New Record For Rates (Again)

HPRI: Two more housing markets reach full value recovery

May 29, 2020 -- Mortgage rates set new "all-time" lows again this week, and having written it several times already, the headline above or one similar to it is one we'll likely be writing with some regularity in the coming weeks and months.

If you think about it, low rates are a blessing as a result of a curse. Low borrowing costs can help homeowners lower monthly mortgage carry costs, help ease budgetary burdens or even free up funds for new spending or trimming other debts down to manageable levels. As well, lower rates can help potential homebuyers qualify for larger mortgages on a given income, helping them to be able to participate in today's COVID-19 distorted housing markets.

But these low rates come at a cost, and are the result of a true economic calamity around the globe and certainly here in the U.S. They are here because demand and commerce have both been crushed, already-modest price pressures are being pushed down further and due to both investor demand for safe-haven assets and monetary policy engineered by the Federal Reserve. These low rates reflect the economic misery of many millions who have seen their incomes and livelihoods interrupted, some temporarily but increasingly on a more permanent basis.

Low borrowing costs are only of value if you need or want to borrow money, and more specifically, if you can qualify to borrow that money. No matter how generous they may be or how long they may be available, unemployment insurance funds don't count as income (in most cases) for mortgage qualifying, and there may be millions of potential borrowers who want or need to borrow money but cannot, and may not be able to do so for some time.

What's happening with home prices? Which markets have recovered... and which still lag behind? Check out the fresh update to HSH's Home Price Recovery Index, covering price changes in 100 metropolitan areas -- and see our Home Value Estimator tool to reckon changes in your market during your ownership period!

That's also the case with millions of homeowners in mortgage-payment forbearance plans, although recent clarity from Fannie Mae and Freddie Mac now indicates that a borrower will be again eligible for another mortgage once three timely payments are made at the end of any forbearance period. Still, a request for forbearance is an indication that the borrower can't make existing mortgage payments, and a borrower in such straits may or may not be able to afford a new mortgage in the future even if they can manage to resume making existing payments by some means.

Even after the pandemic is tamped down and local and national economies reopen, and even after effective treatments and even a vaccine becomes available, there will be some number of people whose lives will continue to be severely disrupted by COVID-19, whether they actually contracted the disease or not. The only question is how many millions and for how long. We won't know this for some time even as we're likely to celebrate the small milestones and "green shoots" that see us moving on the path to something closer to normal.

Such a small relative celebration was seen in some headlines this week, as the number of people receiving on-going unemployment assistance declined for the first time since mid-March. The dip was appreciable, too -- continuing claims dropped by 3.86 million to 21.1 million getting assistance -- and that was a glimmer of better news. Unfortunately, that 21 million still aren't working and were joined by another 2.123 million new claims for benefits really diminishes the joy of the reduction in on-going claims. Over 40 million requests for help have been filed since mid-March, with the 2.123 million claims in the week of May 23 was the best of the bunch to date, if still multiples of the weekly high water mark that existed before the pandemic struck. Still, any improvement is at least something and holds the promise of better labor markets ahead for many.

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As would be expected, some of the data coming in for May (such as unemployment claims above) are less awful than those for April. Frankly, it would be hard for them not to be, as the more backward-looking numbers are pretty bleak. For example, the Federal Reserve Bank of Chicago's National Activity Index for April essentially found no activity; the -16.74 value for this amalgam of 85 economic indicators was the lowest recorded in the 53-year history of the series.

In what would appear to be a bright spot at first glance really isn't: Personal Incomes soared by 10.5% in April, a figure that far outstripped expectations. However, incomes weren't produced in the usual fashion during the month, as wages dropped by a painful 8%, and all categories of income posted steep declines (except rental income, which posted a 0% change). The sole reason incomes rose? "Transfer payments" in the form of CARES Act stimulus checks, enhanced unemployment benefits, social security and the like rose an eye-popping 89.6%, so the gain in incomes was solely due to trillions in government outlays, not actual economic production. With income coming in and literally few places to spend it, personal consumption expenditures declined by 13.2%. This of course dulled the impact of passing funds to people in the first place. However, those funds were partially- or wholly-banked, as the nation's rate of savings rose to 33% from an already-elevated 12.7% in March. Perhaps as things open up, some of those savings will be spent to beneficial effect. Those funds may have somewhat greater purchasing power, too, as the measure of inflation in the income report showed that headline PCE prices faded in April to an annualized 0.5% (1% at the so-called "core" measure the Fed tracks).

