July 29, 2011 — There are plenty of concerns about the pitched battle to increase the nation’s debt limit, additional ones with regard to the potential for downgrades for the United States AAA credit rating and even some localized worries about the impending changes to the conforming loan limits, which will limit access to low-price funding for some borrowers.
While those are of course all troubling, each in their own way, a larger concern might trump them all: The hard downshift and poor rebound in the economy which has left us barely skirting a double-dip recession.
As we’ve noted many times before, bond markets love poor economic growth, as it keeps inflation in check and the Federal Reserve at bay. Mortgage rates were a little firmer for most of the week, but ugly GDP reports on Friday should see them easing slightly as we start next week.
Want to get Market Trends as soon as it’s published on Friday? Get it via email — subscribe here!
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 increased by two basis points, moving to an average of 4.80%. FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers, saw a five-basis-point increase to close the week at 4.47%. Given the wide differential in interest rates, at least some borrowers should be considering hybrid 5/1 ARMs. The five-year fixed-rate periods of these loans held steady this week at an average of just 3.36%. 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.
We wrote last week about the change to conforming limits, so we’ll not re-hash that again. Come Tuesday, we are up against a hard deadline for the US debt ceiling; a technical default will occur at that time if no political compromise is reached.
We’ve been asked a number of times this week: What does it mean? It could mean a temporary (until a deal is actually done) interruption in the flow of credit. Perhaps an easy way to grasp this is to visualize an investor with massive holdings of US Treasuries. The interest and principal being returned from these investments as payments from the US Treasury (cash flow) might be being utilized to fund new loans for mortgages or what-have-you. The government stops making interest and principal payments; cash flow dries up and takes along with it the investor’s ability to make new loans.
Of course, US debt might not be the only holdings in a portfolio, and some cash might come from other investments to keep at least some lending going, but there would likely be a diminishment of the availability of credit to some degree for some period of time. That in turn would have some influence on interest rates, which would probably rise for at least a while.
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.
A more durable change in the cost of credit might come should the US credit rating be downgraded. AAA-rated bonds are among the safest investments, and since they have less risk, they have a lower yield. An AA-rated bond theoretically carries more risk and interest rates on those are correspondingly higher. In this case, if the US is borrowing at a AA rather than a AAA level, their cost of borrowing (interest rates) would rise to some degree on a more or less permanent basis (or at least until a AAA rating is re-established).
Where the debt ceiling issue is a more or less temporary one, this issue is more or less permanent. Interest rates would rise to the government, and “spread” products — things like corporate bonds to mortgages, which are often priced at a markup, or “spread” above given Treasury offerings — would see their interest rates bumped up, too. How much is a matter of conjecture at this point, since the influences of supply and demand from given investors might see those spreads narrow, tempering somewhat the increase in the base or benchmark costs of money. We would reckon any effects from both of the above to be perhaps 0.125% to maybe 0.5% in terms of interest rate.
That said, it is very difficult to know with any certainty the full outcomes of unprecedented events.
All this trouble and uncertainty comes against a backdrop of an economy which was more profoundly affected by spiraling oil costs and the Japan disaster than previously thought. The first look at second quarter 2011 GDP told of just a 1.3% gain for the period, well below forecasts. At the same time, 1.3% GDP growth looks pretty good when weighed against just a 0.4% rise for the first quarter, which has seen almost all of its momentum revised away. Combined, the last two quarters are as weak as those seen at the start of the recovery, way back in the third quarter of 2009.
HSH has put together some new content you should check out. If you haven’t been to HSH.com lately, you’ve missed seeing our
new guides and videos to help both buyers and sellers prepare for today’s rough-and-tumble real estate market.
The Federal Reserve’s latest survey of economic conditions, called the “Beige Book” for the color of its cover, failed to provide any enthusiasm about a near-term speedup in growth, either. In the six-week period ended July 15, the report noted “economic activity continued to grow, although the pace has moderated in many districts.” Six of twelve districts reported an overall slowing in activity, two were mixed and four reported modest growth. The last report noted four slowing with eight on a steady-to-higher trajectory. Clearly, the economy has lost momentum to a pace just a little better than stall speed. If the first quarter GDP represents a near-term bottom of sorts, and the second quarter a mild recovery, here’s hoping the third quarter continues that upward trend. However, nothing we’ve seen so far in the limited July economic data strongly suggest that.
