July 2, 2010 — Low and slow is a good thing, especially when we’re talking about ribs on a Fourth of July backyard barbeque, but not so much as an economic situation.
If you’re concerned about the direction of the economy and the prospects for a robust recovery, not only are you not alone, but you are probably being joined by any number of former optimists. The already-slow economic recovery seems likely to slow further.
Of course, weak growth and investors hungry for protection against roiling stock markets are pushing interest rates downward, with constant investor appetites for mortgage-backed securities joining that for Treasury obligations. Mortgages aren’t quite as safe as government-sponsored debt, but close enough, and they sport far better yields at the moment. With the world still awash in central-bank cash, the money has to find a home somewhere.
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HSH’s overall mortgage-rate gauge, our Fixed-Rate Mortgage Indicator (FRMI) includes rates for conforming, jumbo, and the GSE’s “high-limit” conforming products and so includes a broad swath of the mortgage-borrowing public. This week, the FRMI declined seven basis points (.07%), beginning the second half of 2010 at a flat 5%. The ‘best’ alternative to the 30-year FRM for many folks, especially jumbo borrowers, is the hybrid 5/1 ARM, which finished the week down a full tenth percentage point to land at 4.02%.
Conforming 30-year FRMs moved down by six basis points to new ‘record’ lows, wandering somewhat more deeply into 1956 territory.
Low mortgage rates are a favorable support for housing markets, but the pool of folks who can take advantage of them remains limited, and the recent decline to new record-low levels is in actuality only a small dip from rates we’ve seen on any number of occasions over the past eight months. In this way, and aside from historical reference, it’s not all that much to get excited about.
HSH has several lengthy series of statistics dating back to the 1980s for FRMs and ARMs, Conforming, Jumbo and FHA products. These can be licensed for use — interested parties should inquire here.
More exciting to some, though, was the extension of the transaction period to obtain the homebuyer tax credit. Decoupled from a bill objected to by Republicans, this solid and valuable idea got an 11th-hour reprieve, but it should have stood on its own merits rather than be hung on another bill. Congress could have saved itself this exercise by allowing a reasonable time frame (relative to market conditions) for transactions to be completed. The new September 30 deadline should be plenty… possibly even more than needed.
Rates are low, and even if not at record lows every week, will remain low by any comparison for some time yet. Here’s hoping that during that time, economic conditions improve so that more folks can take advantage of them.
The production-led economic recovery slowed in June, according to the Institute for Supply Management. The trade group’s indicator is among the best measuring sticks of the health of manufacturing, and uses a reading of 50 to indicate expansion or contraction. In June, the ISM index slipped from May’s very solid 59.7 to a more subdued 56.2 in June, signaling a slowdown in the forward momentum for growth. The indicator remains in solid territory despite the decline, but production, orders and employment sub-indexes all cooled during the month and manufacturing seems likely to provide somewhat less boost to an economy already growing at a meager clip.
With a 1.4% decline in factory orders in May breaking an eight-month positive string, it’s little wonder that ISM respondents were less sanguine about their prospects in June. The slowdown in orders is no doubt related to the troubles in euro-zone nations, some of which are in the process of enacting austerity measures which seem certain to limit upside growth as we move forward. Certainly, it’s possible that this was a temporary blip in demand — holding off on orders until the smoke clears, as it were — but there is no way to know at present.
Domestically, we’re a little slower, too. The May reading for the National Activity Index (the Chicago Federal Reserve’s amalgam of 85 economic indicators) slipped back to a reading of 0.21 from 0.25 in April. Growth is still occurring but at a lesser pace, and it seems unlikely that June will ring in any higher given the behavior of many market indictors last month.
Auto sales, battered in the downturn, boosted by last Summer’s CARS act and distorted by GM and Toyota issues (let alone the economy) are still failing to gain much traction. The 11.1 million annualized rate of new vehicle sales in June reported by AutoData was a 500,000 decline from May, and a continuation of a pretty soft (if fairly stable) trend. Auto sales, like so many other economic expressions, will remain weak until consumer fundamentals improve.
One of those fundamentals is confidence about the future, and one’s ability to manage obligations and commitments against future income. In this regard, the almost 10-point plummet in the Conference Board’s measure of Consumer Confidence in June points to an increasingly shaky consume psyche, and that bodes ill for recovery prospects. To be sure, the Confidence measure did run a bit at odds with the latest UMich Sentiment index, which has been firming somewhat of late, and the latest ABC News/Washington Post poll of Consumer Comfort, which touched a year’s high of minus-41 during the week ending June 27. The decline in the Confidence indicator dropped it back to March levels, erasing two months of sizable gains.
