August 20, 2010 — An ongoing string of poor economic news continues to press mortgage rates lower. Already in record-low territory, they are again approaching levels which spark renewed interest in refinancing. These low-rate chances can provide excellent opportunities for certain borrowers, but fall short of a broad-spectrum salve to pour onto economic wounds which still run wide and deep.
Refinancing applications continue to strengthen as interest rates decline. To create and sustain a refinance wave, interest rates must not only fall, but remain there long enough to allow even casual observers of mortgage rates to take notice and ultimate action. Sharp or fleeting dips in rates frequently don’t leave enough time for borrowers to get a transaction put together, making the duration of the dip in rates a crucial element in the formation of the trend.
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After stumbling around in a narrow range since early July, applications to refinance mortgages staged a bit of a breakout last week, with the Mortgage Bankers Association of America report noting a 17% jump during the week of August 13. All indications are that there has been some additional activity this week, too, as interest rates continue their decline.
Of course, refinancings are primarily driven by interest rates.
Every week in its 30-year history, HSH has produced an overall mortgage monitor — our Fixed-Rate Mortgage Indicator (FRMI) and we continue to run at record lows. The FRMI includes rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public. HSH’s FRMI rose by a single basis point (.01%) to 4.80% to close HSH’s weekly national survey. Believe it or not, cheaper alternatives to a fixed-rate mortgage can be found in the form of a Hybrid 5/1 ARM, which rang in at an average rate of 3.77% this week.
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.
It’s good that low rates are promoting refinance transactions, because by themselves they cannot fully support homebuying. This market continues to feel the effects of both weak economic conditions and distortion from the on-again, off-again homebuyer tax credit, and we are in a rather soft spot at the moment. Housing starts in July did tick a little higher (+1.7%) to 546,000 (annualized) new units started, but all of the improvement came in the smaller (and more erratic) multifamily sector. Single-family starts, the more important component, sported another decline, landing at 432,000 annualized units. Permits for future activity eased by 3.1%, so there isn’t much enthusiasm forming for the period just ahead, either.
With this as a backdrop, it’s no wonder homebuilder moods are sour. The latest Housing Market Index report from the National Association of Home Builders for August was quite poor. The value of 13 denoted in the report is far closer to the depth-of-the-recession bottom (8 in January 2009) than a recent ‘high’ (a still-terrible reading of 22 in May). In this survey, it’s worth noting that a reading of 50 represents a breakeven level, a threshold last crossed in April 2006 (and on a downward trajectory).
Lending conditions, tight now for several years, are finally starting to loosen. The latest survey of Senior Loan Officers, which looks at lending policies, found an overall net easing in restrictions to accessing credit, including the terms available to small, medium and larger commercial and industrial firms. Easier, cheaper and more accessible credit is a key element to reviving the floundering economic recovery.
Better news closer to our concerns is that for the first time in several years (since the question was first included in the survey) standards for residential loans being are loosening for prime-quality borrowers. While a small move (-5.5%), it does represent a kind of watershed event that the credit crunch has not only come to an end but is starting to cautiously reverse. Fannie and Freddie — the big players in the space — have made no moves to loosen underwriting standards, but there is reason to hope that if the private market can do it, so can the federal government’s mortgage financing agencies. FHA, of course, is already way looser than the general market and is actually finally starting to tighten up access to credit, albeit only for truly fringe borrowers.
Borrowing cheaper can help firms expand production with less effect on the bottom line. However, they are likely to do so only in the face of rising demand, and there are no clear signs at the moment that this is occurring; in fact, the opposite seems to be the case, and manufacturers are throttling back in response. Two regional reports of manufacturing health — one covering New York State, and the other, the Philadelphia Federal Reserve’s territory — found either soft or declining activity. The NY report saw a small nudge higher to a reading of 7.1 in August from July’s 5.1 level, but the Philly Fed’s report went from a weakly-positive 5.1 in July to a negative 7.7 in August, a worrisome drop.
In some ways, the decline is a bit of a surprise, given that the national report covering Industrial Production sported a nice gain of a full percent in July, with Manufacturing contributing a 1.1% increase, mining adding 0.9% and utility output kicking in 0.1% to the (weighted) total. The gain represented a return to recent trend after a -0.1% decline in June (itself probably a lagged effect of the euro-zone debt mess of late Spring). That said, if manufacturing has begun to downshift in any measurable way then the recovery will slow even further.
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Sources: FRB, OTS, HSH Associates.
More slowness might bring more job losses which would be a most unwelcome situation. Initial unemployment claims have been rising, and the week ending August 14 saw 500,000 more — the first time we’ve seen a 500K handle for initial claims since last November. After holding stubbornly in the mid-450 range for months, the trend has worsened over the last two months and there’s little expectation of great improvement anytime soon.
Looking down the road, the Index of Leading Economic Indicators recovered from a June dip of 0.3%, gaining by 0.1% in July. However, the pattern has decidedly downshifted over the past three or four months. Should the LEI’s predictive power be realized, growth for as long as the next six months will be more muted than that seen earlier this year. On the other hand, it may be simply reflecting a soft patch in an otherwise fair period.
Inflation trends are soft, as well. The Producer Price Index — a measure up prices upstream of the consumer — rose by 0.2% during July, with ‘core’ PPI edging up by 0.3%. Concerns about outright deflation in prices have gotten a little play in the media over the past month, but there does seem to be just enough inflation to keep prices flat. The July bump was a change in the pattern, since the PPI reports for the last three months have all sported negative readings. Over the past year, headline PPI prices have risen by 4.1% and ‘core’ PPI just 1.5%.
After touching 2010 lows a couple weeks ago, the level of Consumer Comfort reported by the ABC News/Washington Post survey has bumped back up for the past two. The two-tick improvement to minus 45 for the week ending August 15 puts us back at mid-July levels and about mid-range for the year.
Next week, we’ll likely see the continuing distortion to the housing market from this Spring’s tax credit. Both new and existing home sales are due to be reported and it’s hard to see how there would be any substantial improvement given the economic situation. Another couple of regional looks at manufacturing activity are also due, but we’ll be more interested to see the revised report for second quarter GDP. The initial estimate was 2.4%, but we think we’ll be lucky to hang on to a 2% figure. A one-point-something report may give mortgage rates some new space to fall, but as we mentioned last week, we have seen patterns change once we get past Labor Day, so any additional decline might not last. Lenders are starting to get a little busy, so if you’re jumping into a refinance, you may need to have a little patience.
Rates were steady this week, but given the behavior of other influential yields we think they have a little room to fall even before next week’s data come out.
Looking down the road toward September? Take a look at our latest Two-Month Forecast.
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