September 23, 2011 — After weeks of market speculation, “Operation Twist” got introduced this week. However, real market twisters came in the form of a bleak assessment of economic conditions, and a surprise announcement that the Fed is getting back into the mortgage-backed securities game, just a little over a year after it formally announced it was getting out of it. Add this to the ever-present potential for a Greek (and possibly other) sovereign debt default, ratings downgrades for the three largest US banks and a worldwide stock market rout and you’ll find yourself with new record low interest rates, mortgages among them.
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 four basis points (0.04%) from last week, moving to a new record-low average of 4.34%. FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers, shed two hundredths of a percentage points; in doing so, the average cracked through the 4% barrier to end the week at 3.99%. Although it’s hard to recommend ARMs at a time of such low interest rates, a case can still be made for them for some borrowers. Hybrid 5/1 ARMs, the most popular among ARMs saw their five-year fixed-rate periods saw a two basis point slip to finish HSH’s survey at 3.06%
For a brief moment after the Fed meeting, it looked like conforming 30-year FRMs might join FHA-backed loans in breaking the four percent barrier. They had slumped to an average 4.01% on Thursday, but bounced back to 4.07% by close of day Friday. Freddie Mac’s survey, conducted at a much higher fee level than HSH’s, will likely fall below 4% by the time next Thursday morning rolls around.
See this week’s Statistical Release and Trend Graphs.
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We expected mortgage rates to be largely flat this week, and they were, right up until Thursday, when the market got a chance to fully react to the Fed’s announcements. It should be noted that we did mention in last week’s MarketTrends that “if something unexpected comes in the statement which will come on Wednesday, some additional volatility in either direction might occur” and we did get an unexpected announcement.
The Fed’s message was twofold: First, they are changing their investment holdings by selling up to $400 billion of holdings with maturities of less than three years, and will use those proceeds to purchase US Treasury debt with maturities of six years or longer. This will lower interest rates for everything from Treasuries to corporate bonds, with mortgages among them. The problem is that, in the present environment, mortgages are low yielding investments which have a fairly high risk profile, and investors are unlikely to want to snap up new MBS with even lower yields. In fact, over the past few weeks, the often-tenuous relationship between treasury yields and mortgage rates has grown more distant, with spreads widening appreciably as new Fed action became more likely. Underlying interest rates have gone down considerably more than their mortgage counterparts, muting some of the beneficial effects that low rates can provide to some borrowers.
Thus, the second component of the Fed’s plan: The Fed announced that they will now start to use money coming in from their still-massive holdings of mortgages — prepayments from refinancing, maturing loans and regular principal payments — to purchase MBS coming into the market. Essentially, the Fed has stated that they will be lowering rates, that mortgages are directly targeted, and if the investor market doesn’t want to buy them for whatever reason, the Fed will be there to pick up the slack. A ready buyer in the market means that mortgage rates will decline, since the investor who is buying them cares more about beneficial economic consequence than yield or threat of loss.
Driving down interest rates is one way the Fed hopes to crowd out investors from parking their money in the safe-haven of Treasuries. If 100% guaranteed yields for Treasury offerings get low enough, investors will have strong incentive to look elsewhere for productive places to put their cash to work, and that would ultimately benefit the economy as a whole. One of the successes (if short-lived) of QE2 was the reflation of equity prices; one of the drawbacks was the ballooning of commodity prices, including metals and oil and the inflationary kick those increases left. Unlike QE2, the twist doesn’t push more money into the economy and so doesn’t carry an explicit inflation threat along with it.
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.
The ultimate question about the Fed’s moves are “will they work?” The answer is less than clear, but some analysts suggest that the investment-mix change could boost GDP by a couple tenths of a percentage point. However, the mortgage portion of the program could add some spendable dollars back into consumer wallets as a result of refinancing, and that might press growth a little higher, too.
In thinking about the Fed’s return to the mortgage arena, we kicked around an idea that this might also be a move to set the stage for an expansion of the HARP refinancing program, something President Obama alluded to in a speech a few weeks ago. See what we think about that possibility here.
