Record Low Mortgage Rates a Thing of the Past

by Anirban Basu 19. August 2013

Anirban BAsu

It was only a Matter of Time

We knew they wouldn’t last forever. An extraordinary confluence of circumstances, including a deep recession, deflationary forces and hyper-aggressive monetary policy, produced the lowest mortgage rates in history. As of July of last year, interest rates on benchmark 30-year fixed-rate loans were hovering around 3.5 percent, sometimes lower. They bottomed out at the end of November, when rates hit an unheard of 3.31 percent according to the Freddie Mac Primary Mortgage Market Survey. Until the last few weeks, these rates had managed to remain below 4 percent despite ongoing economic recovery.

But the mere possibility of slower bond purchases by the Federal Reserve produced a surge in mortgage rates. Recently, these rates have been in excess of 4.5 percent, a level that hasn’t been observed in over two years. As pointed out by MoneyWatch and other publications, at the end of June, rates leapt nearly 0.5 percent, producing the largest week-over-week increases in more than a quarter century. Many economists viewed the bond market’s reaction to possible Federal Reserve policy shifts as overdone, but rates have not declined significantly since their initial surge.

For those who prefer to view the glass as half-full, the rise in mortgage rates is to a large extent the product of better economic news. The nation is now in its fifth year of economic recovery. It has added more than 2.2 million jobs over the past year, including nearly 200,000 in construction.

Improvement in the housing market has taken center stage. Since the final quarter of 2011, advances in homebuilding have been responsible for roughly a fifth of total economic expansion. As a result of improvements in homebuilding and remodeling, housing’s overall share of the economy is gradually climbing back toward historic norms.

Correspondingly, the housing sector, which led the economy into recession in late-2007 and into near financial collapse in September 2008, no longer needs as much monetary policy support as it once did. Home prices are now rising, creating a level of urgency among prospective buyers that did not exist during earlier stages of the economic recovery.

According to the S&P/Case-Shiller Index, a leading measure of U.S. home prices, average prices rose 11.6 percent and 12.1 percent for the 10- and 20-City Composite indices for the 12 months ending in April 2013. Atlanta, Dallas, Detroit and Minneapolis posted their largest annual gains since the inception of these indices. Atlanta, Las Vegas, Phoenix and San Francisco generated year-over-year gains exceeding 20 percent.

In Maryland, median sales prices are up 5.9 percent over the past year (June 2012 versus June 2013) and average sales prices are up 4.3 percent. Unit sales are up 13.1 percent.

Looking Ahead

It is quite possible of course that the recent rise in mortgage rates will slow progress in the housing market going forward. Already, there has been major impact in the market for mortgage refinancing, with refinancing demand recently slipping to a 2-year low.

To date, loan applications for home purchases have not been as significantly impacted. With mortgage rates having risen, some prospective purchasers have undoubtedly reconsidered their selection of mortgage product, with more opting for adjustable rate mortgages than would have had rates remained unchanged. That flexibility allows would-be buyers to continue to benefit from ultra-low rates even in a rising rate environment. Moreover, the latest data continue to indicate rising home prices, which means that the motivation to purchase and enjoy future appreciation still remains.

Anirban Basu, Economist, Sage Policy Group, Inc. & First Mariner Bank Board Member

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Economy, Markets Outperform Expectations

by Anirban Basu 12. April 2013

Anirban BasuA Record-Setting First Quarter

Simply put, the first quarter of 2013 was a fabulous one for U.S. equity investors. The S&P 500 Index, the Dow Jones Industrial Average (DIJA), and the Nasdaq all ended the first quarter of 2013 on a resounding note. The Dow Jones was up 11 percent during the first quarter to 14,578.58– its best first-quarter performance in 15 years. The S&P 500 rose 10 percent to 1,569.19 while the Nasdaq rose 8.2 percent to 3,267.52. Both the S&P 500 and the Dow Jones surpassed previous record closing highs in March.

The national economy has also outperformed expectations thus far in 2013. Real gross domestic product tracked at roughly 2 percent on an annualized basis during the first quarter, far better than the 0.4 percent increase registered during the fourth quarter of 2012. Despite a disappointing employment report for March, which indicated that the U.S. added just 88,000 jobs, the jobless rate fell to 7.6 percent, a post-recession low. During the first three months of the year, monthly job growth averaged 168,000 jobs according to the Bureau of Labor Statistics (+148,000 in January; +268,000 in February).

Improvement in the broader economy continues to support recovery in the nation’s housing market. According to the National Association of Realtors, total existing-home sales in February rose 0.8 percent to a seasonally adjusted annual rate of 4.98 million units. That was up from 4.94 million in January and represented one of many pieces of information indicating that the housing market remains on an upward trajectory. On a year-over-year basis, existing home sales are up more than 10 percent – impressive given overall economic growth nationwide in the range of 2 percent. Home prices are also on the rise. The national median existing-home price for all housing types was $173,600 in February, up 11.6 percent from February 2012. That represents the 12th consecutive month of year-over-year price increases and the strongest gain since November 2005.

