January 31, 2020 — Although the spreading coronavirus probably doesn’t meet the classic definition of a pandemic just yet, that’s less the case for investor psyches, where concerns about the impacts of the spreading disease have caused widespread selloffs of riskier assets such as equities this week. In turn, those funds have been flowing strongly into safe-haven investments such as Treasury and other sovereign bonds (and to a lesser degree, Mortgage-Backed Securities), driving yields and mortgage rates down in kind.
It’s still too early to know the full impact, but it seems likely that there will be at least some economic slowing in some economies around the globe, but where and how much have yet to play out. While unfortunate in many ways on a broad scale — not the least of which for those who have been or will be directly impacted — it is fortunate for American mortgage shoppers, who are seeing rates again approaching multi-year lows. This week’s average rate for a conforming 30-year FRM is only 20 basis points above (what were then) 60+ year lows achieved back in 2012, and although rates may not fall that far, the economic conditions in which they are occurring (a record-long expansion, near-full employment, rising incomes) means that there is a chance that more folks will be in a position to take advantage of them.
Or at least they would, if interest rates hadn’t been for the most part within about a percentage point of these rate for the past few years. Incrementally lower rates should mean incremental increases in refinance activity, and may, but there have been an awful lot of refinances at rates near enough to today’s levels over that time as to have tempered any pent-up demand. Still, we should see a boost in activity, even above the 7.5% increase in applications for refinance mortgages reported by the Mortgage Bankers Association of America in the week ending January 24… and rates have moved lower this week again.
Can lower rates help create more home sales? Yes… but since there is a dearth of homes available to buy on the market (inventory levels of existing homes were at about a 20-year low in December, according to the National Association of Realtors) so a ramp up in sales seems unlikely. In fact, the Realtors reported that their Pending Home Sales Index dropped by 4.9% in December, with the decline attributed to a lack of homes for sale and a spike in home prices toward the end of 2019 that has again crimped affordability.
Some potential borrowers may look to new construction instead, where supply is less of an issue, but prices tend to be higher to start with and homes may be being built in places that are less optimal, such as away from transportation options or a long distance to a center-city job. Sales of new homes eased a little in December, falling by 0.4% to 694,000 (annualized) units sold. Unlike existing homes, there is a 5.7 month supply of newly-constructed units available (a five-month high, and close to optimal), and median prices of new homes sold have waxed and waned from month to month but are just 0.5% higher this December than they were last December. As such, the relative improvement in affordability produced by lower mortgage rates is largely preserved and may make the stretch to a new home possible for somewhat more potential homebuyers. As with refinances, applications for purchase-money mortgages rose last week, gaining 5.3%.
The Federal Reserve met this week to discuss the current domestic and global economic climate and consider if adjustments in monetary policy should be made. This meeting was not accompanied by updated projections from Fed members about their expectations for growth, inflation and the level of interest rates, so all there was to go on was the statement that closed the meeting. It was essentially a repeat of the mid-December missive, with the only notable a change in language one that characterized consumer spending as “moderate” from December’s “strong”. In the press conference that happened after the meeting, Fed Chair Jay Powell expressed concerns about the spreading virus’ effects on economic activity, but noted that “[the Fed is] very carefully monitoring the situation” even as “there are signs and reasons to expect” that global growth will improve as the year progresses. If growth does slow measurably as a result of the outbreak, the odds would increase that the Fed would again cut short-term rates, but for the moment the most likely course remains one where rates are held are present levels for a fair bit of time.
Given the challenges of various trade-and-tariff wars and any number of other items that might impact the economy, the U.S. remains in pretty good shape. The initial estimate of Gross Domestic Product growth in the fourth quarter of 2019 was almost exactly what it was in the third at a 2.1% rate. While subject yet to two subsequent revisions the last three quarters have featured steady economic growth of just about 2% or so, a pretty remarkable string. As has been the case, price pressures are nowhere to be seen, as the quarterly measure of core Personal Consumption Expenditures (the Fed’s preferred measure of inflation) actually decelerated from 2.1% in the third quarter to just 1.3% in the fourth.