The impact of the COVID-19 shutdown was felt everywhere, and still is in some places more than others. The Fed's latest survey of regional economic conditions (called the "Beige Book" for the color of its cover) was quite succinct, if terse, in its summary characterization of the situation in the six-week period leading up to May 18: "Economic activity declined in all Districts - falling sharply in most - reflecting disruptions associated with the COVID-19 pandemic." The rest of the economic activity summary was quite gloomy, and although hope for better days was evident, optimism was hard to come by. The summary noted that "Although many contacts expressed hope that overall activity would pick-up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery."

The second ("preliminary") estimate of Gross Domestic Product growth for the first quarter showed a little deeper contraction, as the initial 4.8% decline in output was rounded up to a full 5% drop. Those hoping that the slight improvement in economic activity in May as a result of easing restrictions will lift this number for the second quarter are likely to be disappointed, as forecasts are calling for perhaps a 20% decline in GDP for the period. Based upon the available data to date, reaching even -20% would represent a significant improvement from the current estimated level, as the present run rate for GDP as reckoned by the Atlanta Fed's GDPNow model puts the figure for the second quarter (mostly terrible April data) at -51.2% for the quarter so far. As such, we have a ways to go to get back up even to the unprecedented -20% being forecast. It bears considering that the -5% for the first quarter saw only the beginning of the COVID shutdown, and that only in the last couple of weeks of the quarter. First-quarter GDP would have been worse if not for housing, exports and government outlays which were the only items that kept the figure from being even lower.

Come Monday, we'll get a look at whether or not May saw any improvement for the nation's manufacturing base. Odds don't favor much improvement, if any, and considering that orders for durable goods dropped another 17.2% in April after a 16.6% decline in March the chances of any rebound aren't good. A sizable bit of the decline was due to falling orders for autos and other transportation equipment, but even the so-called "core" measure (no defense and aircraft spending and a proxy for spending by businesses) shrank by 5.8% continuing a three-month skid.

In keeping with the theme of "a better case of lousy" revealed in the local New York and Philadelphia Fed manufacturing surveys, two others from the Federal Reserve Banks in Richmond and Kansas City revealed much the same pattern. The Richmond Fed 's local barometer rose by 26 points to -27 in May from -53, with measures of new orders climbing by 26 points to -35 and employment rising by 5 to -16 for the month. As such, declines are still happening, but at a much slower pace in May than in was seen in April. Down Kansas City way, the Fed's 10th district fared much the same, posting an 11-point rise in their overall indicator (to -19 from -30 in April), with orders rising by 39 points to -25 and employment moving up from -34 to -13 for the month. To be sure, lesser declination is welcome, but it's not the same thing as actual improvement, which will hopefully start to show before too many more months pass.

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With lockdowns easing and mortgage rates low, the typical spring homebuying season market may yet occur, but it may be more like a summer homebuying season. Social distancing and other roadblocks may continue to bedevil the existing home market for some time, but that's less the case with new construction, which may seems relatively better supported at the moment. Low mortgage rates will continue to help create demand for both measures, but the existing home sales market may not start to revive for a few months yet. That's at least the takeaway from the latest housing data; the National Association of Realtors Pending Home Sales Index for April rang in a a new-low of 69, down from 88.2 in March and well below February's pre-pandemic 111.4 mark, so the downtrend in sales of existing homes can be expected to continue. The NAR's PHSI is a measure of contracts signed to buy existing homes, which can take 30-60 days to complete and be recorded as actually sold - so April's pending sales may show up in May or even June sales tallies.

