May 28, 2010 — Although not by much — just two little basis points — conforming 30-year FRMs cracked into record-low territory this week, pushed there by the ongoing effects of the euro-market debt duress. The 4.90% seen for the benchmark mortgage product was down by three basis points (.03%) from last week, and two basis points better than our previous recorded low of December 4, 2009.
Although records are spotty, HSH reckons these rates to be approximately 50-year lows. HSH surveys run back to 1979, and Freddie Mac’s back to 1971, with scant earlier data available from legacy sources such as the Federal Housing Finance Board (now FHFA), the Federal Reserve, and Housing and Urban Development (HUD). Although the mortgage market back in the early 1960s is not directly comparable to today, the interest rates certainly appear to be. Regardless of the length of the comparison period, there is no doubt that these interest rates are excellent. Tempering that good new, however, is the fact that rigid underwriting standards — and a lot of underwater homeowners — means that there are limited numbers of borrowers who can take advantage of them.
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HSH’s market-spanning Fixed-Rate Mortgage Indicator (FRMI) eased by another three basis points to complete HSH’s weekly survey at 5.18%. The FRMI includes rates for conforming, jumbo, and the GSE’s “high-limit” conforming products in its calculation, and so covers a wider audience than other surveys. The overall average for the 5/1 Hybrid ARM — presently the most popular alternative to the traditional fixed-rate mortgage — came in at an average interest rate of 4.26%.
Low mortgage rates and federal inducements have had a noticeable effect on home sales, and that combination of market conditions this spring may ultimately produce higher levels of sales than happened last November, when the “first-time” homebuyer tax credit originally expired. The offer of a revised and expanded credit available this spring came to an end on April 30, with a pronounced effect.
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Following a 7% rise in March, existing Home Sales rose by 7.6% in April. The 5.77 million (annualized) rate of sale was the highest since last October. The months of available unsold inventory did rise a bit, to 8.4 months. The rise is a bit of perverse effect: when sales begin to nudge higher, sellers who have left the market may suddenly return, boosting inventories available to be sold despite the uptick in actual sales.
Sales of brand-new homes sported an even gaudier 14.8% rise from March to April. The 504,000 units sold was the best annualized figure since the summer of 2008, far stronger than even that seen last November when the credit was also available. More impressive, the latest number is 47.8% higher than last April, and the five months of remaining inventory at this sales pace was among the lowest seen since the 1960s. While the sales pace is likely to slow, the actual number of units completed and available for sale declined by 16,000 during the month to just 211,000, so it appears that many of the contracts signed in April are for to-be-built homes, offering support to construction, lumber and other trades.
The economy could use a little additional support. The revised measure of Gross Domestic Product for the first quarter of 2010 was moved downward by two ticks to a flat 3%. Forecasts called for a two-tick increase to be revealed in the preliminary assessment, but there was apparently less momentum from Q409’s 5.6% rise than expected. A 3% rate of increase isn’t terrible, but is insufficient to generate the kind of hiring needed to get the economy humming again. Of course, the weak GDP number and weak hiring means that interest rates will remain lower longer, a benefit to potential loan borrowers.
Substantial hiring remains a future prospect, even though job creation has turned positive over the past couple of months. Weekly unemployment claims numbers remain in a stubborn stance at an elevated level. Last week (ending May 22), another 460,000 applications for benefits were processed at state assistance windows. We’ll see a new employment number for May at the end of next week, and there are some forecasts that up to a half-million jobs will have been created during the month. Given the persistent high level of unemployment claims, that seems rather optimistic to us.
If such hiring was occurring, wouldn’t consumer moods be rapidly improving? It would stand to reason that they should, since wage income arguably beats government “transfer payments.” However, while none of the three indicators of consumer moods are skyrocketing, they are collectively coming off their recession lows. The Conference Board’s measure of Consumer Confidence bounced to a reading of 63.3 in May, its best showing since March of 2008. Despite the improvement, it remains substantially below the 100+ levels common before the recession hit.
As well, that spate of enthusiasm wasn’t seen in the widely-followed University of Michigan Survey of Consumer Sentiment, which moved higher by a muted 1.4 points but remains in a near-flat trajectory over the past six months. The higher frequency ABC News/Washington Post poll of Consumer Comfort has yet to trend into any new territory this year, with the minus-45 mark seen during the week ending May 23 squarely in the middle of a bleak range which has persisted for too long a spell.
Aside from providing some economic support, the above-noted transfer payments accrue to the figures reported in the Personal Income report for April. Overall, incomes rose by 0.4%, driven by a 0.4% increase in wage income. Despite the bump in income, personal consumption expenditures were unchanged from March. It would seem that the gains noted were instead banked, since the nation’s rate of saving rose back up to 3.6% for the month. Some of those “savings” may have been in the form of tax refunds; if you got one, why not take the latest poll on our blog and let us know what you did with yours?
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Even if the economy has slowed somewhat, it would appear to be on a path of growth. According to the 85-component National Activity Index produced by the Chicago Federal Reserve, the economy is moving forward at slightly above its natural potential. The 0.29 reading in the indicator for April suggests a pace of growth to start the second quarter of 2010 somewhat stronger than we finished the first quarter. As has been the case for the recovery to date, production-related industries are making the largest contribution.
One of the components which is serving to power production ahead is April orders for Durable Goods, defined loosely as items designed to last three years or longer. Orders for these items increased by 2.9% as transportation-related items notched a sizable gain. Of course, those big-ticket items can distort the numbers, but even pulling them out left a 1% gain for the months. “Core” business-related spending for equipment did suffer a setback, though, slipping by 2.4% for the month. That fall came on the heels of a 6.5% gain in March and such swings are not uncommon from month to month.
That said, there does appear to be some leveling off in the rate of growth for production gains. Reports from two Federal Reserve districts (Richmond and Kansas City) both saw declines in their gauges. Where Richmond slipped from a reading of 30 in April to a still-strong 26 in May, Kansas City slumped hard, plummeting from 24 to just 5 for the month, its lowest reading since last fall.
In addition, two reviews of purchasing manager activity in the New York and Chicago regions sported mixed reviews, with New York finding continued gains in activity. The Chicago-centric branch of the ISM reported that their barometer of health eased back from robust to just solid levels during May. First-of-the-month National ISM survey hits the news on Tuesday so we’ll have a wider-ranging view to consider.
Mortgage rates have recently been driven down to these new lows by a flight-to-quality buy of less-risky assets, or at least those denominated in a more durable currency. Adding to the concern about Greece’s finances came a downgrade of debt offered by Spain, sending the market into yet another tailspin this week. Despite this new challenge, underlying interest rates actually moved off their recent lows during the week. Without their considerable downward pull it would seem unlikely that mortgage interest rates will continue their decline as we come off of the Memorial Day holiday.
Next week is a short week, but the first week of the month brings reports from the ISM, auto sales, and the all-important employment report. Turbulent markets seem likely to continue, but unless investors develop a sudden appetite for mortgage-related investments rates appear to have bottomed and may tick a few basis points higher.
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