Mortgage Rate Trends: Weekly Market Trends & Forecast

Fed Intentions Revealed, Mortgage Rates Firmer

January 27, 2012 -- The Federal Reserve kicked off its new strategy of clearer communications at the close of January's Open Market Committee Meeting on Wednesday afternoon. With just a few words, plus some charts, the Fed now expects to keep interest rates "extraordinarily low" for a period up to 18 months longer than the mid-2013 previously in place. Also for the first time, the Fed more officially revealed more explicitly that it will use an inflation target to help control monetary policy.

Armed with this news, and with Fed Chair Bernanke commenting at his news conference afterward that a QE3 is certainly possible sometime this year, markets turned. Mortgage rates were rising somewhat in the early part of the week, goosed by warmer economic news, but reversed course to some degree. Why? If nothing else, it reinforces the idea that the Fed expects the economy to continue to experience sub-par growth which will require additional assistance, and that price pressures are low and will likely remain that way for some time.

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 rose by six basis points (.06%) from last week, climbing to an average 4.28%, closing January just shy of where it began. The FRMI's 15-year companion increased only two basis points (.02%) to finish the weekly survey at an average 3.55%. Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages rose by just a single hundredth of a percentage point to 3.87%, while the overall average for 5/1 Hybrid ARMs increased by two basis points to end the week at 3.06%.

See this week's Statistical Release and Trend Graphs.

Want to get Market Trends as soon as it's published on Friday? Get it via email -- subscribe here!

Will the Fed start a new program of purchasing Treasuries and Mortgage-Backed Securities? If the economy falters, that would be a consideration, especially given that this year is an election year and getting meaningful fiscal support from the Congress is unlikely. That said, the economy has been generally on an improving bent after suffering considerably early in 2011, with all kinds of weather-related interruptions capped off by the Japan disaster causing disruption. After growing just 0.4% in the first quarter of 2011, the path for GDP has been an improving one, with 1.3% in the second quarter, 1.8% in the third and 2.8% in the fourth, according to the advance report released on Friday. The present rate is solid enough, but insufficient to bring down unemployment very quickly, and with euro-headwinds forming for 2012, the upward march of the economy might be disturbed, and the Fed would feel compelled to act. Should economic growth continue on even a modest upward trajectory, the Fed is more likely to hold off, since these programs don't come without consequence of inflation or even more lasting market distortion. For 2011, GDP grew by 1.7%, with inflation waning when compared to 2010.

Mr. Bernanke mentioned that he would think it acceptable if inflation ran above the Fed's 2% level for a time, if it was to promote stronger job growth. That's fine, but we wonder how the market would react to a Fed who states a goal and then feels it they can ignore it. Admittedly, that's not much of a problem at the moment when inflation is easing, but should the reverse occur the market might not like it. Inflation is a monetary policy issue; if it runs hot, failing to control it can cause serious damage, and often worse trouble ensues when it must be corralled again.

The Fed's commitment to a low interest rate policy (and possibly a QE3) is aimed squarely at reviving the housing market. Sales of new homes came in at an annualized rate of 307,000 in December, down by some 7,000 units from November. While it was the worst year for new home sales since records were kept (1963), we have been encouraged by both the stable pattern of sales and also that inventory levels are at record lows (157,000 units built and ready for sale, about 6.1 months worth at the present rate of absorption). With lows of 281K annualized units and highs of 316K annualized, we are closer to the top than the bottom of a weak range, so any increase in demand must be met with new construction.

An amalgam of some 85 economic indicators, the Chicago Federal Reserve's National Activity Index pointed to a faster growing economy in December. The NAI sported a positive value of 0.17, a nice rebound from a sub-par minus 0.46 in November. The NAI seeks to show whether the economy of growing faster or close than what is considered its natural potential to grow, believed to be about GDP 2.8% or thereabouts. Two of the last three months have been positive where only one six prior to October had been, lending hope that we are gaining some economic traction as we move into 2012.

Some of that traction is reflected in improvements in regional activity. The Federal Reserve Banks of both Richmond and Kansas City weighed in with their January reports, and both found improving conditions in their respective districts. The KC Fed's indicator moved from a value of -4 in December to a +7 in January, a nice rebound, while the Richmond district moved from a mile reading of 3 to a high-since-March 2011 reading of 12. At least some of that forward progress is no doubt due to a 3% surge in orders for Durable Goods in December, as spending on items designed to last longer than three years has put in two solid months in a row. Business-related spending picked up in the latest report, rising by 2.9%, so there would appear to be some optimism expressed there about the prospects for growth in 2012.

