Forecast Update: Long-Term Interest Rates, Jobless Claims, Mortgage Purchase Applications, Consumer Price Index

A weekly analysis of the economic data released during the past week, and how current economic conditions are affecting the real estate market.

• The 10-Year treasury rate closed on Friday at 3.3% and has largely traded in the 3.3% range since mid-December.
• The stabilization of the treasury rate followed a 0.75% point increase in the rate from its October level.
• The 30 year mortgage rate increased by 0.47% points to 4.71% in December over the same time frame.
• Although rate increases in long term interest rates have abated starting in mid-December, we expect further increases in long term rates due to enhanced growth prospects as well as higher inflation prospects. The market expectations of inflation over the next ten years, calculated as the spread between the 10 year treasury rate and the inflation protected ten year rate, have increased to 2.25% in December from 1.77% in August.

• The Bureau of Labor statistics released its Job Openings and Labor Turnover Survey (JOLTS) results from November this morning. Total job openings slipped by 80,000 from October, but were 792,000 higher than in November of 2009. The number of hirings rose only 50,000 over this same 12-month period. The construction, manufacturing, and professional and business service sectors showed the strongest increases in job openings.
• On the other side of the coin, layoffs and discharges were 182,000 lower in November of 2010 than 12 months earlier and their share of total separations, defined as the sum of all quits, layoffs, and discharges, fell from 48% to 43% over this time period and was steady from October’s share. The number of workers who quit voluntarily rose by 116,000 from last year, while the quits share of total separations rose from 44% to 47%, but was down from 49% in October.
• The November JOLTS report shows growing confidence on the part of both businesses that are looking for more workers and workers who are willing to let go of a job, presumably with the intent of finding another. This strength is showing up in sectors that have been weak in recent years and which are necessary to drive the economic recovery especially the manufacturing and business services sectors. However, growth in hiring still lags growth in job openings suggesting that business aren’t finding qualified workers. This misalignment may retard job growth, but aid income growth in the short-term.
• It cannot be overstated that jobs are critical to a sustained economic and housing recovery. Job growth builds confidence in homeowners and potential home buyers and undermines the cycle of delinquency and foreclosure.

• Mortgage purchase applications were down 3.7 percent for the week ending January 7th. However, applications are up over 17 percent from July 2010. Purchase applications do not always translate into loan acceptances and transactions. Also, purchase applications do not take into consideration cash buyers who according to the November REALTORS® Confidence Index make up as much as 31 percent of transactions.
• Mortgage purchase applications were down 10.0 percent from the same week a year ago.
• Refinances, which made up 72.1 percent of mortgage activity, rose 4.9 percent as mortgage rates fell to 4.78 percent on a 30-year fixed mortgage.

• In a data packed day, jobless claims rose by 35,000 in the week ending January 8 to 445,000. This also bumped the 4-week moving average up slightly, because the weekly readings since November had been much lower. Still the longer trend is toward fewer claims. This measure is very close to moving under the 400,000 mark that would be more consistent with net job growth and in fact was under this level in one of the last weeks of 2010.
• Producer prices grew at rates that are in line with those of previous periods of low, stable inflation. Stable inflation bodes well for the inflation component of interest rates. Mortgage rates may still move up in the months ahead, but upward movement would be indicative of improving economic conditions and rising real rates rather than inflation fears. Growth in the headline producer price index moved up to 1.1 percent in December, while growth in the core price index, which excludes food and energy, eased to 0.2 percent. Measured year over year, the price of all finished goods rose 4 percent and the price of goods except food and energy rose 1.3 percent.
• There was also a slight improvement in the trade balance as the growth in exports outpaced the growth in imports in November Exports are only about $6 billion shy of their 2008 peak while imports are about $34 billion lower. Both exports and imports declined sharply during the recession and have improved markedly as markets have normalized.
• Finally, yesterday the Federal Reserve released its Beige Book, a summary of economic conditions observed in the 12 Federal Reserve Districts from November to December. The economy was said to be continuing to expand. The report noted that, “Conditions were generally said to be better in Districts’ manufacturing, retail, and nonfinancial services sectors than in financial services or real estate.” Residential real estate activity was characterized as slow, and commercial activity was mixed; leasing conditions improved somewhat while construction remained weak. Mixed outlooks for both real estate sectors hinge on expectations for economic recovery, especially in the labor market.

• A big jump in the price of gasoline drove the overall Consumer Price Index (CPI) up in December. The increase for the month was 0.5 percent. Over the year, the CPI increased just 1.5 percent. Looking at all items excluding food and energy, which tend to be more volatile, prices were up 0.1 percent for the month and 0.8 percent for the year. Because of the volatility in food and energy prices, they are often disregarded by economists trying to determine whether price changes are inflationary or market adjustments to supply and demand. However, consumers purchase these goods and will see the purchasing power of their dollar diminish, even if the root cause is not inflation but rather surging demand from recovering economies. Utilities and gasoline are just shy of 10 percent of consumer expenditures. In the core index, shelter increased a modest 0.1 percent on the month, but third month in a row. It comprises 32 percent of expenditures and therefore was a big factor in the increase.
• Retail sales data for December also released today showed an increase of 0.6 percent, following a larger 0.8 percent jump the month before. Gasoline prices again played a role in increased sales values. Excluding motor vehicle sales which were up 1.1 percent and the strongest drivers of the retail sales in December, overall retail sales increased slightly, 0.5 percent. General merchandise which includes department store sales, fell in December after jumping the month before. Overall retail sales including motor vehicles over the past year improved to 7.9 percent, while sales excluding autos rose 6.7 percent. Retail sales suggest that consumers are still timid. After finishing early Christmas shopping, their shopping slowed down in December.
• Separately, both industrial production and business inventories posted positive numbers. Industrial production led by manufacturing sector increased 0.8 percent in December, while business inventories rose 0.2 percent in November. Both numbers indicated strong demand and suggested increase in future employment.