Although equity markets seem to be having a bit of a rough (or at last interesting) time of it lately, the overall economy seems to be on a pretty level stance, propped up as it is from all angles. With more stimulus seeping into the overall economy and arguments about the next and perhaps larger round in process, an already-performing economy may be set to perform a little more strongly as we work our way toward spring.

Certainly, the economy will do better once the pandemic is damped down. A wide swath of the leisure, hospitality and entertainment sectors of the economy simply can’t fully function while the virus rages. The only question is “how soon?” and for that, there simply isn’t one clear answer available. Meanwhile, the economy that is functioning did so at a pretty solid level in the fourth quarter of 2020, and that despite increasing sickness and tightening of restrictions in a number of hard-hit locales.

After a record annualized decline of 31.38% in the second quarter and an equally impressive 33.33% increase in the third, the economy settled to something closer to normal, sporting a 4.01% annualized increase in the advance reading of Gross Domestic Product for the period. For the year, GDP output shrank by 3.5%, the biggest decline since the Great Recession days of 2009. Comparing the fourth quarter of 2020 against the same period one year ago (pre-pandemic) overall output was about 2.5% lower. Given all that has happened in a year’s time, that’s really not as bad is it could have been. Price pressures settled during the fourth quarter, too, with Personal Consumption Expenditure inflation easing from a 3.7% annual rate to 1.5%, and core PCE for the period downshifting to 1.4% from 3.4% annualized.

The Federal Reserve held its first meeting of 2021 last week, and there was no change to monetary policy. Rather, the Fed simply reiterated its position of holding rates near zero, purchasing Treasuries at $80 billion per month and accumulating new mortgage-backed securities at $40 billion per month. At the close of its meeting, the Fed again noted that “The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.(emphasis ours)

Sales of new homes have cooled from their heady pace of a few months ago, but some seasonal slowing as the holidays kick in isn’t uncommon at all. The Census Bureau reported that 842,000 (annualized) homes were sold in December, up 1.6% from a (downwardly) revised 842,000 in November. No worries, though, since sales are still some 16.5% above December 2019 levels, so it’s not as though the market has slowed appreciably — more like settling back to a more sustainable pace. The supply of new homes available to buy at the present rate of sale rose 0.1 to 4.3 months (302,000 units built and ready for sale) and prices of new homes sold were 2% higher compared to November (about 8% higher than last year during the same month). With spring soon on its way, sales of new homes will likely flare higher again as is the normal seasonal case.

Existing home sales may level off for a bit, though. The National Association of Realtors Pending Home Sales Index was down by 0.3% in December, a fourth consecutive decline. As this is indicative of signed contracts, it’s not surprising to see a softening as during the holidays, as fewer homes are available to buy (inventory levels are presently record thin) and fewer homebuyers are out and about looking at the homes that are available. The PHSI is more than 21% higher this year than a comparable month a year ago, and looking forward, spring’s coming, and it may be that we’ll have a more normal spring housing season this year.

Overall, the economy seems to be back to a much steadier state, and perhaps even poised to start to fill in the remaining growth gap caused by the pandemic before too much more time passes. It does seem like we’ve endured a bit of a soft patch for January; the facts and figures that show this will be revealed in the coming weeks, and the bit of a lull may continue into February, too. That said, the present position overall for the economy isn’t a terrible one, and, with rising vaccination and falling incidence of disease we may be able to get more fully back on track before long.

In the last couple of weeks, mortgage rates have mostly wandered about, favoring a slightly downward bent. That seems to have mostly run its course over the last few days, and so we think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will likely be unchanged when the next report comes on Thursday morning. However, it’s a big week for data to start the month, so there’s perhaps a little uncertainty in this near-term outlook.

Mortgage Market information provided by Jon Aucutt, Main Street Bank
31780 Telegraph Road, Suite 100
Bingham Farms, Michigan 48025
jaucutt@msbmi.com