Perhaps the most important fundamental to this economy is employment, which remains in short supply for too many. According to the Bureau of Labor Statistics, 125,000 jobs were shed in June. With the Census bulge in hiring gone, we have returned to a weaker pattern; the 83,000 private sector hires was somewhat more encouraging, but government layoffs overwhelmed that minor spark. In a surprise move, the unemployment rate declined two ticks to 9.5%, but before you break out the champagne, consider that the decline was due to over 650,000 people giving up the search for work (and hence aren’t counted as unemployed for the purposes of the calculation).
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Sources: FRB, OTS, HSH Associates.
Given the duration of unemployment, and that the pace of job creation remains nil, it seems increasingly likely that near-retirement-age workers may not be able to find suitable work and simply opt to retire if they can. As well, first-time entrants into the workforce will continue to lose opportunities to older, more skilled participants for some time to come, delaying their full beneficial impact into the economy. These distortions will probably be with us even after the labor market begins to recover, and continuing indications such as weekly unemployment claims continue to hold at elevated levels. Some 472,000 new applications for benefits were filed during the week ending June 27; extensions of benefits for people already receiving assistance hadn’t been put into place as of this writing, and an estimated 1.7 million people will find no check in the mailbox before long, a number which more than doubles by month’s end.
For those who do have jobs, wages are increasing to some degree. According to the latest report, personal income rose by 0.4% in May, with wages income rising by 0.5% for the month, the same as April. Wage growth has firmed up this year relative to last, but overall personal incomes — influenced by things like dividends and rental income — is up a meager 1.6% over that time frame. Despite the boost in cash flow, spending only increased by 0.2% during the month, and so the nation’s rate of saving bounced back to a fat 4%, the highest figure since last July. Since credit is tight, this accumulation of funds is providing some (if less immediate than credit) support to consumer spending.
Without widespread and substantiative improvement to the labor market, the recovery remains imperiled. Consumer demand for houses, autos and goods will remain tepid, and the pool of those who can put low interest rates and solid resources to work will remain relatively small. Looser credit would no doubt help grease the skids, but financial market “reform”, credit legislation like the CARD act, tight underwriting standards for (ultimately) taxpayer-backed mortgage loans, strict regulatory oversight and other forms of credit restriction or curtailment make ventures into risk out of the question at the moment.
With the homebuyer tax credit gone and commercial real estate markets troubled, expecting a lift in construction spending seems a bit of a stretch. In May, spending on building projects eased by 0.2%, with residential outlays declining by 0.4% and commercial by 0.6%. A bright spot was public spending for projects; the 0.4% lift there was the third positive reading, and probably reflective of last year’s $787 billion stimulus project (ARRA) funds finally hitting “shovel ready” projects — road construction and repairing and the like. Fixing the infrastructure is probably a good thing given the sorry state of roads and bridges.
We’re trying hard to look for optimistic signs, the little flares and sparks which suggest that we’re on an economic upswing. Early in the year, they seemed much more numerous and frequent, but they do seem to have diminished over the last month or two. The Summer is setting up to be a slow one, and in a way, that’s to the benefit of those needing just a little more time to get their particulars together to take advantage of low interest rates to refinance or to commit to the purchase of a new or existing home. While talked about in the press this week, a double-dip recession is still the least likely course of events for the economy, but risks remain prevalent.
And what of the economic and housing risks we began the year with? Back in December 2009, we produced a 2010 Market Outlook entitled “The Ten Most Important Factors for 2010’s Mortgage Market”. Since we’ve just crested past the halfway point of the year, we thought we’d take a look to see how things are progressing — or whether we missed the mark — so we’ve reviewed and updated the issues we identified. It goes without saying that reviewing one’s own predictions can be a humbling exercise.
Given all the above, it would be hard to find a reason why mortgage rates would move upward. It should be noted that the 10-year Treasury legged down in yield last week, and again early this week, but has remained pretty steady since Tuesday, June 30. Have we stopped falling? Probably, unless another spate of dire news comes next week. Let’s call rates largely unchanged for the holiday-shortened week.
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