The report that covers personal income and spending for December was pretty mild on both accounts. Personal incomes rose by 0.2% for the month, a bit of a falloff from November, while spending kicked up a little bit, rising by 0.4% for the period. Of course, more income than outgo meant less for savings, and the nation’s savings rate was trimmed back by 0.2% to 7.6% for the month. The monthly PCE component as tracked here was both a little warmer and more steady than was the quarterly measure in the GDP report, running at a 1.6% annual rate for the month, a figure fairly level when compared to recent months.
For inflation to start to flare, we’ll probably need to see something stronger in the growth of wages at least as a catalyst. In the fourth quarter of 2019, the cost of keeping an employee on the books as tracked by the Employment Cost index (a measure that includes wages and benefits) rose by 0.7%, another quarterly value that falls within a very tight range that has persisted for some time. Within the report, the measure of wages eased from the third quarter’s 0.9% rise, sliding back to 0.7%, a value now seen in four of the last five quarters. Benefit costs have settled a bit over the last year, and sported just a 0.5% increase in the fourth quarter of 2019. On an annual basis, overall compensation costs to businesses rose 2.7%; wages have risen 2.9% and benefit costs 2.2%, a set of fairly modest-to-moderate values and one that doesn’t suggest that we’ll see surging inflation anytime soon.
Orders for durable goods spiked by 2.4% in December, a welcome flare, but the gains were concentrated solely in the transportation space (planes, trains and automobiles) and military-related orders. Absent those narrow contributions, orders for goods intended to last three years or more declined, with the proxy for business-related spending posting a 0.9% decline for the month, so capital investment remains temperate at best. Still, there may be bright spots for factory activity; for example, the manufacturing gauge as maintained by the Federal Reserve Bank of Richmond rebounded smartly in January, rising 25 points from -5 in December to 20 in January. In the report, the new-order tracking component posted a value of 13, a mirror image of the -13 in December and the fastest for new orders since last February, while the employment metric also kicked up 13 points to land at 20, also good enough to be the best since early 2019. A national review of manufacturing will come next week from the Institute for Supply Management and we could see a slight improvement in what will likely continue to be a sub-par trend for a time yet.
The steady, moderate pace of economic growth continues to be viewed favorably by consumers, and their optimism and spending power continue to drive the economy forward. As measured by the Conference Board, consumer confidence rose by 3.6 points in January, with the 131.6 value posted by this gauge the highest in five months’ time. Present conditions were viewed most favorably, with this component rising 4.8 points to 175.3 for the month, but even expectations for the future moved higher, gaining 2.5 points to stand at 102.5 to start 2020. Spending plans for autos slipped a little, but those for homes and major appliances nudged higher.
As tracked by the University of Michigan survey of consumers, consumer sentiment also pressed upward in January, if perhaps in a less pronounced manner. The headline sentiment barometer rose by 0.7 points to 99.8 for the month, but that modest gain was sufficient to put the overall measure at an 8-month high. The components that contributed to the move were less balanced than for the confidence gauge, with current conditions in January rated slightly less favorably than those in December, so there was a 1.1 point fall in this segment. Hopes for the future did manage a bump, though, and the 1.6-point gain left the expectations portion of the gauge at 90.5 for the month, the highest in six months. Overall, consumers remain happy and resilient despite all manner of challenges that face them, from spreading disease to presidential impeachment politics. Good for them, and for us, as there could be a slower, more challenging economic period ahead if the virus cannot be better contained and managed.
Still, that’s not here yet, but concerns are enough to continue to put downward pressure on interest rates and mortgage rates. A large selloff in major stock indices here on Friday will no doubt see overseas market start the next trading week on a sour note, and the downward pressure on rates will continue. Despite a largely positive economic climate, the effects of the spreading pandemic has already blown out the bottom of out most recent Two-Month Forecast, and that seems like a trend that will continue next week. We think by the time Freddie Mac reports next Thursday morning that another handful of basis points will be shaved off the average offered rate for a conforming 30-year fixed-rate mortgage, putting us closer to historic lows again. A couple of basis point fall would put us on full par with last September; a 4 to 9 basis point decline drops us back October 2016 levels… 11 sees us at July 16… but a dozen or more and we’re back at 7-year lows.