March 7, 2014 — Mortgage rates stepped back a little this week, but all indications are that an uptick is imminent, as the underlying interest rates which help to govern fixed-rate mortgages have firmed up measurably in recent days.
While the Ukraine troubles continue to concern investors the situation does appear to have at least stopped worsening for the moment. We might say as much about the economy; although the freshest data covering it is still revealing a mixed bag of results, at least some key indicators managed to improve a little bit. There is also some hope that rough winter weather is to blame for any subpar numbers, and if that’s the case, an uptick in growth and mortgage rates is likely in the offing.
HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found the overall average rate for 30-year fixed-rate mortgages slipped by three basis points (0.03%) to land at 4.39%, 2014’s lowest average rate to date. The FRMI’s 15-year companion also eased by three basis points (0.02%) to dip to 3.51%. Popular FHA-backed 30-year FRMs joined the fray, sliding by three basis points of its own to land at 4.01% for the period, and the overall 5/1 Hybrid ARM also managed a fall of three hundredths of a percentage point, too dipping to an average rate of 3.03%, remaining at its lowest rate since late November.
See this week’s Statistical Release and Mortgage Trends Graphs.
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The Federal Reserve’s latest report covering regional economic conditions during the six-week period that ended February 24 (the so-called “Beige Book”) reported that eight of twelve districts were experiencing modest to moderate levels of activity; two posted slight declines, one slowed and one remained mostly stable. Segments of the report noted that difficult weather conditions impacted consumer spending, retail and auto and nonfinancial service businesses, manufacturing, travel and agriculture, and the expectation is that these areas will improve with the onset of better weather, boosting growth.
Sales of new vehicles in February held firm to the recent trendline as a 15.4 million annualized rate of sales occurred. This was up slightly from January’s pace, but roughly equivalent to rates seen in December, October and September of last year; only a November spurt to a 16.4 million pace broke up the string. Auto sales don’t seem to have been much affected by the weather over the last three months, although the mix of vehicles sold has favored light trucks over cars, as purchasers perhaps looked to four-wheel drive choices as a means to best the snow and ice many parts of the country endured during the period.
At least some of those vehicle purchases required taking out new loans. Consumer Credit expanded in January by $13.7 billion, a downshift from December of about $2.2 billion. All of the growth in consumer debt was seen on the installment side of the ledger; these kind of loans are most commonly used to buy autos and finance education needs. As far as revolving credit, a $0.2 billion decline was noted, and for revolving credit, the last six months have swapped between expansion and contraction as households remain way of adding high-rate credit card debt to the monthly budget.
Less wariness and more accumulation of debt may be seen in the months ahead, should income gains pick up. In January, personal incomes rose by 0.3 percent, with both wages and disposable incomes gaining a little after a stumble in December. Personal outlays did also move higher during the month, rising by 0.4%, but at least some of that spending was for higher utility bills, and as is always the case, more outgo than income means it’s hard to save. Despite the slight imbalance this month, the nation’s rate of saving remained unchanged at 4.3 percent.
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Among other things, income gains of course rely heavily upon gainful employment. In this regard, the economy has not been all that friendly over the last few months after managing pretty fair job gains in 2013. The latest employment report for February estimated that 175,000 open positions got filled during the month, a figure a little higher than forecasts and one which seems to refute to some degree the impact of poor weather, as the increase in hiring took place despite repeated storms in perhaps half (or more) of the country during the month. Regardless for the reason, the February figure was also accompanied by slight upward revisions to weak December and January gains and the latest report has moved us much closer to last year’s average levels than not.
For interest rate watchers, the Fed has been using a 6.5 percent unemployment rate as a bellwether for considering a change in monetary policy. Of late, rumblings have come that the unemployment rate benchmark will be pushed aside in favor of a wider view of labor market metrics before any change to interest rates will be considered. Regardless, the employment report also revealed that the official unemployment rate moved up by a tenth-percentage point during the month, rising to 6.7 percent. Even though somewhat more folks entered the job market, the measure of the labor force participation rate held at 63.0 percent, just above recession lows. Overall, the news about the job market was better than expected and may also contribute to a firmer rate environment.
