September 30, 2011 — In the aftermath of the initiation of the Fed’s “Operation Twist”, mortgage rates moved down somewhat. Last week’s knee-jerk market reaction after the announcement saw a more pronounced downward dip for rates which proved fleeting, giving way to a slight firming since then. The Fed’s program should ultimately foster lower interest rates, but no one should expect the effects to happen all at once, since the program will be taking place on an ongoing basis though next June.
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 (0.02%) from last week, moving just off new record lows to end the week at an average of 4.36%. FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers held steady at an average interest rate of 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 kind among adjustable rate products, saw their five-year fixed-rate periods post a three-basis-point rise to finish HSH’s survey at a still-incredible 3.09%
The Fed’s move is intended to help the economy grow, and some forecasts value OpTwist’s effects at perhaps a couple of tenths of a percentage point of growth in the nation’s Gross Domestic Product (GDP), a measure of the economy’s total output. While a couple of tenths of a percentage point would be just a meager boost, the economy can use all the help it can get at this point. The final estimate of GDP for the second quarter of 2011 was released this week, and featured an upward revision of 0.3%, which landed us back at the original July estimate of 1.3% GDP growth. That does represent a full 1% increase from a terrible first quarter this year, and anything the Fed’s new contribution brings would be a welcome addition. Growth needs to get to and hold at perhaps a 3% or better clip for the job and housing markets to get on track to any great degree.
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Unfortunately, few if any indicators are pointing to anything near that. The Chicago Fed’s National Activity Index posted a minus 0.43 reading for August. The amalgam of some 85 economic indicators suggests that we are in the midst of a soft patch at the very least. The NAI had turned barely positive at 0.02 in July, indicating the economy had grown for the period, but downshifted again in August. This indicator points to whether the economy is or is not growing close to its “potential”, thought to be around GDP 2.8% at an NAI value of zero, and it’s clear we are well below that at the moment.
Even with record low mortgage rates, sales of new homes remain weak. The annualized 295,000 homes sold by builders in August was a step down of 7,000 from July but not all that far from the range of the last six months, all which hung around the 300,000 mark. At this sales pace, there is a 6.6 month supply of homes ready for sale, which translates into about 162,000 actual units completed and ready for occupants. The 162,000 units available is a record low and a continuation of a slow dwindle in the stockpile. At some point, builders will need to begin to replenish inventories, but that seems to be well off in the future at the moment.
The sooner we get some hiring, the faster that day will come. While the nation’s September employment report isn’t due until next Friday, perhaps the best news on the labor front in a while came out Thursday, when initial filings for new unemployment benefits soundly broke below the 400,000 mark for the first time since July. The 391,000 new applications for benefits was the lowest figure since the Spring, and a welcome sign, but the large downshift from last week (a decline of 37,000) seems a little suspect and likely to be revised. Still, any move downward is welcome, and perhaps the employment report next week may beat market forecasts which expect a only very slight increase in hiring.
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Hiring would bring more wages; more wages would bring more spending, and more spending would bring stronger economic growth. Personal Incomes declined by 0.1% in August, following a steady declining pattern since the beginning of the year. The negative figure was the first decline in two years, and wages actually shrank by 0.2% for the month. Personal consumption expenditures rose by 0.2% for the period, and with more outgo than income, the nation’s rate of saving slipped back to 4.5%, the lowest rate of the year. A finally-arriving decline in gasoline prices should serve to add a few dollars to consumer wallets in September, while also trimming inflation pressures, too.
Measures of factory activity continue to be more mixed than they were earlier on in the economic expansion. Our trading partner’s economies are not quite as solid as they had been, so export growth is more limited, while the domestic situation is keeping retailers and wholesalers from cranking up inventories. Orders for Durable Goods declined by 0.1% in August after 1 4.1% rise in July, and while the decline isn’t welcome, it continues a pattern of fits and starts for this indicator which is pretty commonplace. Also, readings for September factory activity aren’t as soft as August’s were, so perhaps some resumption of business is taking place now that the rough political and economic climate of August is falling behind us.
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For example, local reports in two Federal Reserve Districts were less dour than in recent months. The Richmond Federal Reserve’s local gauge was still negative at a minus 6 for September, but that represented an improvement from the -10 in August. A similar slight bump was seen in the Kansas City Fed’s domain, where their needle moved from a reading of three in August to six in September. Two regional purchasing manager associations reported better results: a steadier pattern of activity was noted in New York, but a surprisingly strong showing came from a Chicago-area group, whose index rose by 4.8 points to land at a very firm value of 60.4 for September; improving auto production no doubt plays a role there. With economic growth as weak as it is, even slight increases in the factory can boost growth to a measurable degree, and on Monday we’ll get a look at the national Institute for Supply Management data to help see if the pick up in activity is spreading. Forecasts are calling for a virtual breakeven reading of 50.1 for the month, itself a downturn of 0.5 for the period. Perhaps a mild upside surprise will come. Good news from anywhere would be a welcome change from the usual litany of poor reports.
This litany of bad news no doubt beats down the psyches of consumers, until there’s very little to get enthused about. The Conference Board’s measure of Consumer Confidence sported a value of 45.4 for September, almost a two-and-a-half year low, if improved by 0.2 from August. The weekly Bloomberg Consumer Comfort Index certainly wasn’t improved; with a reading of minus 53 during the week ending September 25, it set a new low for 2011 and is a single point above the low water marks of the recession. That said, a somewhat brighter demeanor was seen in the University of Michigan survey of Consumer Sentiment; while still very low, it at least moved 3.7 points in the upward direction, closing the month with a 59.4 final reading for September. That said, it was the second lowest reading of the year and is barely above recession levels.
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|Current Adjustable Rate Mortgage (ARM) Indexes|
We’ve noted here many times before that bad news and doom and gloom is good news for mortgage seekers, since it tends to push interest rates lower. It’s worth keeping in mind that this weakness is exactly what the Fed’s program is intended to counter, and if the program succeeds in stanching the economic bleeding, interest rates will ultimately firm. It’s also worth noting that Treasuries and mortgages both used to benefit from flight-to-safety buys in times of global or domestic economic strife, but that is much less the case today. Treasuries remain highly liquid investments with a guaranteed return and willing investor audience; the same cannot be said for mortgage-related investments, given all the risks which continue to face the market and the relatively puny returns for taking on that risk.
This is precisely why the Fed’s MBS purchasing program was revived, and the reason that we expect lower mortgage rates as a result of Operation Twist.
Next week comes a cascade of new data about the economy, and four or five of them will set the tone for rates during the week, including the ISM manufacturing and ISM service indicators, weekly unemployment claims and of course the September employment report. Surprises to the downside would see rates fall and new calls for Federal or fiscal support to arise; surprises to the upside might firm rates ever so slightly. If we flipped a coin and had to call it, we’d hopefully (and with little confidence) call for a better-than-expected overall tenor, and a minor increase in average interest rates next week.
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 still a lot going on in mortgage markets this fall 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.