Terrible Two’s BY HSH MARKET TREND 07/17/2020

After flirting with the 3% mark for a number of weeks, mortgage rates finally eased enough to drop into the upper two percent range for the first time. To be most accurate, it is the average offered rate for a conforming 30-year fixed-rate mortgage as tracked by Freddie Mac that stepped below this mark; other mortgage types and terms have been available in the twos at other times. For example, the conforming 15-year FRM has already been there for a majority of 2020, and there have been over 100 weeks in the last decade where that has also been the case. As well, there have been over 200 weeks where a hybrid 5/1 ARM could have been had at an initial rate below three percent, not to mention formerly-popular other ARMs and mortgages with other terms at various points in time. Still, it’s a noteworthy achievement, even if the difference on a $200,000 loan made at the new record loan (2.98%) compared to the previous record low (3.03%, just a week prior) creates a payment difference of about $5 per month. While welcome, that five dollars doesn’t much change the homebuying or refinancing equation for consumers.It also bears remembering that while Freddie Mac’s data is a benchmark, but only for a select slice of potential borrowers — those with great credit, who can make a substantial down payment, fully document their income and assets and meet other underwriting criteria. For potential borrowers who can’t meet these requirements, those whose credit isn’t stellar, who have smaller down payment or equity stakes or can’t meet documentation standards, mortgage rates are still likely low but may or may not be at record lows.It’s also worth noting that while the interest rate gets all the headline play, one can’t ignore the presence of fees paid to obtain the rate. In Freddie’s case, this week’s record low rate was available by paying 0.70 points — a fee of $700 for each $100,000 of the loan being borrowed. Often, these fees are incorporated into the interest rate rather than paid outright, so a rate at no points (sometimes called a “par” rate) would be closer to 3.25% than not. With this in mind, it has been pretty easy in recent weeks to get an interest rate in the twos simply pay paying a whole point (1% of the loan amount) or more. The economy is in terrible straits, and only partially emerging from its worst downturn since the Great Depression (and probably the only recession-by-design in history). Millions are unemployed or underemployed, assisted only by extraordinary fiscal supports that aren’t a long-term solution. The Federal Reserve (and other central banks) are keeping monetary policies at emergency levels and employing novel programs and approaches to stave off even worse outcomes and inflation remains little but a future threat. Meanwhile, the ongoing battle with COVID-19 continues, and the current outbreak across the southern and western U.S. threatens to undue some (or perhaps more) of the economic progress made after widespread shutdowns. Although we may have become somewhat more accustomed to them, risks of financial loss or even ruin for some and risks of life and health for others haven’t gone away, and may even be again intensifying somewhat. Perhaps we’re less afraid than in the early stages of the outbreak — to be sure, we know more now than we did then — and each day may be bringing us closer to effective treatments and even a vaccine, so there is always hope. However, between now and whenever then comes there are likely to be a number of difficult periods to navigate. The Fed’s own survey of regional economic conditions (called the “Beige Book” for the color of its cover) detailed the situation most succinctly. In the weeks leading up to the July 6 report date “Economic activity increased in almost all [Fed] Districts, but remained well below where it was prior to the COVID-19 pandemic” and business contacts noted that “Outlooks remained highly uncertain.”With mortgage rates low, inventories of existing homes for sale razor thin and amid still-considerable demand, the nation’s homebuilders are pretty happy at the moment. The National Association of Homebuilders Housing Market Index rose by a stout 14 points in July, returning to a robust level of 72 and completing a rebound to levels seen before the pandemic shutdown kicked in. Subcomponents covering sales of single family homes popped back, too, gaining 16 points to leap to 79, the same value as seen in March. Expectations for sales in the next six months followed suit, rising 7 points to match March’s level of 75, and traffic at showrooms and model homes leapt 15 points to 58, the best since January. For homebuilders, it would seem that the recession and recovery has taken the form of a “V” (for the moment, at least), provided demand does not falter in the coming months.Certainly, if demand is fully back there is plenty of building that will need to be done. Housing Starts kicked 17.3% higher in June compared to May, with the 1.186 million (annualized) units started a bit strong than was expected. Still, even with the rebound over the last two months, construction activity remains well below winter levels, when warm weather goosed construction up to a 1.61 million level. For the latest month, single-family home construction rose by 17.2% to 831,000 annualized units underway, while starts for multifamily projects gained by 17.5% to 407,000 for the month. Permits for future construction also managed an increase, but the 2.1% month-over-month gain to 1.241 million annual is still a few hundred thousand units shy of where they began the year.
Given the chance to spend, consumers continued to open their wallets and pocketbooks in June. Retail sales for the month rose by 7.5%, a strong follow up to a record May surge of 18.2%, a figure revised up from the initial estimate. Unlike May, the increase wasn’t quite across-the-board in all categories; building materials, food and beverage and non-store retailers all saw a touch of softness (softer non-store sales are to be expected, as brick-and-mortar stores probably siphoned off some sales from online outlets as shoppers got out and about again). Digging deeper, so-called “core” retail sales (no cars, no gas station sales) were solid with a gain of 6.7%. While the continued rebound in retail sales is impressive and welcome, the reality is that sales are only 1.1% above year-ago levels, a fairly soft pace, and only about 25% of what was in place pre-pandemic.Manufacturing continues to try to get back up to speed, and in two Fed districts activity was pretty good in July. The Federal Reserve Banks of New York and Philadelphia both released their localized reports this week; New York’s gauge rose by 17.4 points to a positive 17.2 for the month, a value good enough to be the highest since back in 2018. Orders moved 14.5 points higher, rising to a positive 13.9 for the month, and after four declines, the employment measure climbed over the zero mark to 0.4, so at least some meager job growth happened. Just down the New Jersey Turnpike, the Philly Fed’s similar barometer remained solid, if perhaps a little less so, as a 3.4-point decline in the top-line index left it at 24.1 for July. While inventory levels damped the headline figure, measures of new orders rose 6.3 points to 23, and employment solidified with a 24.4 point surge to a positive 20.1, the highest level since October 2019. Industrial production improved in June, climbing 5.4%. Consistent with the above and other reviews, manufacturing production rose a strong 7.2% for the month, and the upward momentum was improved by a 4.2% increase in utility output. Mining output remained a drag for a fifth consecutive month, as demand is still pretty slack and oil prices remain at levels that make profitable extracting a challenge. The overall increase in production did lift the percentage of industrial floors in active use to 68.6% and there remains considerable spare capacity as historic norms are closer to 80% total utilization. We’ll not see production-led bottlenecks that can contribute to inflation anytime soon. Although price pressures remain subdued, they aren’t non-existent. Prices of imported goods rose by 1.4% in June, up from a 0.8% rise in May and rather above forecasted levels. However, it will take a number of strong readings just to get us back to a zero level of import price inflation, as prices this year are still some 3.8% below where they were in the same month in 2019. Petroleum price increases accounted for much of the overall rise in import costs, as oil continued its firming trend during the month. Also firming again of late are export prices; like imports, these also rose 1.4% in June, a second monthly gain after a three-month string of declines in the Feb-Apr period. That said, we’re not exporting any inflation, either, as export costs are still 4.4% below year-ago levels. Consumer prices are edging higher, too. The Consumer Price Index had been steady to increasing in the months leading up to the pandemic shutdown, stumbled for three months, and has now resumed an upward path. The 0.6% increase in headline CPI was pushed again by firm food prices, and this time that lift was joined by energy costs, too. It’s not as though there was no price pressure to be seen when those were excluded from the tally, either, as the so-called “core” CPI increased by 0.2%, back to the same levels seen before COVID-19 distorted them. Overall CPI remains very low with just a 0.7% year-over-year increase (but also moving back upward) and core CPI remained flat a 1.2% for a second month. We’ll see if prices can stay a bit firmer, which would likely please the Fed as they are hoping to avoid a de- or disinflationary environment with short-term rates already pegged at about zero. In looking at the weekly series for initial unemployment claims, labor market improvement appears to have stalled. In the week ending July 11, another 1.3 million applications for help were filed around the country, a decline of just 10,000 from the holiday week of July 4. The steady level is in indication that businesses are still shedding workers at an unhealthy pace, but at least the ranks of those receiving benefits are slowly diminishing, so at least some folks are being reabsorbed into the workforce. Continuing claims slid by 500,000 in the latest week, but 17.3 million people getting assistance — the lowest of the downturn so far — isn’t much to get excited about when you consider it is a figure about 10 times that seen as the calendar turned to March. 

