December 19, 2008 — It was a historic week for mortgages and mortgage markets. Average conforming mortgage rates flirted with breaking the 5% barrier on Wednesday before ticking slightly higher as the week progressed.
In any number of ways, the Federal Reserve was to thank for the drop in rates, but mostly because of the program announced on November 24 to support the mortgage markets. This week’s change in the Federal Funds target rate wasn’t meaningless in this regard, but regular readers of our work know that the Federal Funds target rate and long-term fixed-rate mortgage (FRM) rates have little to do with one another, at least directly.
More important than the change in short-term rates was the reassurance offered to the market that despite the end of the road for one of the Fed’s preferred policy options, the Fed is by no means out of ammunition or ideas to further manipulate markets to effect economic benefit. The Fed statement which accompanied the close of the two-day meeting took pains to note that the $600 billion program to support mortgage markets was getting under way — and could even be expanded if market conditions warranted. As well, the Fed noted that it was considering other more novel ways to influence rates, such as directly purchasing Treasury securities, as well as still other options. Read more about the Fed meeting here.
The downdraft in mortgage rates was also influenced by the ongoing rally in longer-term Treasury issues, particularly the 10-year Treasury. The yield on that instrument broke into record low territory about a week ago and has continued to trend downward, flirting with a 2% level on a couple of occasions. While the relation between the 10-year Treasury and fixed mortgage rates has become fractured and tenuous over the past year, the benchmark instrument does still wield some influence on other market-based interest rates.
Part of the reason for the rally in Treasuries is a continued demand for a safe-haven parking place for investor money, at times skittish and nervous amid a stumbling economy and fresh news that another $50 billion of invested cash has vanished in what is alleged to be a massive Ponzi scheme perpetuated across the markets. The other part of the Treasury rally is more likely due to the complete reversal of inflation pressures. Oil’s collapse from record highs to multi-year lows is pulling down other prices of goods, and slack demand is also serving to foster serious discounting of products and services all throughout the economy. On Tuesday, the Consumer Price Index for November was released, and the 1.7% drop in headline prices was the largest month-to-month decline since records began in 1947. “Core” inflation was unchanged during the month and has now cooled to just a 2% annualized clip, down from 2.5% in July and starting to slide at a faster rate. Over the past three months, headline CPI has declined at an annualized 10.2% pace, while core CPI is falling at an annualized 0.4% level.
With the economy flailing about, and the “inflation premium” being bled out of longer-term prices, it’s little wonder that mortgage rates had some space to fall. Can they go lower? In these government-influenced times, it’s not out of the question. However, it does seem unlikely that another offer of massive government support will come soon, unlikely that inflation will continue to decelerate at such a pace, and also unlikely that investors will continue to flock to instruments which yield little or next to nothing, safe haven or not. That argues for perhaps a little more firmness to rates overall than weakness, even if there isn’t much upward pressure to be seen at the moment.
The overall fixed-rate mortgage average revealed in HSH’s Fixed-Rate Mortgage Indicator Series shed 23 basis points this week to land at 5.85%, diving below the 6% mark for the first time since September 2005. See the history of the FRMI here. The FRMI’s companion 5/1 Hybrid ARM slipped by 27 basis points, closing the survey week at an average of 5.89%, but this market is by far a fixed-rate mortgage market.
In the forefront of the minds of the vast majority of borrowers is that conforming 30-year FRM rates eased from last week’s average 5.52%, losing nearly a third of a percent this week. By our reckoning, and based upon some research we did back in June of 2003 (when rates last visited near these levels), we believe today’s average conforming rate to be roughly equivalent to 1961 or 1962 levels. Records from back then are thin and spotty, and even where they exist, they don’t provide a direct comparison of product or frequency. Those markets were very different, dominated by local thrift loan committees wary of committing depositor funds to “risky” borrowers. FHA and VA loan guarantees were usually the order of the day, for fixed-rate products with terms closer to 20 years than 30.
Jumbo mortgages remain pricey by conforming standards, but also nudged down enough to achieve the 7% mark for a 30-year fixed. That’s the best news for large-loan borrowers since mid-February.
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Daily FRMI rates are available at HSH.com. News outlets who want daily statistics for conforming or jumbo mortgages should contact HSH for more information.
One of the benefits of the Fed’s program and headline-grabbing rate cut this week is that refinancing activity is booming, with lender offices reporting being swamped with requests. Unfortunately, the mortgage industry is collectively unprepared to deal with a cascade of business; staffs were pared to the bone as the market for mortgages shrank over the past year. As well, volumes are certain to rise even higher once the holiday season falls behind us; the surge of applications for refinancing is likely to be joined by increasing demand for home purchase loans, too — provided that rates are still historically low at that time. We think that’s likely to be the case, for unlike the dips in rates engineered by the private market at times this year, the Fed’s support for low rates is much more enduring; the Fed won’t relent at any sign of renewed market stresses. That’s a good thing, because the process of deciding to purchase a home, shopping for one, executing a bid and acceptance transaction, and securing a mortgage loan can take weeks or even months. Low rates will need to remain available throughout that process to make it happen.
