HSH MarketTrends

Mortgage Rates Back at New Lows, For Now
New Two Month Rate Forecast at HSH.com

October 7, 2011 — The economic news wasn’t quite so bleak this week, and we passed the end of the quarter. This pulled some money out of hiding, and the stock market had a little better time of it for at least the time being. To the extent that things aren’t getting economically worse at the moment suggests that rates might stabilize at bit. After a small upward blip last week, mortgage rates sported a small downward blip for this one.

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, slipping back into new record-low territory and stopping at an average 4.32%. FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers manages a five-basis-point fall, easing to another record low of 3.94% for the week. The broad average to 15-year FRMs, popular among refinancers, closed at 3.63% for the period.
The Fed’s Operation Twist is exerting some influence on short-term interest rates, the kinds which govern ARMs, and rates on most ARMs have ticked up over the last couple of weeks as a result. Hybrid 5/1 ARMs, the most popular kind among adjustable rate products, saw their five-year fixed-rate periods post a four-basis-point rise to finish HSH’s survey at a still-attractive 3.13%

Although the economic data out this week couldn’t easily be characterized as “great”, the collective tenor of the available reports was arguably the most solid in some time, lending at least a little hope that we will not slide into recession as we close 2011. The improving economic news will tend to put at least some upward pressure on interest rates, and the influential 10-year Treasury was solidly over 2% by the close of business Friday. Still, even upward pressure on rates will keep them near record lows.

See this week’s Statistical Release and Trend Graphs.

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Sales of new vehicles rose to a 13.1 million (annualized) rate of sale in September, adding a million units to August’s pace. That was the strongest reading since April of this year and suggests that consumers are starting to perhaps become more willing to spend after a rather slow period over the spring and summer months. In turn, that may serve to keep factories humming to a greater degree and push the economy forward as we move along.

The broadest gauge of manufacturing health comes from the Institute for Supply Management, whose indicator uses a value of 50 as a breakeven point; above indicates expansion while below signifies contraction. In September, forecasts called to the indicator to hold at a barely-breakeven 50.5 for the second month, but the reading of 51.6 was a nice surprise on the upside and points to a little more activity than was expected. Production and employment indicators rose, but new orders were flat for the month. Still, that the needle is moving away from flatline is encouraging.

That said, the aggregate value of factory orders moved down by 0.2% in August, but that came on the heels of a 2.1% jump in July. Despite the decline in the headline figure, capital spending by business powered 0.9% ahead for the month, a nice rebound from a July decline of -0.3%, so while businesses hunkered down in advance of the August budget mess in Washington, they seemed to get back in step once that distraction was settled.

Service-related businesses are the larger component of the economy, so any clues about a coming recession forming might be reflected here before other indicators catch up. The ISM’s measure of non-manufacturing business activity eased just slightly in September, slipping from a reading of 53.3 to one of 53.0 for the month. This points to ongoing, mild expansion, and the indicator has held almost steady now for the past four months, so it would seem that even the very difficult summer months haven’t quashed activity, even if it can’t find much upward traction at the moment.

Spending on new construction projects have been beat down by poor market conditions and weak government budgets, but outlays for new projects jumped by 1.4% in August, with residential, commercial and public money all contributing to the gain. While homebuilding remains soft, some of the 0.7% rise in residential construction is probably attributable to home remodeling projects. If you can’t sell your home and move, perhaps re-configuring it to better suite your needs is the way to go after all.

The job market is of course first and foremost in the minds of most people. How could it not be, with unemployment over 9% now for an expended period of time? It goes without saying that it’s going to be very hard to get the expansion to a greater level of speed if we don’t start adding some jobs. How disappointing, then was Wednesday’s report from the outplacement firm of Challenger, Gray and Christmas, whose report for September told of over 115,000 announced layoffs for the month? Digging deeper, though, the sizable jump to the worst levels in more than two years was almost solely due to military reductions and the Bank of America mass-layoff announcement which is expected to take several years to complete. Outside of those, relatively few job cuts were announced, so the weakness at least was widespread.

Weekly claims for unemployment benefits rang in at 401,000 for the week ending October 1. That figure is more in line with those we saw before a late summer swoon, and the last two weeks have been the best back-to-back readings in just about two months. With claims at or around the 400,000 mark we’re nowhere near an improving job market, but could say that at least additional deterioration is being kept at bay.

Keeping jobs in play might also serve to elevate consumer moods somewhat. That said, quickly-sliding gasoline prices might suffice to get the ball rolling in the right direction. Most likely, that was the impetus for the near 3-point rise in the Bloomberg Consumer Comfort Index, which moved from minus 53.0 to 50.2 during the week ending October 2. Some analysts have forecast that gasoline prices may continue to slide to around $3 per gallon or less, and that would put potentially billions of spendable dollars back into consumer wallets before the holiday season kicks in.

But more jobs would bring more income and seriously goose the economy forward. Until that really gets underway, we’ll have to simply welcome the news about hiring when it is just better than expected. The employment report for September featured the creation of 103,000 new jobs; that was about 40,000 more than was expected, and better still were upward revisions to August (now +57,000 from zero) and July (+42,000 for the month). While the unemployment rate remained at 9.1% for the month, that was partially due to more folks again actively looking for work, itself a hopeful sign of improving conditions.

It was already clear that consumers pulled in their horns in August, but the $9.5B reduction in outstanding consumer credit was was rather unexpected. Revolving lines of credit (aka credit cards) sported a decline of $2.3B, while installment lending (things like auto, furniture and student loans) saw a $7.2B drop. Perhaps the focus on finances provided by the Washington mayhem over the budget produced a renewed focus on fiscal sanity and getting one’s finances in order. We won’t know if that’s the case for at least a couple of months, but a hopeful 10-month string of mild upticks in consumer borrowing came to an end.

Could we be at the cusp of an uptick in the economy? September’s data seems to suggest that things have at least stopped getting worse, and with lower gasoline prices, lower interest rates via the Fed’s new emphasis and even a little bit more hiring in the mix, we just might be. What does that mean for mortgage rates? As we’ve noted here before, mortgage rates just love bleak economic news, and we’ve certainly had plenty over the last couple of months. That the data suggest some economic stabilization would also serve to stabilize rates, but there’s likely to be a long slog ahead of us yet until we get to the point where the economy no longer needs extra supports just to gin up a little growth.

For the moment, though, mortgage interest rates may tick up a couple of basis points over the next week. Investor enthusiasm at even a series of “better” reports will probably not last, given that all they’ve really confirmed is that things remain pretty lousy, and we’re working in a period of time when lackluster gains seem outsize.

For an longer-range outlook for rates and the economy, one which will take you up until mid-December, have a look at our new Two-Month Forecast.

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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.

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