October 14, 2011 — We’ve noted many times that even mild improvements in the economic picture would likely turn mortgage rates upward a little bit. After a less-dire tone to some key economic reports last week (and even rumors of some improvement on the Euro-mess front) we got our first taste of that this week, as mortgage rates moved off record lows to former record-low levels seen just a few weeks ago. Over the past ten days or so, most major stock indexes have moved considerably higher, with the Dow Jones adding about 1200 points. The money to push stocks higher has come from the selling of “safer” investments, like Treasuries, and that has pushed yields and mortgage rates a little higher.
The mild rise in mortgage rates is not a great concern. Frankly, aside from kicking refinance activity a little bit higher, the effect on mortgage and housing markets of even record-low rates has been slight. At the moment, homebuying activity is more affected by factors other than rates.
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 fourteen basis points (0.14%) from last week, rising back to early September levels to an average 4.46%. The FRMI’s 15-year companion followed the 30-year FRM upward, closing the week at 3.76% after a 13-basis point rise. Important to homebuyers and low-equity-stake refinancers, 30-year FHA-backed mortgages nudged back over the 4% mark, increasing by nine hundredths of a percentage point, while the overall average for 5/1 Hybrid ARMs managed a week-to-week move of seven basis points to land at 3.20%.
See this week’s Statistical Release and Trend Graphs.
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The homebuying market is being impacted by a lot of things, but the price of mortgage money today isn’t really among them. Along with income, the mortgage’s interest rate is a regulator of how much money a borrower might be able to obtain, relative to the income available to use toward a monthly payment. When rates are low, a given level of income allows the borrower to carry a larger loan amount, but just marginally so, and of course the inverse is also true. In this regard, low mortgage rates may serve to help steady home prices, since buyers in the market can ostensibly afford somewhat higher-priced homes.
But low rates, as alluring as they are, cannot alone overcome all of the other obstacles in the market. Most notably, a weak economy and corresponding poor job market have failed to produce the kind of confidence needed to feel comfortable making the kind of forward-looking commitment which is the purchase of a home. Confidence is further eroded by the very real possibility that this expression of faith might turn into an albatross, as it has for so many of today’s homeowners and former homeowners.
Consumer confidence figures are at a low ebb and seem unlikely to improve much for the foreseeable future. Our fractious political body is now turning its attention to 2012 elections, diminishing the likelihood that solutions to our many economic problems are coming anytime soon. This can be seen in the most recent measures of consumer moods: At minus 50.8, the weekly Bloomberg Consumer Comfort index remains just a whisper off recession lows and has firmly held this territory for several years, and the Index of Consumer Sentiment from the University of Michigan did a hard downshift in August and shows no signs of recovery as of yet. The preliminary October reading of Sentiment came in at 57.5, a 1.9-point decline from September’s final figure. Looking forward, the “expectations” component moved even lower than August’s terrible number, as folks seem to be expecting no improvement in conditions as we roll forward, either.
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.
There was a thin set of new economic data out this week, and few surprises. However, Retail Sales did flare 1.1% higher in September, the strongest such reading since February. Stronger auto sales (reported last week) were among the contributors, but even leaving them out of the picture left the largest gain since March. It remains to be seen if the surge in spending was a distortion caused by hurricanes and tropical storms, both preparation for the storms and to help cope with their aftermaths. Consumers pumping a few more dollars into the economy is a good thing, and may also be improved to some degree with the decline in gasoline prices over the past few weeks.
No doubt that some of the increase in sales is due to somewhat higher prices. While inflation isn’t a huge problem, no one would dispute that prices for many goods and services are higher now than earlier this year. Prices of goods coming into the US rose by 0.3% during September, a reversal from August’s decline of 0.2%. Although strong price increases here came to a dead halt back in April and have been pretty flat ever since the increase in costs stands at a stout 13.4% over the past year. That’s less the case with goods heading to our trading partners; our weak dollar helps to keep a lid on increases to some degree. Goods for export rose by an aggregate 0.4% last month, but the 12-month increase was a smaller 9.5%.
The nation’s imbalance of trade was unchanged in August, holding at a steady minus $45.6 billion dollars. There was near-stasis in the value of both incoming and outgoing goods and services, and given the budget fight here and the debt problems overseas, stasis is not a bad thing, per se, since it indicates we held pretty steady despite those troubles.
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Also holding flat were new claims for unemployment benefits. During the week ending October 8, 404,000 new applications were filed at state windows, down just 1,000 from the prior week and about the same as we have seen over the past couple of weeks. If the pattern should hold, we might expect perhaps 80,000 – 110,000 new jobs to be created by the time the October employment report comes out in a few weeks’ time. It’s too soon to tell and certainly the figure isn’t much to get excited about, even if it does actually come.
As we already know, the Federal Reserve made some policy changes at its last meeting, including Operation Twist (swapping holdings of short-term debt for long-term) and also a new mortgage-support portion of the program. The minutes of that meeting were released this week and it is clear from them that there is no universal agreement about how best to support the economy, if at all. A range of options were discussed, including new plans for purchasing Treasuries (QEIII), Operation Twist, and paying banks less on the reserves the Fed itself holds. There are some benefits and pitfalls to all approaches, and the ones with the fewest drawbacks were ultimately selected. The sentiment seems to be that “we’ll try these first, and if they don’t achieve the desired effect, we can move on to the next.”
It can be claimed that the Fed’s previous plans have worked well enough, with low rates and accommodative policy helping to steady the economy. That seems to have created at least a low “base” platform of growth keeping GDP from completely flatlining. Additional benefit has come from special programs like the $1.25 Trillion MBS purchase program, then the $600 Billion QEII (among others). However, each times those programs have expired, we fall back into a new economic funk, and the drumbeat begins for more and different supports from the Fed. With fiscal policy at a standstill, the Fed pulls a new (or even old) idea out of its bag of tricks and lets it run until some date in the future in hopes that the economy will be able to get by on its own by that point. So far, that’s not exactly been the case, but we can certainly hope that “the third time’s the trick.”
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for 11 products, including Hybrid ARMs.
Our state-by-state statistics are now here.
With inflation levels firmer this year than last, the Fed would probably prefer not to have to embark on a QEIII, since this would add more cash to the economy which would have an inflationary impact, just as QEII did. The minutes also noted that the effects of reducing the interest rate it is paying banks may have unknown consequences for money markets and such and so requires more study. This suggests that Operation Twist and its MBS component are probably all that we can expect, unless truly dire conditions should show themselves, requiring an emergency response.
So this is where we find ourselves. If the economic news is generally “better”, interest rates cannot easily fall. Should an emerging issue darken the picture, rates will ease. To the extent that volume is playing a role in firming mortgage rates, well, the minor rise in rates this week will tend to temper demand, and any premium would shrink as a result. It’s worth pointing out that if you want to see the economy get its legs back under it, you cannot expect lower mortgage rates, too. At this stage of the game, there’s little benefit in cheering for lower rates if it comes at the expense of economic promise.
Rates bumped higher this week, a little higher than even we forecast last week. They have probably overshot the mark to some degree, and with a fuller calendar of data next week, including reports on prices, home construction and sales, and more, some settling is probably the most likely course, so a decline of a few of basis points is expected.
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.
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.