With plenty of troubles to ponder, consumer moods have darkened a bit of late. The University of Michigan survey of Consumer Sentiment declined by 4.9 points in the preliminary July reading and is barely above pandemic recession lows. Both present conditions (-2.9 points to 84.2) and expected (-6.1 points to 66.2) declined, The surging coronavirus was the primary concern cited in the commentary provided, with rising concerns about the economic impacts from the increased outbreak over the last few weeks. There may be a lot of difficult issues with which to contend, both happening currently and expected to come, but at least we have low mortgage rates, which are a blessing (for some) as a result of a curse (for all). In the week of July 10, applications for mortgages flared higher by 5.1%; applications for purchase-money mortgages slid by 6.1% for the week, but refis more than made up for that decline, powering 11.9% higher for the period. With headlines of never-before-seen rates everywhere in recent days, refi activity will likely be set to climb again, much to the delight and chagrin of lenders who welcome the business even as they are struggling again to keep up with demand. Lower rates can’t much help the purchase market, though, as they simply serve to incite more demand into a market of limited supply. Simply said, low rates are great, but won’t put more homes on the market, and may serve to lift prices further for those that are.Next week comes a light calendar of data, but we’ll see if falling mortgage rates in May, June and July have improved existing and new home sales. Since both were beaten down pretty well, existing home sales will likely pop a great deal higher, while new home sales will build on June’s rebound. As far as mortgage rates go, we’re shaping up to see another record low next week, as the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will likely drift down another 3 basis points or so.

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