September 17, 2010 — After a Summer of almost steady decline, mortgage rates have mostly plateaued as the season comes to a close. During the period, rates moved down by a little better than one-third of percentage point, frequenting new lows regularly. That said, the vast majority of the decline in mortgage rates took place early in the season, and the last six weeks have found a very narrow range in which to wander.
Provided the economy gets no worse, and there is no return of financial panic, mortgage rates don’t really have much place to go.
HSH’s overall mortgage monitor — our weekly Fixed-Rate Mortgage Indicator (FRMI) has tracked the market for nearly 30 years. This week, the average rate tipped back by three basis points to a flat 4.75%, touching new record territory. The FRMI’s fifteen-year FRM counterpart — attractive to refinancers — came it at a new record of 4.21%, while its hybrid 5/1 ARM cousin sported a 3.73% initial interest rate. 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.
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The production-led recovery did downshift pretty considerably in the third quarter, sparking concerns about a double-dip recession. While it’s true that the slowing is by no means welcome, it does appear that there is enough activity to promote at least a stagnant period of growth.
Industrial production moved ahead by 0.2% in August, a bit of deceleration July’s 0.6% gain. Manufacturing and utility output throttled back, while mining activity kicked up nicely for the month. The little boost in output was enough so see the percentage of factory floors actively in use continue a slow, steady upward trend. At 74.7% for the month, we are now about halfway between pre-recession levels and those seen during the depths of the downturn. However, there is still plenty of available capacity without businesses needing to expand, keeping economy-boosting spending on the sidelines.
Local surveys of manufacturing activity in New York and the Philadelphia Federal Reserve district found soft conditions. The Empire State manufacturing index eased back to a reading of 4.1 in September, down from 7.1 in August and continuing a cooling trend after 2010 high readings in the low 30s as recently as April. Over in the Philly district, their gauge improved to a less-negative minus 0.7 during the month, but the August-September period was the first back to back negative reading since early summer 2009. The Philly index too was at lofty levels in the spring, but now is struggling to get back to breakeven.
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.
Retail Sales did bounce ahead by 0.4% during August, a figure which came in a little better than expected. Reviewing the details of the report, gains were concentrated in food, gas, clothing and sporting goods; if that doesn’t sound like back-to-school shopping we don’t know what would. Unfortunately, school’s back in now, and retail sales don’t seem to have that great an upside at the moment, given the high unemployment rate, weak income growth and a lack of borrowing appetite for consumers.
Given the tenuous nature of sales, it’s not surprising that retailers aren’t much adding to their inventories at present. The broad measure of inventories out this week found manufacturers and wholesalers adding goods to their shelves, but retailers letting them remain thinly populated at the moment. Overall ratios of goods on hand relative to sales have inched up slightly over the past couple of months, but final demand has been soft but steady. To get manufacturing revved up again, we’ll need to start to see strengthening by consumers and businesses, but favorable conditions — and confidence — remain elusive.
This lack of confidence was seen in the preliminary reading of Consumer Sentiment from the University of Michigan. After a hopeful upward trend though June, the rocky economy has again crushed consumer spirits, and with the 66.6 initial reading for September reflects this quite well. If this level holds for the entire month it would mean we have fully erased all of the gains of the past twelve months. With an impending election season and all the focus on negativity sure to hit the airwaves before long, it’s hard to see where great improvements will come from in the period just ahead.
The weekly ABC News/Washington Post poll of Consumer Comfort held firm at minus 43 for the week ending September 12, still somewhat nearer to the high end of its year-long range than the bottom.
Discussions about outright widespread price declines — deflation — and what the administration and Federal Reserve responses might be to such a situation have been in the news at times over the past few months. The latest news on price pressures didn’t suggest any imminent problem which needs addressing, but did suggest that inflation does remain quite muted.
Prices of imported goods rose by 0.6% in August, rather above expectations and a bit of a bump from the 0.1% seen in July. On the flip side, costs for exports rose by 0.8%, leading to a balance of sorts; over the past twelve months, both import and export prices have risen an identical 4.1% for the period.
Since we bring far more goods into this country than we send out, the lift in import prices may have found its way into the Produce Price Index, which rose by 0.4% in August. Overall inflation for finished producer goods rose by 3% over the past year, so there’s been no deflation to be seen here, and even so-called “core” PPI remains a positive 1.3% for that period. Over where consumers purchase items, inflation ticked 0.3% higher during August, a second consecutive month 0.3% gain. Price pressures exclusive of food and energy (core CPI) was unchanged for the month, and prices are rising at a very slow 1.2% over the past year at both the headline and core levels.
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Sources: FRB, OTS, HSH Associates.
Some inflation is a good thing, since it helps to produce rising incomes and profits and such, and can even promote greater spending today (since items will get more expensive tomorrow). It is thought that the Federal Reserve might prefer to see consumer prices increasing by about 2 percent per year, but given all the “resource slack” in the economy — idle factory space, idle workers — all they can hope for at the moment is that we don’t slide under a zero percent rate, since that might require extraordinary measures, such as purchasing sizable amounts of Treasury bonds or flooding the markets with even more cash. At the moment, the problem isn’t that there is insufficient cash in circulation, it’s that this cash is being held onto by consumers and businesses who are afraid that the poor economy might hurt them further. This impacts confidence, confidence impacts demand and spending, spending impacts inflation, and around and around we go.
Reducing labor slack — aka creating jobs — should long ago been the focus of the administration. However, that didn’t turn out to be the case, and as a result, we are coming into those November elections with a very high unemployment rate. At this point, even a decline in the number of layoffs would lend some cheer, but we remain at elevated levels for first time unemployment claims, so there’s little progress to note in this regard. During the week ending September 11, another 450,000 applications were filed at state windows, but at least this number was slightly better than the week which preceded it. The last two weeks represent the best back-to-back figures since at least July, but are nothing to get excited about.
It would seem that the economic setback of the Summer has passed, leaving it its wake a rather higher mountain to climb to get us back to full employment and a robust economy. Forthcoming elections and possibly looming tax increases shortly thereafter only adds to the steepness of the incline we will need to travel.
Next week, the Federal Reserve meets again to discuss monetary policy and consider what steps, if any, need to be taken to try to push the economy in the right direction more strongly. No policy action is expected, since the short-term interest rates the Fed directly controls are near zero percent already. Still, participants will have plenty to discuss. For our part, we’ll be keenly eyeing the NAHB index and both new and existing home sales, which are likely to be poor yet again. Since the expiration of the last homebuying tax incentive, conditions have been very weak. Although reportedly not in the cards,
we think that another homebuyer tax credit should be on the table, but rather different than the programs previously offered. As always, we welcome your feedback.
Also, if you missed it last week, you should have a look at our plan to help responsible homeowners who are underwater. Unlike the “FHA Short Refi” idea, the concept doesn’t penalize homebuyers or investors… and there might even be no cost to taxpayers, either. Curious? Read HSH.com’s Value Gap Refinance and be sure to let us know what you think.
Rates seem likely to continue to wander aimlessly next week.
Looking down the road toward September? Take a look at our latest Two-Month Forecast.
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