Sales of new homes, though, did fare a little better in April than in March. With a 0.6% increase to 623,000 (annualized) units sold, the uptick was both unexpected and likely the reason for the small rebound in builder sentiment we detailed here last week. However, the slight improvement didn't much make a dent in available supply, which slipped to 6.3 months of stock (325,000 actual units) from 6.4 months, so builders won't be in any rush to accelerate building any time soon. Sales of new homes may have also been goosed a bit by builder discounting; on a year-over-year basis, the cost of a new home in April was 4.3% below a comparable year ago level and on this basis prices have been declining in five of the last six months, and three in a row. Contrast this with the prices of existing homes, which continue to rise strongly, posting a 7.4% year-over-year gain in April. At least for April, the gap between the median price of a new home sold and an existing one was $25,600 -- only about $111 per month more for a new home than for existing, a smaller gap than usual.

Reflecting increased interest in home buying, applications for purchase-money mortgages continued on a six-week positive string, rising by 8.6% in the week ending May 22. The Mortgage Bankers Association's report also showed a now six-week decline in applications for refinancing with a 0.2% fall. This week's small move to a new record notwithstanding, mortgage rates have been pretty level for about the last two months, and there are only so many homeowners who can profitably refinance at a given interest rate level. With the decline and associated headlines of "record low rates" its reasonable to expect that we'll see a pick up in refinance apps in the next week or so.

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Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
May 22Apr 24May 24
6-Mo. TCM0.15%0.14%2.41%
1-Yr. TCM0.16%0.17%2.34%
3-Yr. TCM0.22%0.26%2.14%
5-Yr. TCM0.35%0.36%2.17%
10-Yr. TCM0.69%0.61%2.37%
Federal Cost of Funds1.657%1.888%0.997%
FHLB 11th District COF0.884%0.989%0.644%
Freddie Mac 30-yr FRM3.24%3.23%3.99%
Historical ARM Index Data

After significant declines in April, consumer moods leveled off and even improved a bit in May. The final reading of Consumer Sentiment from the University of Michigan edged 0.5 points higher, landing at 72.3 for May. The minor improvement came from improved assessments of the current climate, and this component rose by 8 points to 83.2 even as the outlook dimmed, declining 4.2 points to 65.9 for the period. As well, a measure of Consumer Confidence from the Conference Board sported a small gain, with a 0.9-point increase leaving the gauge at 86.6 for the month. In a reversal of Sentiment, all the gain cam in the expectations for the future, which improved by 2.6 points to 96.9; assessments of current conditions dimmed a bit, declining 1.9 points to 71.1 to close May.

Next week comes the first-week-of-the-month cascade of data, including the ISM surveys of manufacturing and service business activity, employment report, worker productivity, imbalance of trade and more. It will be May data, and some of the data will probably be improved to a degree relative to April, but probably not by much where it is, and in the case of the employment report, probably truly awful. As is always the case, you need to hit bottom before you can start to climb and perhaps we are now seeing the worst of the downturn. Here's hoping so, and that the month of June finishes the quarter on a much stronger and more optimistic note than it began. It would be hard for it not to.

Mortgage rates slipped a little more than we expected this week. As underlying interest rates that influence mortgages really didn't move much, it may be that lenders are finally starting to ease up a little on their defensive pricing postures and that risks of making mortgage loans are at least leveling off if not outright improving. If this is actually the case (and fewer requests for forbearance and easing new claims for unemployment assistance suggest that it might be) we could see another small ease in rates again next week. The only thing that might disturb the potential dip is if there is a sudden surge in refinancing requests that re-clogs the system, but that probably doesn't happen, at least not yet. With this in mind, a couple of basis point decline could be seen next week in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac. If if comes, it will again be a new record low.

For a bit of a longer view, in what is likely to prove to be a foolhardy move, we recently took occasion to release a new Two-Month Forecast. Check if out if you are so inclined.

You can still see our 2020 Outlook , where we provide our thoughts and forecasts for mortgage rates, Fed policy, housing sales, home prices and more. As with many things in 2020, COVID-19 has ruined a lot of it.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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