November 22, 2013 — Like standing on a boat in nearly calm seas, watching mortgage rates lately might make you a little queasy, what with the regular cadence of rolling back and forth in single- and multi-week swells. Of late, for example, a 4.45 percent average on October 18 gave way to a 4.27 percent one two weeks later, only to turn back upward to 4.45 two weeks after that.
This week, we’re on the downside of the swell again. That said, fairly calm seas are preferable to the roiling ones we saw earlier this year, when an eight-week wave pushed rates to multi-year highs. Since then, things have calmed appreciably, even if the tide remains considerably higher now than that of the low ebb back in early May.
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 decreased by eight basis points (0.08%) to 4.37%. The FRMI’s 15-year companion managed a fall of only five basis points (0.05%) from the prior week’s value, dropping to 3.48%. The popular FHA-backed 30-year FRM is again testing the four percent level, with a four basis point decline setting it at 4.02% for the week. For its part, the overall 5/1 Hybrid ARM closed in on the three percent mark, falling by four hundredths of a percentage point (0.04%) to 3.02% for the week.
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Minutes of the Fed’s October meeting were released this week, and make for some interesting reading, if you’re so inclined. In the minutes this this time was a sub-section titled “Policy Planning” where discussions about QE, QE tapering, communication issues and more were revealed, and is most enlightening into the Fed’s present state.
Given the unexpected reaction by financial markets when the Fed first revealed its intention to taper asset purchases (QE) earlier this year (mortgage and other interest rates spiked, among other items) quite a bit of time was spent discussing how to better communicate the distinctions between asset purchases and use of manipulating short-term interest rates, the Fed’s typical policy lever, and how to dissociate them in the minds of investors.
Clarity of intention has proven a challenge for the Fed, and as they have tried to tweak their messaging the markets have become less certain of them. Having tried economic projections, thresholds and now a strong emphasis on data dependency, it’s less clear when or if asset purchases will taper, or how large the accumulation of solid news must be for the Fed to make not only the first move, but ones in the future, and under what conditions the Federal Funds rate might start to be pushed upward.
Based on the discussions, it doesn’t appear that Fed members actually know. Should the asset purchase program be changed so as to automatically taper as milestones are passed… or should a calendar approach be used? Should Treasury and MBS purchases be tapered at the same time… or the same rate.. or not?
The need to separate the manipulation of the Fed Funds rate from QE purchases got a lot of play, too. It would appear that futures markets don’t fully believe that the Fed won’t start changing short-term rates soon after QE ends (or perhaps as it ends). But how best to communicate the Fed’s commitment to low short-term interest rates well beyond the end of QE (or any other program which might come)? Should the “threshold” of a 6.5% unemployment rate be abandoned, or lowered? What about the 2 percent to 2.5 percent inflation rate coupled with that? Are there other signals and changes to policy the Fed might use to try to convince the markets that low rates will remain for a long while yet, QE or no QE program?
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If anything might be taken from the minutes, it is that the intention to exit QE remains fully in place. The efficacy of the program may be diminishing, as at one time it produced record-low mortgage rates and certain Treasury yields; however, that is no longer the case, even with the Fed fully in the market and inflation quite low. As such, the Fed may consider starting a tapering over the next few meetings even if the economy doesn’t strengthen much from here. How best to let the markets know that this is the case — and that even so the Fed Funds rate will remain pegged at rock bottom — will be a continuing challenge, no doubt, and one which may become Janet Yellen’s problem.
With changes to Fed policy data dependent, attention will need to be paid to employment and labor market releases and inflation reports. Also, as housing has again become a contributor to the recovery and is interest-rate sensitive, some heed should be given to any changes there, too.
Homebuilders remain mostly happy, according to the latest Housing Market Index from the National Association of Homebuilders. The HMI posted a reading of 54 for November, on par with October and a pretty firm level. Sales of single family homes held steady at a solid 58, even as projections for the next six months and traffic at model homes and showrooms diminished a little.
It’s pretty easy to see the reasons for optimism here. Compared with the awful conditions of a few years ago, things are quite bright; stock prices of publicly-traded homebuilders are quite high, inventories of homes are quite low and there is likely plenty of upside in construction and sales for the next few years. While improved, both construction and sales of new homes remain well below normal; at some other points in time, these levels would represent dire conditions but look pretty good in comparison to times not all that long ago.
