April 2, 2010 — Mortgage rates rose this week, at least a little bit. Most of the increase wasn’t due especially to the end of the Federal Reserves’s MBS purchase program, but rather to good, old-fashioned economic data and perhaps even some increase in investors searching for places to put their money outside of ultra-safe investments.
The DJIA is now approaching 11,000 as a mostly-steady five-week increase continues, oil and gold prices are again firming and represent competing investment opportunities, especially if the economy continues to show signs of healing. Underlying interest rates which influence mortgage rates continue to tick higher, with a yield on the 10-year Treasury now at levels last seen in November 2008 — not coincidentally, perhaps, just weeks before the Fed began its initial program. How have things changed since then? The last time the 10-year Treasury was this high, conforming 30-year FRMs were averaging 6.38% and spreads were nearing modern record levels. Not so today, where ‘risk premiums’ continue to get thinner, and are actually near or better than pre-financial crisis levels.
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The overall average 30-year fixed-rate mortgages (FRM) tracked by HSH.com’s FRMI added six basis points (.06%) to last week’s average, landing at 5.41%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s 5/1 Hybrid ARM counterpart climbed by just two basis points (.02%) to close the survey at at flat 4.5%. Most of the increase in the FRMI came from conforming rates, which rose by nine basis points from last week.
A lot of data out this week pointed to signs that an economic spring may actually be forming. Investment markets seem to be champing at the bit to rally, waiting for just enough good news to really celebrate the recovery. There were a few such items this week.
Daily FRMI rates are available on HSH.com.
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The Institute of Supply Management’s monthly survey was among them. This measuring stick of factory activity moved to a reading of 59.6 in March, its best showing since 2004 and a strong signal of a recovery with good momentum. That kick higher was probably fostered by a 0.6% increase in Factory Orders in February, another solid gain, and the ISM report noted that production, employment and orders all are in solidly expanding territory. A couple of regional surveys in the New York and Chicago areas also found a good basis for optimism about the state of the recovery, too, with New York marching higher and Chicago holding up well.
After some fairly brutal winter weather provided distortion, auto sales rebounded in March to 11.8 million (annualized) units sold. While not yet near normal — perhaps 13 million-plus units — it was a move in the right directions and probably added to the production gains seen above.
Winter weather, a lack of demand and a lack of available funds all contributed to a 1.3% decline in Construction Spending in February. Residential spending declined by 2.1% and Commercial by 0.4% as there are plenty of empty houses and office buildings to go around. Spending for public works projects slipped by 1.7%, as state and local governments are broke at the moment, with even simple road paving projects going lacking in some areas.
While the monthly Challenger, Gray and Christmas report noted an increase in the number of announced layoffs during March, a rise from February’s 42,000 to March’s almost 68,000, it’s worth noting that some 75% of those were government- or postal-service-related jobs, not those in the private sector. While that’s not especially good news, especially for those it affects, but it’s not unexpected, either, as budget crises of all forms are fully in play at the state and local government levels. Unlike government jobs, private payrolls have already taken a severe hit in the recession and have a long, long road to to return to “full employment.”
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Sources: FRB, OTS, HSH Associates.
We do seem to be taking small steps in that direction, finally. New claims for unemployment benefits are trending downward again, a combination of “no one left to fire” and a modestly growing economy. During the week ending March 27, some 439,000 new applications for benefits were filed, among the better readings of the year.
A confirmation of economic growth was seen in the latest employment report. In March, some 162,000 jobs were created, the first sizable increase of the nascent expansion. Only 48,000 of those were related to the Census, and some of the boost was a shift in hiring from February (which featured several blizzards), but the net effect was an actual small gain in private sector hiring for the month. That said, the good news was still tempered by a 9.7% unemployment rate, an actual decline (-0.1%) in hourly earnings and little gain in the average workweek, which might presage some additional hiring. Despite these drawbacks, it is still a positive move, and a welcome one.
More hiring would likely improve consumer moods. The Conference Board’s gauge of Consumer Confidence did firm somewhat in March, rising to a reading of 52.5 for the month. However, that’s not much different than number seen over the past 6-9 months, so we remain rangebound. Trapped in a rut as well is the weekly ABC News/Washington Post poll of Consumer Comfort, which ticked back to -45 from -44 during the week ending March 28. Neither of these indicators seems likely to break new ground anytime soon.
With still-weak job growth and no increase in wages, Personal Incomes were unchanged in February. Spending, though did increase by 0.3%, driving down the national savings rate to 3.1%, the lowest since October 2008. If weather was a contributing issue during the month, some of those savings were probably spent on shovels and gasoline for the snowblower and generator during the tough month. Given plenty of flooding in the northeast in March, some more spending will probably occur for repairing damaged homes and structures — once the water finally recedes.
We’ve been asked about the now-upon us change in the mortgage marketplace many times over the past few months. As we transition away from a Federally-backed mortgage market to a more private-oriented one, cues for interest rates will come from more traditional factors, including economic growth or decline, inflation or deflation concerns, and investor appetites. This shift from certainty back to the vagaries of the marketplace will probably have some unexpected twists and turns, but at least at the moment, we seem to be in a fairly gentle handoff period. Intervals of rising rates are sure to come at some point; the April to July period over the last couple of years has seemed particularly vulnerable to such things. Increases in rates of three-eighths to as to as much as three-quarters of a percentage point have been seen during this period since 2006. There’s no way to know if one will come, but if it does, it’s a good thing we’re starting from extraordinarily low levels.
Which is where we’ll begin, and remain, next week. Rates are likely to firm a little bit more yet, based purely on the direction of underlying rates as this week progressed. The stock market may be starting to be due for a breather before long, but perhaps not just yet. Figure another 4-5 basis points increase in the FRMI by week’s end.
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