As an example, a few localized reports covering regional economic activity for the month provided little reason for excitement. The Richmond Federal Reserve’s barometer of activity moved from a reading of three in June to minus 1 in July; no joy there. The Kansas City Fed’s local report showed a downshift from 14 in June to 3 in July, so there’s no upward swing to be seen here, either. Also, a couple of purchasing manager group releases found just okay activity, with a NY-based group finding some increase in July activity after a tough June, while a deceleration in growth was noted among in a Chicago-area group’s membership. At least both of those reports remained in pretty solid and positive territory.
Fresh data from June wasn’t pretty, either. The Chicago Federal Reserve’s amalgam of 85 economic indicators — their National Activity Index — closed the month at minus 0.46, barely better than May’s minus 0.55, but continuing an upward trend of sorts from April’s minus 0.78 mark. The NAI tracks whether the economy is running at, above or below potential, thought to be roughly a GDP of 2.8% — and we remain on a path quite below that at the moment.
The weak economy isn’t providing any reason for people to buy new homes. At best, sales of new homes have at least held a bottom over the last three months, and June’s sales figure of 312,000 (annualized) is the third in a row in the low three-hundred-thousands. All these figures are near all-time lows. However, even if sales aren’t yet happening, homebuilders will at some point have to get at least some projects underway, lest they run out of homes to sell. Presently, there are 164,000 built-and-ready-for-sale units available; this is a record low figure but still represents a 6.3 month supply at the present pace.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
|ARM indexes, APOR rates, Libor, usury ceilings, & more — all available from ARMindexes.com.
Email and webservice delivery are available.
Sources: FRB, OTS, HSH Associates.
Orders for durable goods slumped by 2.1% in June, erasing a 1.9% lift in May. The backing and filling pattern for durable goods orders is a familiar one and was seen often before the recession hit. Still, a steady level of orders for goods intended to last three years or more would serve to keep the nation’s factories busy and help to improve those weak GDP figures. Spending by businesses on long-dated items did rise by 0.4% but was a deceleration from recent trend.
Good news perhaps was seen in the latest initial unemployment claims figures. Although often untrustworthy at this time of year due to seasonal adjustment issues, claims for new unemployment benefits dipped to 398,000 for the week ending July 23, the first foray below 400,000 in a number of months. To the extent that it indicates a new trend, perhaps the weak employment market is starting to nudge forward after a rather difficult period. However, one week does not constitute a trend, so guarded optimism is perhaps the best stance.
Those with jobs are costing their employers just a bit more. In the second quarter of 2011, the Employment Cost Index moved 0.7% higher, up a tick from the first quarter’s 0.6% clip. Wage growth was 0.4% for the period, same as the last one, but rising benefit costs bumped the headline figure upward. The small wage gains don’t provide any great lift in purchasing power among consumers and both contribute to and are reflective of the softness in the economy.
Softness can be found in all the available measures of consumer moods. The high-frequency Bloomberg Consumer Comfort Index slumped by 3.5 points deeper into its years-long range in the week ending July 24, the decline no doubt linked to the political debt mess noted above. While the Conference Board reported a 1.9 point lift in their measure of Consumer Confidence, the 59.5 reading still left the indicator in awful territory and barely above 2011 lows. That was basically the same situation with the University of Michigan’s survey of Consumer Sentiment, where the final July reading stood at a 63.7 mark, the lowest value since August of 2009, when the economy was still in recession.
The poor GDP numbers saw investors yank money out of stock funds, since the revelation about the weaker state of the economy invokes concerns about the profitability and potential for gain in those investments. That usually sends investors to the safe haven of Treasuries, and it did; however, there are concerns in the Treasury market that there would be no new supply come Tuesday if there is no debt deal, and the coupling of these actions served to drive up the prices of Treasury offerings sharply on Friday, driving their yields down. In turn, those yields influence a wide range of other interest rates, including mortgages. However, a big rally in Treasuries probably doesn’t translate in to a huge fall in mortgage rates — for mortgages, there is plenty of available supply for the moment, and only a finite group of investors, given ongoing market challenges — but we could see a small fall in rates to start the week. After that, and absent any debt deal being done, liquidity issues are more likely to increase than decrease the cost of credit.
Next week features that hard deadline for the debt ceiling; we still believe that a deal will get done, but the hour grows late. Other than that, there’s a slew of first-week-of-the-month reports, including the biggie, the Employment Report for July, various ISM surveys and more. It would be a good time for an upside surprise or two to help lend some confidence… a debt deal which balances some of the issues, or an employment report which beats forecasts, for example. Unlikely, but we can dream. With a bit of volatility in the markets next week, we think we might end at about the same place as we finished this one, but there is admittedly not a lot of confidence in this forecast.
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.