The twin ISM reports seemed to disagree about the direction for the economy in February. The ISM report covering manufacturing posted a hopeful 1.9 point rise to 52.3 in February, taking back a portion of January’s 5.2 point plummet and moving the indicator back away from the flat-level stall speed of 50. Although current production measures slumped, those for new orders moved higher while the employment figure firmed. For the larger service side of the economy, roughly the reverse was true, as the ISM report covering non-manufacturing businesses dropped by 2.4 points to land at 51.6 for the month, the lowest monthly value in several years. Overall business activity cooled even as new orders ticked higher, while the employment component of the report dropped below 50 for the first time since July 2012.
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If final demand remains tepid, and as long as worker productivity remains strong there is less need to add new hires to meet output goals. Although worker productivity was ratcheted down from an initial estimate of 2.6 percent growth to only 1.8 percent in the fourth quarter of 2013, the last three quarters have seen 1.8, 3.5 and again 1.8 percent growth in output. This rise in productivity may have presaged the slowing in hiring at the end of 2013 and the beginning of 2014, as demand doesn’t seem to be expanding at the same pace. Workers with jobs who are putting out more means that they can also be paid more with no effect on prices, and compensation per hour expanded at a 1.7 percent clip in the quarter, leaving a 0.1 percent fall in per-unit labor costs, which now have declined for two consecutive (and three of the last four) quarters. If we hope to see a job market more on the mend in the period ahead, we’ll probably need to see a combination of somewhat more demand (which unfortunately largely depends upon someone having a job) or somewhat smaller gains in productivity growth.
At least somewhat fewer folks are losing jobs of late. In February, the outplacement firm of Challenger Gray and Christmas tallied 41,835 announced layoffs, down 7.3 percent from January’s figure and also below year-ago levels. As well, the number of new claims for unemployment benefits fell to their lowest level in 2014, dropping by 26,000 to land at 323,000 in the week ending March 1. If we can hold these levels or even manage to decline from them for a period it will be a clear signal that the economy is again starting to muster some strength.
While it is starting to seem rather long ago, data for January continues to trickle out. As the weather issue is believed to affect so much of the available data really got underway in January, it might be expected that something as outdoorsy as constructing new buildings would be profoundly affected. Not so much, at least as can be gleaned from spending on construction projects during the month; total outlays increased by 0.1 percent, driven higher by a 1.1 percent gain in residential projects, but pulled back by weak commercial building (-0.2 percent) and public works projects (-0.8 percent).
HSH’s Statistical Release features charts and graphs for eleven mortgage products, including Hybrid ARMs.
Our state-by-state statistics are now here.
Based on the January ISM manufacturing data, we already knew that factory orders in January were probably poor. They were, with the overall measure of total orders falling by 0.7 percent, fast on the heels of a 2 percent decline in December. That behind us, and with February’s ISM reporting a pickup in new orders, we will probably see improvement in this figure when next month comes rolling along.
It stands to reason that we’ll also accumulate more orders here if our trading partners’ economies can find some traction. The latest reading on the U.S. imbalance of trade for January was little changed from December, widening by just $100 million to $39.1 billion for the month. Exports rose by $1.2 billion, imports by $1.3 billion; both numbers are a little stronger than in December, and suggest that there has been a little resumption in activity both here and abroad, which is better news for the economy as a whole.
Finally, Consumer Comfort as measured by Bloomberg rose by a single tick to negative 28.5 in the week ending March 2, as we slowly climb away from a recent nadir of -33.1 achieved on Groundhog Day. Perhaps the nearing of the end of the “six more weeks of winter” period is lending some cheer.
While the rough economic period of the last couple of months may or may not fade quickly, the most recent evidence is sufficient to suggest that it is fading. If this turns out to be the case, it’s reasonable to expect that interest rates will nudge away from their recent lows and that the Federal Reserve will continue to trim QE apace. Any homeowners hemming and hawing about waiting for lower rates to pull the trigger on a HARP refinance should consider getting underway before too much more time passes. As they will remain favorable despite any small rise, interest rates are of somewhat less consequence to potential homebuyers, an audience who is arguably more concerned with both home prices and a lack of desirable properties than a few basis point change in rates.
More new economic clues will come next week and mortgage rates will be firming a little. We’ll see if retail sales have picked up, get a look at producer prices and early March readings for consumer sentiment, among other things. If the change in underlying interest rates is any guide, we’ll take back this week’s dip plus a few basis points, a move probably totaling 8 to 10 basis points in all.
For a longer-range outlook for rates and the economy, one which will take you up until mid April, have a look at our new Two-Month Forecast.
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