In the U.S., the 30-year fixed mortgage rate ticked down to 7.1% in the first half of December.
While still more than double the rate as recently as early 2022, it is nearly a point lower than what was available to homebuyers in October. This reduction, owed in large part to inflation’s steady moderation and the Federal Reserve’s acknowledgment of that fact, has initiated an uptick in refinancing.
Refinancing hit its highest level since the beginning of 2023 in the week ended December 10, though levels are still historically low.
Recent homebuyers may have initially closed on their mortgage at a rate higher than what is available today, and refinancing represents an attractive option.
Others may have secured a rate in the same ballpark as what is available in today’s market, but on an adjustable basis. Therefore, the recent reduction in mortgage rates presents the opportunity to lock in something better, even if only slightly, than the fixed portion of the adjustable rate because it removes the possibility of rising costs later on.
Purchase activity has also risen, though again, from unusually low levels. The four-week moving average of the purchase activity index from the Mortgage Bankers Association was 12.2% higher in the first half of December than a month earlier.
Homebuilders may be beginning to notice. After four consecutive months of declines, homebuilder confidence reversed trend and increased 3 points to 37 in December, according to the National Association of Home Builders’ Housing Market Index.
Even with the slight increase, the index remains well below the 50-point threshold, indicating that building conditions will be poor during the next six months. This trend is widespread, though the Northeast has a leg up on the other regions.
The Northeast is the only region to post above the break-even threshold indicating good building conditions. This is partly because of less construction in the pipeline in the Northeast compared with other regions, giving builders more room to run.
Monitoring the situation in the Red Sea
Freight passing through the narrow strait of Bab al-Mandab, to and from the Suez Canal, has been increasingly attacked by Houthi militants in Yemen. While the missiles have intermittently been launched in recent weeks, they ramped up in mid-December, causing major shipping and energy firms to cease operations in the area.
According to some estimates, about 10% of ocean freight by volume passes through the Suez Canal. The latest threat to global supply chains comes as the Panama Canal battles severe drought that has limited the volume of ships permitted to pass through per day.
The attacks’ potential to disrupt the global economy is worth considering and something Moody’s Analytics is keeping a close eye on. Oil prices are a sensitive barometer of the potential impact. At close to $75 per barrel, prices for crude oil remain low, but they have risen nearly $5 in the past week over fears that oil supplies will be disrupted.
While the situation is volatile, the U.S. military’s involvement, along with a growing cadre of other countries, increases the likelihood that shipping activity will be largely restored in the next few weeks.
Further, there are few buffeting forces keeping the conflict from becoming a significant economic disruption. In the immediate term, there are still more than ample inventories of oil and holiday shipping is complete.
Should disruptive attacks persist in the Red Sea, it will be during what we anticipate is a global economic softening in 2024 when demand for ocean freight capacity is expected to be below trend. Moreover, there are alternative shipping options already in play.
For example, manufacturers are using sea freight from Asia to Dubai and then flying freight from Dubai into Europe and potentially New York City or Chicago. The rail connection from China to Europe will no doubt be fully booked.
To be sure, the rerouting of ships and the resulting price increases will hurt global importers and exporters. Earlier this week, shipping firm MSC raised the rate to transport a container from India to the East Coast of the U.S. from $2,000 to $6,600 per 40-foot container.
The increase goes into effect on January 18. This will sting, but it is only a fraction of the prices reached in 2021, when container costs surged above $20,000. The supply-chain issues of two years ago have also led to a buildup in container capacity, which will dull some of today’s pain.
Customers may now start to divert cargo to the U.S. West Coast to avoid passage through the Suez Canal and a backlogged Panama Canal. This will lead to tighter space and propel further rate increases. Where possible, more freight will shift to rail.
As it adapts to the increased volume, the U.S. rail network may be overwhelmed for a short period, leading to some added delays and elevated costs. Transitioning to the West Coast, for a manufacturer typically operating from an East Coast port for its imports and exports, will increase transportation costs.
Thankfully, goods prices in the U.S. have come in considerably since peaking during the post-pandemic supply-chain crunch in late 2021. The added transportation costs, while far from desirable, are not of scale to create a meaningful macroeconomic event.
Of course, there are many darker scenarios, including U.S. military intervention leading to a broader regional conflict. Nevertheless, the most likely scenario is that the struggle in the Red Sea does not significantly affect the global economy.
Our December baseline forecast calls for West Texas Intermediate crude oil to average $79 per barrel in 2024, slightly higher than 2023’s average. Of course, as the escalation in the Suez Canal this week reminds us, budding threats to the global economy can quickly emerge.
By Moody’s Analytics
