Economy improving, mortgage rates easingby Keith Gumbinger
In a perfect recovery, economic growth would come in bursts above levels needed to foment a self-sustaining recovery without extraordinary supports. That’s not been the case with this recovery, at least to date, but perhaps those days are approaching more quickly than previously expected.
That’s not to make a claim that we are there yet, or that an even and steady gait is to be expected, or that supports will suddenly disappear, only that forward momentum seems to be occurring, the kind which might help us power though whatever headwinds might come. They may yet prove considerable but for the moment don’t appear to be slowing us down much.
Some supports come in the form of Federal Reserve policies to keep long-term interest rates and mortgage rates low. Although rates did move a tad higher in the last couple of weeks, grinding just above record lows, they remain a powerful inducement to finance or refinance a home.
Mortgages down all around
Last week, 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 (conforming, non-conforming and jumbo) slipped by three basis points (.03 percent) from the week prior, easing to an average 4.22 percent.
The FRMI’s 15-year companion gave up just one basis point of the previous week’s rise to finish the weekly survey at an average 3.50 percent. Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages declined by a single hundredth of a percentage point to 3.85 percent, and the overall average for 5/1 Hybrid ARMs followed suit, falling one basis point to 3.01 percent.
FHA mortgages getting more expensive
Mortgage rates are only one component of the transaction, though. Fees and insurance costs of course play a role as well. HUD announced this week an increase in FHA insurance premiums, starting April 1. The required fee to get into the FHA insurance pool is rising from 1 percent of the loan amount to 1.75 percent, and annual recurring premiums are rising by about 10 percent overall.
The FHA is looking for any way possible to shore up its insurance pool, which has been decimated by losses from loans in the early years of the housing crisis, largely 2007-2009. While these are not huge increases, it does mean that it will be a little tougher for some borrowers to get cheap, low-down payment loans. The move is also one means of pushing borrowers back toward private lenders, most notably “jumbo” borrowers, as those higher MI costs are a deterrent to using an FHA mortgage.
3 signs of economic improvement
- Fed’s assessment: Last week, Federal Reserve Chairman Ben Bernanke spoke before Congress in semiannual testimony on monetary policy. His assessment of present conditions was considerably more upbeat than at times over the last couple of years. The tenor of his remarks left an impression that perhaps the Fed’s expectation of keeping short-term interest rates low until late 2014 might not happen, and that the Fed might begin to adjust policy sooner than that. The Fed originally maintained that rates would be low “through mid-2013″, and that timeline might be more in play at the moment than when the Fed extended it back in January.
- GDP growth: The sum of the nation’s output–Gross Domestic Product–rose by a better-than-expected 3 percent in the final quarter of 2011. The preliminary report on GDP saw growth ratcheted up by 0.2 percent for the period, and is a stout increase from the 1.8 percent seen in 3Q11. That boost should keep us moving in the first quarter of 2012, but some of the gain was probably related to purchases of certain goods so that businesses could receive more favorable tax handling.
- Positive employment trends: The employment report for February is due next Friday. If present trends in unemployment benefits are any indication and can be trusted, we should see perhaps 200,000 new jobs created during the month and a steady unemployment rate at 8.3 percent. New claims for benefits appear to have settled at a new level in the 350,000 range, and the week ending February 26 found 351,000 new applications filed at state windows. We will need continued gains in hiring and spending if we hope to move from economic recovery to actual expansion.
The Fed’s latest survey of regional economic conditions–called the Beige Book for the color of its cover–again reported a “modest to moderate” pace of economic expansion in the six week period which ended mid-February. The report noted that “residential real estate activity increased modestly in most districts” and that some expectations of future home sales had moved higher. This was an improvement over the “very steady at low levels” noted in the January report.
What does the future have in store?
While we believe that interest rates will firm somewhat as we head toward spring–see our latest two-month forecast for that–it is more likely to be a modest grind higher rather than a leap, at least at this stage of the game.
In looking at a closer time period like this week, we think that there will continue to be a little more upward pressure on mortgage rates than downward. A two to three basis point rise might occur, perhaps a bit more if the employment report surprises to the upside.