Sales of existing homes have lost some of their cheap-financing and low-price steam of earlier this year. Sales of used homes slipped by 3.2 percent in October, easing to a 5.12 million annualized rate, the slowest pace since June. To be fair, these sales are reflective of decisions made perhaps 45 to 60 days prior (e.g. August/September) when interest rates were near two-year highs. We are about a quarter percentage point lower than those levels at the moment, so perhaps some additional sales might come as a result. However, tight inventories of unsold homes are a challenge to buyers; with only a 5 month supply available (six is closer to normal) finding a great used home may be difficult, and if you should, you’ll find its price about 13 percent above this time last year. Couple that with firm mortgage rates and tight lending conditions, and it’s hard to see how sales will gain much momentum at the moment.
More folks with jobs will help that equation, though. New unemployment claims move downward by 21,000 in the week ending November 16, landing at 323,000 new claims filed. Taken by itself, it was the lowest number of initial claims since late September, but the data from that period was quite noisy. It does, however, match the last week of August, the final week before all manner of distortions began to wreak havoc on the reporting of claims, and so does appear to be a return to trend, suggesting a firming labor market.
Another indicator that things might be improving somewhat is the Retail Sales report for October. Shutdown or not, consumers opened their wallets a little wider than was expected during the month, engendering a 0.4 percent rise in spending, the fastest pace since July. Even removing pricey autos and unpredictable gas prices from the mix left a solid 0.3 percent rise. Gains were seen almost across the board, excepting declines in building materials (a third consecutive month, and four of the last five) and gasoline stations (prices of gas had been falling, generally a good thing). Despite the gain this month, the year over year rate of sales remains a modest 3.9 percent. As balances on revolving credit accounts have been generally declining for months, it would seem that cash is being used to push sales forward; if this is the case, and with income growth still weak, there are limits to how much sales might rise.
Sales might be perked up if incomes were regularly rising faster than inflation. However, that’s not the case, at least when the Employment Cost Index is considered. The broadest measure of the cost of keeping an employee on the books rose by 0.4 percent in the third quarter of 2013, a slower pace of increase than the 0.5 percent seen in the second quarter. The report noted that wages rose by 0.3 percent for the period, while benefit costs bounced upward by 0.7 percent. Over the past year, wages have grown by 1.9 percent and benefit spending by 2.3 percent.
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Our Statistical Release features charts and graphs
for 11 products, including Hybrid ARMs.
Our state-by-state statistics are now here.
|Current Adjustable Rate Mortgage (ARM) Indexes
||For the Week Ending
|SAIF 11th Dist. COF
|HSH Nat’l Avg. Offer Rate
The price increases being borne by consumers are fairly modest, though. The Consumer Price Index for October actually showed a 0.1 percent decline in aggregate costs, the indicator’s first dip below zero since April. All of the fall was caused by sliding costs for energy, and leaving food and energy out of the calculation left a 0.1 percent rise in costs. Of late, inflation has cooled; after running as warm as a 2 percent annual pace as recently as July, price pressures have eased to just a 0.9 percent “headline” rate, dragged downward by those cheaper energy costs. That said, the “core rate” of CPI is holding at a pretty firm 1.7 percent annual rate, so the wage gains above are really barely above the underlying rate of inflation at the moment.
Prices are still pretty benign upstream of the consumer, too. The Producer Price Index eased by 0.2 percent in October, a decline which was expected to occur. Like the CPI above, the “core” rate of inflation was above the “headline”, with core PPI rising by 0.2 percent for the month. Mirroring the influences noted above, year-over-year price pressures have been diminishing, thanks to cheaper energy, slipping to a rise of just 0.3 percent over that time. However, baseline “core” costs tell a little different story, sporting a 1.4 percent rise over the last 12 months.
A couple of reviews of local manufacturing conditions found either moderating conditions or moderate expansion in activity. The Philadelphia Federal Reserve’s yardstick measured less strength, as their indicator moved from a strong 19.8 in October to a more subdued 6.5 in November. Measures of orders and employment both fell from lofty levels but remained in positive territory. Over in the Kansas City Fed district, some firming was seen, and their gauge rose to 7 from 6 for November, and orders and employment moved upward.
Consumer attitudes retreated again, with the Bloomberg Consumer Comfort Index slipping by 0.7 points to minus 34.6 in the week ending November 17. A string of declines was interrupted by a four-point improvement last week, but it would seem that after consideration that optimism was tempered somewhat. Overall, measures of moods all remain below recent highs, and given present conditions we might not be ending the year on any kind of high note.
Next week, a short week is on tap for many people, but even so there is a spate of new reports due out, including Housing Starts, consumer sentiment, leading economic indicators and a few others. Compared to early in the week this week, interest rates firmed up a little though Thursday and Friday, so it’s to be expected that we’ll see rates moving back up a little next week, perhaps taking back 5-6 basis points of this week’s dip.
For a longer-range outlook for rates and the economy, one which will take you up until mid December, have a look at our new Two-Month Forecast.
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