Although these Fed plans will be in effect until next June, mortgage borrowers who might consider procrastinating for a while should keep this in mind: The Fed is making these changes in hopes of spurring the economy, which is pretty rough shape. It won’t happen overnight – some would say “if at all” — but should it start to work, interest rates will begin to rise as a natural course of events. That would slow refinancing down, which in turn would slow down the speed at which the Fed would be buying MBS. In our view, this suggests the largest impact on rates is most likely to come earlier in the program than later. This is not to suggest that rates are likely to rise significantly anytime soon, but that they will stop posting record lows and turn around at some point, and successful efforts to help the economy will move that date closer.
HSH has put together some fantastic new content you should check out. If you haven’t been to HSH.com lately, you’ve missed seeing our new study that can help consumers and businesses decide where to locate or relocate in and around a dozen major cities. If you’re moving, considering moving or are just curious about how your market stacks up, you should check it out!
A thin set of economic data came out this week, allowing the market to focus on the Fed more clearly. While three indicators of the housing market provided some mixed signals, none of them exhibited any outsized strength or were all that surprising.
The National Association of Homebuilders index of member sentiment and activity declined by a point in September, landing at a reading of 14. Although the lowest reading in a couple of months, the “high” reading for 2011 was only 17, so we aren’t all that out of range. However, single-family sales and expectations for the coming six month period both turned down, too and traffic at sales offices fell to a 2011 low. The period just ahead does look somewhat darker for the nation’s homebuilders, and the typically slow winter months are fast approaching.
With housing starts falling by a full 5% in August, it’s not too hard to understand why builder moods have soured. The 571,000 (annualized rate) of units under construction was the weakest since May. However, permits for future building activity bounced up to an annual pace of 620,000, and the rate of single-family home initiations was actually 2% higher this August than in August 2010, so that’s modestly better news of sorts.
Sales of existing homes nudged back over the five million mark in August, landing an annualized rate of 5.03 million sales. That was rather better than expected, was the first foray over the 5M level since April. Gains were led by a surge of sales in the West; with the high-balance agency jumbo mortgages starting to disappear from the market during the month, some borrowers in high-cost markets may have felt compelled to jump in while cheaper financing was available. The lift in sales left supply at 8.5 months, more foreclosures seems certain to re-stock supply as we go along.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
The index of Leading Economic Indicators continues to flash a green light for future economic growth, if less so in August than July. The indicator rose by 0.3% during the month, pushed higher by an expanding money supply. The index has been positive for eight of the past nine months even as economic growth has remained at a crawl at best. The LEI is purportedly a tool which forecasts economic conditions for up to six months in the future, but may better reflect present conditions.
Highly reflective of present conditions are two other indicators. Weekly claims for new unemployment benefits declined by 9,000 during the week ending September 17, landing at 423,000 for the week. While the decline was of course welcome, the number of claims remains stubbornly high and even this dip leaves claims at their second highest level since July. These troubles and plenty of others, including a rough-and-tumble stock market continue to weigh heavily on the minds of consumers, and Bloomberg’s Consumer Comfort Index shed 2.3 points during the week ending September 18 to land with a thud at a 52.1 mark. This is the lowest value for the index since early 2009 when the economy was still mired in recession.
The Fed made their moves this week because it is their duty to try to promote economic growth, maintain stable prices and foster lower unemployment. Manipulating interest rates in a variety of usual and even unusual ways is really all they can do to try to nudge the economy forward, and some of these programs produce better results than others. However, the Fed cannot do it alone. The twin to monetary policy is fiscal policy; brilliant ideas coming from Washington to foster economic growth have and continue to be in short supply, and so the economy continues to try to fly with one wing, and continues to go round in circles, making little forward progress.
The market seemed to settle a little bit on Friday after a truly wicked day on Thursday. Mortgage rates moved to new record lows again this week, and we seem likely to be in that territory again next week. A larger bit of economic data is due out but there doesn’t seem to be anything on the horizon which would come in so strong as to convince the market that the recovery is gaining speed which would move rates upward.
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.