yet before the full effect is revealed, we are seeing a couple of inklings already.
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 fell by five basis points (0.05%) to 4.55%, the lowest rate in three weeks. The FRMI’s 15-year companion dropped by four basis points (0.04%), landing at 3.64% for the week. FHA-backed 30-year FRMs also declined by four basis points, falling back to 4.18%, while the overall 5/1 Hybrid ARM fell by two one-hundredths of a percentage point (0.02%) to land at an average 3.33%.
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We noted here last week that builders were happier due to plenty of upside prospects for their businesses in the months and years ahead, as the recovery promotes more reliable demand for new homes, which remains at a level perhaps one-third of the mid-2000s peak. The rise in rates has not crushed their business at all, at least not for the moment, and builders have a key way to offset any rise in rates: they can lower prices as needed to keep affordability at a desired level.
Sales of new homes rose by more than 8 percent in June, rising to an annualized 497,000 units sold. The trend has been generally upward for the past year now, but the June pop may have been accelerated by borrowers looking to get deals in place before rate rose even further (which of course they have). It bears noting that the increase in sales also took place in the context of a 10.3 percent month-to-month decline in prices.
Here’s an interesting way to consider this. In May, the median home price was $262,700 – and the average conforming 30-year FRM was 3.68%. That combination produces a $1,206 monthly payment. Despite a substantial rise in rates to 4.20 percent in June, the fall in the median price to $235,700 means the payment actually declines to $1,153 each month, so new homes were arguably more affordable in June than May. Of course, it isn’t this simple, since the mix of homes sold (and where they are) changes from month to month, but the ability of a builder to adjust the price of a new home (within reason) means that affordability can be preserved.
The increase in sales during the month far outstripped supply, leaving just a 3.9 month supply of homes (actually, 161,000 units) available. The monthly figure matches a record low.
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There’s arguably a lot less elasticity in prices of existing homes, so sellers cannot adjust prices to offset higher mortgage costs. Since prices are recovering after considerable declines, it also is likely the case that sellers need recent gains in prices to avoid selling at a loss or having to endure a painful and protracted short-sale process. As such, we might expect to see effect of the rise in rates be more clearly revealed here, and perhaps we are starting to see this already.
Confounding expectations of a rise, sales of existing homes eased by 1.2 percent from May, slipping to 5.08 million (annualized) units. Despite the decline, the annualized figure was the second best of the recovery, but as noted above, rates in May were measurably lower than June, and July’s have been more expensive still. Unlike new homes, though, prices of existing homes sold in June were some 13.5 percent higher than May, and that even as inventory levels expanded to 5.2 months of supply. All the caveats noted above (mix of homes, etc.) apply here, but on balance, the cost of purchasing an existing home in June (at the stated median prices) was $125 per month higher than May.
There is nothing to suggest that rates will continue to rise, even with a pause or two. However, in order to preserve a given level of affordability and keep sales rising, price gains may need to cool. It’s to be expected that that news will be met with resistance on the part of sellers, but we’ll need to see how strong demand remains as the summer progresses.
HSH.com has a great variety of calculators for homeowners and homebuyers alike. From refinancing, prepaying, deciding how to pay closing costs, seeing if its a good time for you to buy a home or simply figuring out when you’ll no longer be underwater, our unique tools and tips can make your financial life easier. See our entire selection of calculators for all your mortgage management needs!
Housing remains among the bright spots of an economy trudging along at best. While we wait for next week’s first look at second quarter GDP growth, it’s most likely that we will struggle to achieve the 1.8 percent growth seen in the first quarter of 2013. As such, and now nearly a month into the third quarter, there doesn’t seem to be much momentum.
That’s essentially the message which can be taken from the Chicago Federal Reserve’s National Activity Index. This amalgam of some 85 economic components reveals if the economy is growing above or below its potential, believed to be about GDP of about 2.3 percent or thereabouts. In June, the NAI recorded a minus 0.13 reading, its fourth consecutive negative, but at least the smallest of them. Should it persist, the improving trend may see us bump into positive territory in a month or two, but there are plenty of things (the effects of higher rates among them) which could temper the trend as well. Five of six months of 2013 have featured negative values, with the last positive seen in February.
Mixed signs detailing uneven recovery strength are all around us. Even as a local report covering economic activity in the Richmond Federal Reserve Bank’s district dropped by 19 points to minus 11 in July, a similar report from the Kansas City Fed gained by 11 to land at a positive 6 during the same time frame. Both series have seen fairly regular forays into negative territory over the last while; including July’s report, the KC indicator has had exactly two positive values since last August, while Richmond’s barometer had more positives last year but has broken the zero barrier only once in 2013.
Orders for durable goods popped higher by 4.2 percent in June, fast on the heels of a 5.2 percent gain in May. Both months featured strong orders for transportation-related items, largely non-military aircraft and autos. Although there was no gain in orders once these pricey items were removed, orders by businesses for goods expected to last longer than three years still rose by 0.7 percent, so there is still some strength in “core” orders to be seen.
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|Current Adjustable Rate Mortgage (ARM) Indexes|
Weekly claims for new unemployment benefits continue to hold in a pretty tight pattern. During the week ending July 20, some 343,000 new applications for benefits were files, up about 7,000 from an upwardly-revised 336,000 the week prior. Claims have wandered in a pretty narrow range for months now, and just as firings have leveled off, so has hiring. New hires have held at about a 196,000 clip for the past three months, and the pattern suggests that the employment report for July next Friday will feature about the same number.
In a suggestion that economic conditions are fair, measures of consumer attitudes have been holding near recovery highs over the last couple of months. The high-frequency Bloomberg Consumer Comfort Index regained all of the 1.1 points it lost last week, climbing back to a recovery high of minus 27.3 for the week ending July 21. Meanwhile, the final July report on Consumer Sentiment from the University of Michigan rose slightly, adding a single point to 85.1, closing July on a positive note and a new high for the recovery. It’s likely that reliable gains in hiring, stock market indexes touching records at times and firming home prices are all contributing to the improvement in moods.
The Federal Reserve meets next week to discuss all of these considerations. There have been fairly dramatic effects on mortgage rates after the close of the last two meetings in May and June, but Fed Chairman Bernanke and many others have since taken pains to try to enlighten the market about the timing of the beginning of the end of the Fed’s extraordinary programs of purchasing MBS and Treasuries. Although the Fed will again try to keep the markets from responding in an unruly and unwanted way, there is no way to know how they will react, especially with an impending — and key — employment report due on Friday.
Mortgage rates dipped a little this week, but all suggestions are at the moment that a firming of rates is to be expected next week. A Fed meeting and an employment report would normally suggest a volatile week ahead, but markets have just recently settled after weeks of upheaval, so we may get more exaggerated changes in rates. Best to figure on at least some increase in rates next week, probably taking back this week’s decline and perhaps a little more. However, it might be best to avoid being in the market at all next week, if you can, since there is a chance of wider swings in rates depending upon the Fed and the strength of the data.
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.
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, to learn exactly when you will no longer have a mortgage greater than the value of your home.
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