If you’re among those considering financing or refinancing, this new flood of mortgage activity makes it doubly important to start your preparation now. Get your paperwork in order and start looking for a mortgage lender or broker — you might even complete as much of a mortgage application is as possible in advance — so that you are in a position to get a transaction into the system more quickly. The onslaught of unexpected business seems likely to cause backups in the loan-approval system, and it’ll take time for lenders to hire experienced help (if even temporarily) to move things forward more quickly.
Housing could use a boost, too. The National Association of Homebuilders index of member sentiment didn’t worsen in December, but remained at a truly bleak reading of 9 for the month. Of course, that those firms worked very little in November probably led to the lack of improvement in sentiment. The report covering Housing Starts for November told of the lowest annualized rate of starts since 1959, when this indicator began to be tracked. The 625,000 annualized rate of starts was accompanied by a sharp slump in permits, which fell to an annualized 616,000 units to be constructed in the future. Of course, with little new inventory being built, and little coming down the pipe, the existing inventory of unsold homes is certain to be diminished, especially in light of rising affordability. However, new homes have strong competition from foreclosures, which include homes built just a couple of years ago and now available at rock-bottom prices.
How many new home sales can be fostered in the current economic climate is uncertain. Job losses are still rising, the economy still slowing, and many lack confidence about the future — all contradictory to making the long-term commitment which buying a home is supposed to be. Weekly unemployment claims did manage to ease slightly during the week ending December 13, falling by 19,000 to stop at 554,000 new applications filed, but that’s the barest of improvements in a long uptrend.
Measured by the weekly ABC News/Washington Post poll, Consumer Comfort has at least managed to steady. The -51 reading seen during the week ending December 14 was not much of an improvement, but the reading was the highest in five weeks.
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Sources: FRB, OTS, HSH Associates.
There’s little doubt that manufacturing remains troubled and challenged. Local reports covering activity of firms in the district covered by the Philadelphia Federal Reserve saw a modest improvement to less-negative territory in December, where their index moved from -39.3 to -32.9 during the month. In New York, the indication was that there was no improvement for the month, but at least there was no real decline either as this index eased from -25.4 to -25.8 for the period.
Back a bit further, November’s report covering Industrial Production slipped downward by 0.6%, but the decline was actually better than forecasts, if a sharp turnaround from a 1.3% lift in October. With the slowing of activity, the amount of factory floors in active use declined as well, falling to 75.4% of capacity in action. Manufacturing is weak, hurt by falling domestic and international demand, which was also impacted by the slightly stronger dollar during the fall. However, the dollar has begun to slide again, so perhaps that may boost factory health.
The Index of Leading Economic Indicators fell less than expected. The 0.4% decline should be a harbinger of muted economic activity over the nest few months, but probably better reflects the weak month of November in which the index was compiled.
It was a tremendous week for the mortgage markets. Pieces are coming together one by one which should foster improvement in at least some household balance sheets, the ability for banks to more naturally recast their frozen holdings of assets, and some important support for homebuying (and, in turn, for home prices). By no means are we near or in recovery just yet, but may be turning the corner as we trek into 2009.
With all the talk about refinancing, though, there’s one key but unaddressed audience: those good credit quality borrowers who are making payments on time, but are inadvertently underwater on their loans due to poor market conditions. These borrowers cannot sell; they cannot refinance; they are well and truly stuck. Worse, the only incentives for them in the markets are perverse ones, since no help is available until these borrowers fail (or nearly fail). With a fair bit of money left in the TARP — but mere days left to employ it under the present administration — we believe that any new focus should be to helps these folks become more solvent. As home prices continue to decline, this problem worsens every day. Time’s a-wasting.
Next week’s a holiday-soaked affair. There’s little reason to expect any serious moves in rates one way or the other. Rates hit their nadir on Wednesday and moved up modestly since then, but we should see little if any move next week. HSH is closed on Wednesday and Thursday, December 24 and 25, but will be open on the 26. Happy Holidays!
One final note: President Bush’s offer to the “big three” auto makers on Friday — $17.4 billion dollars — would have been enough to put brand new $20,000 cars under 870,000 Christmas trees this week. Santa Bush was very generous, indeed.
For today’s top stories, see our HSH Finance blog. For a longer-term analysis, check out our Two-Month Forecast.
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