July 1, 2011 — The downward swing for mortgage rates may have come to at least a temporary end. Somewhat better economic news, a hopeful start to a resolution of the Greek debt mess, growing concerns about our own debt-limit ceiling and the turn of both the quarter and half-year are all factors contributing to the upward pressure. The end of the Fed’s QE2 program no doubt has played a small role in the increase in rates, too. It’s also worth noting that the government’s push to drive oil prices downward through the use of the Strategic Petroleum Reserve should also help to put additional billions of dollars back in consumer pockets and eventually into the economy as the year moves forward. This should help continue or even possibly improve the strength of the recovery.
The benchmark 10-year Treasury has risen appreciably over the past seven days, running from 2.93% on June 24 to a close of 3.18% this afternoon.
A little more optimism and a little less fear among investors pushed the Dow Jones Industrial Average up by a fat 650 points this week, and a lot of cash to fuel that rally seemed to be was generated by selling Treasuries of all stripes. The quarter-point rise in the 10-year’s risk- free yield puts pressure on the rates of other, more risky investment products, and mortgage rates will begin the second half of 2011 moving higher.
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HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages moved two basis points higher, moving to an average of 4.79%. FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers, also moved two basis points upward to close the week at 4.44%. Given the wide differential in interest rates, at least some borrowers should be considering hybrid 5/1 ARMs; whose five-year fixed periods now averages just 3.40%, up three hundredths of a percentage point from last week. A borrower with a $300,000 loan willing to accept the risk of higher future payments would save about $20,000 over the next five years.
While there wasn’t any great news out this week, at least one key indicator provided a suggestion that the Spring slowdown isn’t turning into a Summer “double-dip” recession. The Institute for Supply Management (ISM) index which tracks the health manufacturing had been expected to reflect some additional slowing in the economy, but instead sported a surprise increase for June. The indicator rose from 53.5, a modestly expanding reading to 55.3, a much firmer footing, and lent some hope that manufacturing’s role in the economic recovery would continue for at least a while longer. Given that the consumer isn’t yet fully engaged (and won’t be until the job market improves) it is crucial to have factories picking up the slack.
That improvement was buttressed by more local and regional outlooks. The Kansas City Federal Reserve’s report of activity in its district showed a strong bounce back in June. Their barometer of business had fallen from a strong reading of 14 in April to a standstill mark of 1 in May, but popped back up to 14 in June, so the spring slowing seems a temporary blip in the district. Over in the Richmond Fed’s area, a milder rebound was seen, but their indicator moved back to a positive 3 in June from a negative six in May.
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.
Localized manufacturing trade groups in both the Chicago and New York markets reported higher levels of activity, too. New York’s was a weak upward move; the slowdown seen in other parts of the country may be having a delayed effect here. Over in the Chicago region, a strong upward kick was seen, probably from the influence of auto manufacturing revving up domestic supply chains to offset those lost or still troubled after they were considerably disrupted by the Japan earthquake and tsunami disaster a couple of months ago.
Auto sales were soft again during June. An annualized rate of sale of 11.4 million represented a downturn of about 400,000 units from May, and well below the 13 million annualized figures we saw in the February though April period. The reports from manufacturers suggested that dealers have run low on inventories of the fuel-efficient cars in highest demand, and the spring slowdown in the economy no doubt put some buyers back on the fence to wait for improvement in their financial situations.
That may be a bit off in the future yet. Personal Incomes rose by 0.3% in May, about the same increase as seen over the last couple of months. However, the wage component of the report did shift down, falling to an increase of 0.2% from 0.4% in April (the rest of the gains are made up in things like dividend and investment income, government transfer payments and the like). Of course, no real improvement in income means none in outgo, either, and personal consumption expenditures failed to budge, registering no change from April. A minor rise in income with no like increase in spending means a little more savings happened during the period, and the nation’s saving rate stands now at 5%.
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To push incomes higher, jobs are required. However, they continue to be hard to come by and seemingly hard to keep, too. Another 428,000 new applications for unemployment benefits were filed during the week ending June 25, virtually unchanged from the week prior and a capper on what has been a very weak month for labor markets. The monthly employment report for June comes next Friday, and given the trends, the present forecast of perhaps 90,000 jobs seems optimistic to us.
Optimism among consumers certainly remains in short supply. All indicators that track consumer moods are in dark territory. Declines in confidence were seen in the Conference Board’s measure of Consumer Confidence, which eased from a 61.7 level in May to a 58.5 one in June; Consumer Sentiment, measured by the University of Michigan survey found a downturn in their gauge, which slid from 74.3 in May to 71.5 in June, and the weekly Bloomberg Consumer Comfort indicator remains mired in recession-level ranges. All these indicators are below or well below their year’s highs, which also weren’t much to get excited about.
Construction spending eased by 0.6% in May, as declined in residential and public outlays overcame a 1.2% increase in commercial construction.
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Sources: FRB, OTS, HSH Associates.
Even given the positive factors noted above and a more-hopeful expression by investors, it’s not as though the economic skies have suddenly brightened by much. There are still many roadblocks to a full recovery and no doubt more troubles ahead to overcome. Still, if the outlook does not continue from bleak to black, there is little likelihood that interest rates can continue on a downward path, and signs of improvement in the economic climate — even sporadic ones — will cause a an upward pop in interest rates. To sustain any increase in rates, we’ll need either a sustained increase in stronger economic news (especially job markets) or a renewed bout of inflation, which seems unlikely at the moment, particularly if oil holds below $100/bbl.
It’s a holiday-shortened week next week, but there are a number of important new pieces of economic data, including the employment report. Mortgage rates will be higher, perhaps 10-15 basis points by the time mid-week rolls around. That would make them the highest rates since… late May to early June, so there’s little reason for great concern, even if a few refinancers may find less-stellar rates than they might have a week ago.
Enjoy your Independence Day holiday. July 4th is just a date on a calendar, but take a minute to reflect on all the things which make America great, and don’t forget to spare a moment for those in our Armed Services who protect our freedoms.
For an outlook which will take you up until early August, have a look at our new Two-Month Forecast.
There’s a lot going on in mortgage markets this spring and beyond. If you missed it, we wrote an outline to get you up to speed. Take a minute and read HSH’s 2011 Mortgage Market Swirl.
One way to keep refinancing activity moving forward is to help underwater borrowers refinance. How? Have a look at our idea — read about HSH.com’s Value Gap Refinance idea, and be sure to let us know what you think.