August 12, 2011 — After an unprecedented whipsawing in markets this week, thirty-year fixed rate mortgages have moved to historic lows. Fifteen-year fixed rate mortgages are already there, as are adjustable rate mortgages. That said, and despite monstrous swings in influential Treasury yields, the overall effect on mortgage rates when all was said and done (so far) was little more than a reasonable decline from week to week.
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 decreased by twelve basis points (0.12), moving to an average of 4.53%, besting the previous low of 4.58% set for the week ending October 22, 2010.
FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers, saw an eleven-basis-point (0.11) decline to close the week at 4.20%. Given the wide differential in interest rates, a case could be made that some borrowers might do better for their situation by selecting a hybrid 5/1 ARM, which could save them a bundle of money. Given record low fixed rates it is more difficult to make that case, but there is a chance for considerable savings. The five-year fixed-rate periods of these loans declined by four hundredths of a percent to close the week at an average of 3.25%.
Conforming 30-year FRMs didn’t quite make it into record territory, falling just four basis points shy of hitting last year’s near 56-year low. Thirty-year FRM private market jumbos are now available at an average 4.87%, and are sliding deeper into record territory. With the loan limits for agency jumbos starting to decline in the market, private mortgage money for these borrowers will become more important, and it is available at fantastic rates.
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That’s not to say more declines won’t come. However, with a surge in refinance activity over the past couple of weeks as conforming 30-year FRMs moved below the psychologically-important 4.5% level, lenders don’t need to compete as aggressively for your business. If you couple this with investor concerns over a new wave of inbound prepayments from refinancing plus the possible formation of a new recession (which increases delinquency and default risks) and there’s little wonder that the difference between 100%-safe Treasuries and average 30-year mortgage rates widened appreciably this week. There is apparently plenty of appetite for the safety of US Treasuries, but obviously rather less for the risks inherent in mortgage investments.
All this turmoil has come as a result of the considerable mess in European sovereign debt, with Italy and Spain said to be in crisis, and rising concerns about France emerging. The European Central Bank (ECB) has begun purchasing both Spanish and Italian bonds to help provide stabilize them and ward off additional increases in interest rates which might undermine their weak economies. At the same time, the US credit rating was taken down a notch by Standard & Poors to AA+, adding to the rattling of markets. Despite the downgrade, the US is still seen as being positioned to best manage its troubles; while the downgrade will eventually have the effect of increasing the cost of borrowing [blog link], the desire for investors to park cash in the safest place available has overwhelmed any concerns the downgrade has created.
The US stock and bond markets could not make up their minds about how they felt about all of this. Swings of 600+ down, 500+ up, 400+ down and 400+ up points in the Dow Jones Industrial Average were hard to watch, and interest rates fared little better, with wide swings each day from start to finish and sometimes eve wider ones intra-day. Oil prices have collapsed to the mid-$80/bbl range, and the backdrop of a potential new recession forming became a central idea at times during the week.
These swings persisted despite — or perhaps because of — the Federal Reserve. While not exactly riding to the market’s rescue, they did take pains in the statement which accompanies the close of their meeting to quantify the “extended period” for exceptionally low interest rates, putting their sunset at mid-2013 while also downgrading their assessment of the state of the economy. Such an explicit statement removes some uncertainty about when the Fed might raise rates, and might serve to engender some economic activity as it is somewhat easier for businesses and consumers to plan for the cost of money in the near future.
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.
Of course, it is important to remember that “exceptionally low levels” for the short-term interest rates the Fed controls doesn’t mean that they will always be at or near zero; virtually anything south of one percent in the Fed Funds rate easily qualifies as exceptionally low relative to virtually all other times in history. Of course, low interest rates alone may not be enough, the Fed acknowledged, as they also revealed that they discussed other policy tools available to stimulate growth, and announced that they are prepared to employ them as appropriate. This could mean additional bond buying, lowering the rate they are paying on bank reserves or other method of manipulating rates or liquidity to help support growth. For the moment, we expect that they will sit and wait for a while to see if the economy will improve on its own, or if this latest crisis has created more intractable economic trouble which needs addressing.
To be fair, there are a few important signs that should spark at least a little optimism. After the 0.4% first quarter, GDP was moved upward to 1.3% in the second. Revisions might trim that somewhat, especially since the nation’s imbalance of trade expanded in June to $53.1 billion, with exports sliding by 2.3% and imports easing by 0.8% for the month. The widening gap would tend to trim GDP, as the 1.3% first estimate included a smaller expected difference for the month. Still, that 0.4% in the first quarter gave way to something more is an upward trend in itself.
Also on the uptick was new hiring, with July’s job report considerably better than was May or June’s. In addition, somewhat fewer folks have been filing for unemployment benefits for the first time lately. During the week ending Aug 6, only 395,000 new applications for benefits were filed. Over the past couple of weeks we have flirted with falling below the 400,000 mark, only to see the number revised above it in subsequent weeks. That was the case last week, to, as the 400,000 figure was revised upward to 402,000. That said, and with only slight revisions common, this could very well be the first week we actually remain below this important mark since early this year. The number would still not be great by any means, but would represent an improvement relative to the spring.