Perhaps most remarkably, higher stock prices working in conjunction with recent increases in home prices have allowed Americans to collectively recoup the roughly $16 trillion in wealth that was lost during the Great Recession and its aftermath. According to the Federal Reserve, net worth for U.S. households reached $66.1 trillion during the fourth quarter of last year, representing the highest level in five years and more than 98 percent of the pre-recession peak of $67.3 trillion achieved in Q3:2007. First quarter Federal Reserve data are likely to indicate that collective household wealth is now at all-time high, though it remains true that much of the gain has been concentrated among a relatively small proportion of households (i.e., those that own significant amounts of financial assets).

Corporate earnings continue to expand. The Bureau of Economic Analysis reports that corporate profits rose to $2.013 trillion during the fourth quarter of 2012. That represents an increase of 2.3 percent from the previous quarter and 3.1 percent compared to one year ago. According to the New York Times, corporate profits as a percentage of GDP are now at their highest level since 1950.

US Corporate Profits

 

Looking Ahead

It has been a long time since circumstances appeared so promising. But we are not out of the proverbial woods. The U.S. economy could slow significantly during the next few months as federal spending cuts begin to take hold. The Congressional Budget Office projects that $1.2 trillion in federal spending cuts could lead to approximately 750,000 job losses in 2013 alone. The March employment data provided us with a taste of things likely to come.

The second quarter should be very interesting. Both certain macroeconomic and corporate factors suggest that the financial market rally could persist, but there is a sea of potential hazards, including N. Korea, the eurozone, another debt ceiling debacle in Washington, Iran, Syria, Egypt, a sharp rise in oil prices and unanticipated inflation. While investors will likely want continued exposure to equities, there are many reasons to remain somewhat guarded. As always, financial diversification appears to be the most reasonable investment strategy to pursue.

 

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

Out of the Frying Pan, into the Fire

by Anirban Basu 16. January 2013

Anirban Basu

U.S. Avoids Fiscal Cliff but Familiar Challenges Remain

With the noteworthy exception of the nation’s still expanding national debt, 2012 will be viewed by economic historians as predominantly a year of progress. Financial markets performed, the number of jobs expanded, unemployment fell, auto sales surged, housing prices stabilized and consumers were active. According to the most recently revised estimate supplied by the Bureau of Economic Analysis, national gross domestic product expanded 3.1 percent during the third quarter of 2012 on an annualized basis. The fourth quarter wasn’t nearly as good, and though fourth quarter data have yet to be released, the expectation is that the U.S. economy expanded only about 1 percent on an annualized basis during the quarter. Despite that, many economists estimate that the nation’s economy expanded 2.2 percent last year, a bit better than 2011’s 2.0 percent performance.

Equity markets started 2013 with a bang, in part because of news regarding partial resolution to a variety of fiscal cliff issues. On the year’s first trading day, the Dow Jones Industrial Average soared 308.41 points or 2.4 percent to 13,412.55. The S&P 500 rose 36.23 points (2.5 percent) to 1,462.42, the index’s biggest one-day improvement in more than a year (December 20, 2011). The NASDAQ composite index rose 92.75 points, or 3.1 percent, to 3,112.26.

While all major stock indexes were down for the fourth quarter, they were up for the year. The Dow Jones Industrial Average rose 886.58 points from 12,217.56 on December 30, 2011 to 13,104.14 one year later (7.3 percent). The S&P 500 rose 13.4 percent to 1,426.19 and the NASDAQ was up 16 percent to 3,019.51.

Despite the heightened uncertainty that characterized the fourth quarter, businesses continued to hire. In December, the nation added 155,000 nonfarm jobs (168,000 private sector jobs) following a gain of 161,000 jobs in November and 137,000 in October. For the year, the nation added approximately 1.84 million net jobs, almost exactly the same number added in 2011. Job growth was sufficient to tug the nation’s unemployment rate below 8 percent. In January 2012, unemployment stood at 8.3 percent. By December of the same year, the corresponding figure was 7.8 percent, translating into 542,000 fewer unemployed workers.

One of the most noteworthy improvements in 2012 occurred in the housing market, which is now associated with both rising sales and median prices. According to the National Association of Realtors, existing-home sales rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million in November from 4.76 million in October. The number of existing home sales is now 14.5 percent higher than a year ago, due primarily to a combination of consistent job growth and extraordinarily low mortgage rates. The national median existing-home price for all housing types was $180,600 in November, up 10.1 percent from November 2011.

Consumer Spending, January 2008 - November 2012

Looking Ahead

Even during the fourth year of economic recovery, massive uncertainty lingers. While fiscal cliff part I is behind us, in front of us is the grisly sequel. Over the next two months, Congress will be wrestling with another set of issues, including whether or not to raise the debt ceiling and to what extent as well as scheduled automatic federal spending cuts.

Taxes have also risen, including in the form of the elimination of the payroll tax cut and an increase in the rate at which dividend income is taxed. With the economy already expanding slowly and with taxes having risen recently, expect the first half of the year to be another period of subpar growth. If Congress fails to appropriately deal with the budget and tax issues now facing it, the first half of the year could be worse than mediocre. On top of that, there is plenty of headline risk emerging from other parts of the world, including Europe where the economy remains in disarray. News from China has been better of late, however.

If Congress is able to successfully navigate the debt ceiling and other issues, the latter part of 2013 could be quite good for the U.S. economy. It is for this reason among others that many financial analysts remain bullish about the longer-term. However, investors should be prepared for a good bit of volatility during the months immediately ahead.

 

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.



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