The monthly employment report for January comes next Friday, and everyone is hoping to see continued gains in new jobs created and a decrease in the unemployment rate. Forecasts are for perhaps another 200,000 jobs created, but since claims for new unemployment benefits has been a little higher in January than December we'd expect perhaps 180,000 for the month. There may be some upward revision to December, though. That said, unemployment claims came in at 377,000 during the week ending January 21, a figure about average for the last four weeks.

With slow improvement on the job front you would expect to see the same reflected in the demeanor of consumers. That's roughly seen in the final report on Consumer Sentiment from the University of Michigan. The final January value of a flat 75 was the highest since February 2011, and continues a fairly steady climb since a summer nadir. On a higher frequency note, the weekly Bloomberg Consumer Comfort Index continues to hold in a very narrow range, with a reading of minus 46.4 for the week ending January 22. That was an improvement from the previous week of a full point, but the indicator remained mired near the bottom.

Improvements yet to come might change that. Things should continue on an upward bent, if the forecasting ability of the index of Leading Economic Indicators can be believed. The LEI rose by 0.4% in January, it's third gain in a row after a couple of rough summer months. The LEI may better reflect the economic climate in which its components are measured, but to the extent that it does foretell the future, we should have enough momentum to power us ahead in at least the first quarter of 2012.

The Fed's assessment of the economy over the next few quarters are no doubt darker than the conditions we are experiencing. The effects of a slowdown in Europe have yet to be fully felt here, which may trim exports to a measurable degree, and the economy here is by no means firing on all cylinders and is less able to endure any kind of shock. That being the case, of course the Fed would say that they stand ready to do more, but all the while, its a safe bet that they would rather not. The value of the Fed's previous actions is not nil, but it is limited, as is the Fed's ability to manage issues better done from the fiscal side rather then the monetary. That is to say, low interest rates are great for some things, but they only go so far.

It should be noted that there are those for whom low rates are a problem, like savers, pension funds and others. The longer-term commitment for low rates may force some rates even lower than they already are, which is very close to zero for many short-term accounts. If banks can get 0.25% for parking excess reserves with the Fed, perhaps they might consider time deposits which return something. It's not going to happen, but is a thought.

Arguably, the broad economy is better served by re-igniting and re-inflating housing, and this is the path we are set upon, for at least the foreseeable future. Refinance if you can, purchase a new (or used, or additional) home if you are inclined, but there doesn't seem to be much of a sense of urgency... for the moment. We are perhaps more optimistic than others that the housing market will strengthen in 2012.

In a one-sentence quip in his State of the Union speech, President Obama alluded to a new administration refinance plan. We've read plenty of speculation, but it may be a hybrid plan based upon a streamlined refinance concept detailed in an economic paper revealed last fall, coupled with elements of the FHA Short-Refi concept. It is claimed to be aimed at non-GSE mortgages (jumbos, etc) but there has been no official plan revealed. If it comes, we'll review it and critique as necessary.

In the meanwhile, we have a full plate of economic data due out next week. We'll be looking for the Fed's Senior Loan Office survey detailing lending standards, ISM reports, worker productivity, the employment report and more. Rates have settled after initially being upset by the Obama announcement, soothed no doubt by the Fed's comforting hand. We would expect that this week's minor blip will be erased and we'll settle back to just about record lows, again.

For an longer-range outlook for rates and the economy, one which will take you up until mid-February, have a look at our new Two-Month Forecast.

----------

Like HARP 2.0? We think we have a better plan... for over a year now! Have a look at our idea -- read about HSH.com's Value Gap Refinance concept, and be sure to let us know what you think.

Have you seen HSH in the news lately?

Want to comment on this Market Trends? Post it here -- add your feedback, argue with us, or just tell us what you think.

And for today's top stories, see our HSH Finance blog. Want the latest news/advice/whatever? Follow us on Twitter.

Daily FRMI rates are available on HSH.com. Check out our weekly Statistical Release here (and archives here).