Some additional hiring may be in the offing. A 0.3% decline in worker productivity in the second quarter – a second consecutive decline – suggests that workers with jobs are running at or near capacity, and any increase in orders or growth will require at least some hiring. Despite the decline in output, the labor-cost component of each unit produced eased to a 2.2% rise from the first quarter’s 4.8% increase, lessening the chance that rising costs would need to be passed along into final prices, which would serve to foster more consumer price inflation.
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Some powerful new stimulus may be forming, too. We mentioned oil prices last week falling to about $91/bbl, and wondered when the corresponding fall in gasoline prices would come. Prices have started to decline slightly over the last week, but oil has now slumped by an additional $5 or so per barrel, and so we might see a substantial decline in the cost of gasoline this fall, releasing billions of dollars of spendable income back into the economy and spurring growth. Here’s hoping that significant declines come sooner rather than later and remain in place for a while. In additional to the direct benefits, falling fuel costs would translate into lower costs for many goods, since both input and freight costs would ease.
More spendable dollars would boost retail sales, which could use a lift. The Census Bureau reported a 0.5% rise in spending during July, an increase from the 0.3% seen in June but goosed by higher sales at gasoline stations (vacation driving season, presumably). “Core” sales, which leave out pricey autos and those sales at the pump, rose by 0.3%; this was a smaller gain than seen in June but still better than the April and May reports. Year-over-year measures continue to firm up after a weak later winter/early spring period, but more spending would be better, given that consumer outlays account for some 70% of the economy.
That final demand starts to pick up is important for the health of manufacturing, too. After driving a significant portion of the economic recovery, the rebuilding of recession-trimmed inventories has largely run its course. During June, inventories at wholesaling firms expanded by only 0.6%, and that gain was matched by a like size increase in sales, so the ratio of goods-on-hand relative to sales remained at 1.12 for the month. However, without a faster pace of sales to deplete some previous increases in stocks, there’s little reason for anyone to place the kind of sizable new orders which would drive up the pace of manufacturing and help expand economic growth.
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That the terrible political theater in Washington over the debt ceiling has soured consumer moods is a given. However, the amount of dismay is eye-opening. Aside from the decline in the weekly Bloomberg Consumer Comfort Index to minus 49.1, just a few points shy of recession lows (and record lows for the series), the initial August look at Consumer Sentiment from the University of Michigan revealed its bleakest figure in some 31 years. The 54.9 level for the index was down 8.8 points from the final July number of a few weeks ago, itself quite poor, and caps a better than 20 point slide in the past three months. Measures of both present conditions but especially future conditions were marked down, and the expectation for future inflation settled back to levels seen earlier in the year.
Last week we expected rates to largely be flat, but admittedly were blindsided by the effects of the late Friday announcement of the US credit downgrade. The Fed did act mostly as we expected, but their more downbeat assessment of the state of the economy certainly helped mortgage rates to decline. In fact, until Wednesday, mortgage rates were actually very stable; the conforming 30-year FRM sported a 4.43% average on 08/04; 4.41% on 08/05, 4.44% on Monday 08/08 and 4.43% for Tuesday 08/09. Wednesday, after the Fed’s post-meeting statement was digested, we recorded an 11bp downshift in rates to 4.32%, with just a single basis point decline for Thursday 08/09. Friday finished at 4.27%. The Fed’s reduced expectation for economic growth, lower inflation and a declaration of a long, long period of low short-term interest rates yet to come fostered the decline.
Will the decline continue? That’s a very good question. Could the economy turn toward recession, which would lower rates? Possibly. Can inflation move from mild to outright deflation? Possibly, but the Fed is betting not, at least for the moment. There has been some “spread expansion” this week which may diminish over time, allowing rates to back down somewhat. However, now that we are past the fear of the debt ceiling debacle, and now that the actual downgrade has replaced fear of the downgrade, we again should be turning to clues about the economy and inflation to evaluate where interest rates will go. Next week brings some housing-related news (both from builders and buyers), measures of inflation, looks at the state of lending, and the forward-looking Index of Leading Economic Indicators.
To the extent that July’s economic numbers are warmer than June’s — feats which are not all that difficult to accomplish — mortgage rates will tend to respond by firming slightly. Any report that is less terrible than expected, and especially anything that quells fear or otherwise removes the immediate need for the safe-haven parking of money will serve to firm up mortgage and other interest rates. For next week, we should start the week on a lower note, but may not end there, even if we aren’t likely to go very far.
For an longer-range outlook for rates and the economy, one which will take you up until early October, have a look at our new Two-Month Forecast.
There’s a lot going on in mortgage markets this summer 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.