HSH Market Trends

Mortgage Rates Remain Firm

January 30, 2009 — After touching near-50-year lows for certain products over the past few weeks, mortgage rates have largely settled in a firmer pattern. Lousy economic news continues to fill screens and news pages, but it’s not doing much to tug rates lower.

In fact, certain influential interest rates are moving in the other direction. For fixed mortgage rates, that’s notably the 10-year Treasury Security. At record low levels in the middle of the month, visiting 2.23% at one point, the yield on this instrument has moved back to today’s mid-2.8% range.

While this Treasury instrument doesn’t have as much influence as it once did, such a move can still produce enough sway to at least nudge fixed mortgage rates higher as well. Investors appear to be ready to shift away from ultra-safe-but-barely-yielding-anything US Treasuries in favor of other investments. Those would appear to include ‘hard’ assets, like gold and other commodities as well as oil, though not to the extent we saw last year.

There aren’t many reasons for investors to get excited about financial assets or equities at this point. Many banks remain in precarious positions; investing in loans — especially mortgages — remains a risky proposition, and prospects for corporate profits to improve are pretty slim.

For the week, HSH’s Fixed-Rate Mortgage Indicator — inclusive of conforming, jumbo and ‘expanded conforming’ interest rates — actually managed a three-basis-point decline, easing to an average 5.86%. The FRMI’s 5/1 Hybrid ARM counterpart decreased by a like amount, closing the weekly survey period at 5.61%. Both conforming and Jumbo 30-year FRMs were largely stable compared with last week, but there was a slight bump higher in both series at times during the week.

Housing is starting to present a more mixed picture. Low mortgage rates are serving to help attract at least some buyers, but unlike refinancing, the decision to purchase a home isn’t purely a financial one; it’s also an expression of faith in one’s ability to manage a sizable future commitment.

Existing Home Sales bounced higher in December, rising by 6.5% to a still-weak 4.74 million (annualized) rate of sale. Goosed by price cuts largely related to foreclosures, it was the biggest one-month increase since 2002. The lift in sales pushed the level of available homes for sale inventory down to 9.3 months, the first time it has breached double digits in some time. It is precisely the intersection of low rates and lower prices — affordability — which is attracting buyers into the market, and with prices still pressured downward, affordability should continue to improve, provided rates don’t trend too much higher.

New Home Sales, though, suffered a different fate. The December sales pace was just 331,000, the worst annualized figure in some 45 years. This came despite price cuts and offers of cut-rate financing, and may lend some credence to our contention in last week’s Market Trends that “it just may be that it is becoming increasingly difficult to move the remaining, possibly least desirable, new homes still on the market.” While the actual level of inventory of homes shrank to just 357,000 units, with sales falling even faster, the “months of available inventory” ballooned to nearly 12 months. New Homes sales are suffering from many ills, not the least of which is competition from “nearly new” foreclosures at even deeper discounts.

The weak and perhaps still weakening economy is arguably the greater influence on home sales. In the fourth quarter of 2008, the nation’s output as measured by GDP contracted by 3.8%, the steepest decline in 27 years. Even with that sizable drop, the number was still considerably better than forecast of a 5+% decline in the indicator. As this was the earliest (or “advance”) reading of GDP, the number certainly could be revised upward, or downward, as new information becomes available.

Having a job certainly improves the prospect of buying a home, too. Weekly jobless claims rang in at 588,000 new applications filed during the week ending January 24. Leaving out the few holiday-distorted weeks from the pattern, it appears that claims have stopped worsening for at least the moment, a hopeful sign.

As is to be expected amid a weak labor market, the Employment Cost Index — perhaps the best measure of the costs of keeping an employee on the books — rose a scant 0.5% during the 4th quarter of 2008. Both wages and benefits costs rose meager amounts, and the mild cost increases may help businesses to preserve some profitability at a time when sales are weak. It also provides more evidence that inflation isn’t poised to return anytime soon, allowing the Fed to keep rates at present levels.

The Federal Reserve did have a meeting this week which resulted in no change to policy, but rather simply brief outlines of the kinds of programs the Fed may enact or expand to manipulate interest rates. These include expanding its mortgage-backed-securities purchase program, getting its Asset-Backed lending facility underway, and even conducting outright purchases of Treasury Securities. We think that they discussed this option publicly as a message to the market to provide some assurance that as nearly $1 trillion of expected stimulus comes into the market in the near future, there will be at least one entity to mop up any excess supply, keeping interest rates from rising above desired levels.

In these troubled times, hopeful signs are few and far between, but one did come in the form of the Index of Leading Economic Indicators, which ticked 0.3% higher in December, the first positive reading since last June. A quickly increasing money supply was the cause of the lift, while other components of the index remain quite weak. Still, any improvement is a welcome sign.

Our Statistical Release features charts and graphs for 11 products, including Hybrid ARMs.     Our state-by-state statistics are now here. Current Adjustable Rate Mortgage (ARM) Indexes Index For the Week Ending Previous Year Jan 23 Dec 26 Jan 25 6-Mo. TCM 0.30% 0.25% 2.39% 1-Yr. TCM 0.43% 0.40% 2.31% 3-Yr. TCM 1.11% 1.12% 2.21% 5-Yr. TCM 1.58% 1.50% 2.74% FHFB NMCR 5.51% 6.18% 6.35% SAIF 11th Dist. COF 3.155% 3.125% 4.233% HSH Nat’l Avg. Offer Rate 5.89% 5.88% 6.05% Get the indexes & financial indicators you need from ARMindexes.com. Email and webservice delivery are available. Sources: FRB, OTS, HSH Associates.

Various local readings on manufacturing activity were downbeat at best. Orders for durable goods slumped by 2.6% during December, lifted only by the end of the Boeing strike and an improvement of sorts over the 3.7% decline in November. However, core business related spending fell by 2.8% after a fair 1.7% increase the month prior, so businesses are again standing on the sidelines of the economy with wallets closed.

Of course, that closed-wallet stance reverberates everywhere, and measures of factory health around the country found no improvement. Declines of varying degrees in December and January were noted by Federal Reserve offices in in the Richmond and Kansas City regions, as well as by purchasing manager groups in Chicago and New York. There’s not much going on at the moment as we await more concrete outlines of what form the forthcoming “stimulus” may take.

Consumers, too, are waiting to see where we go from here, and they’re not happy. The Conference Board’s report on Consumer Confidence eased down to a 37.7 level (from 38.0) during January, while the weekly ABC News/Washington Post poll of Consumer Comfort found new misery with a record-low-tying -54 for the week ending January 25. Only the University of Michigan survey of Consumer Sentiment saw improvement, nudging up to a 61.2 level in January from December’s 60.1 mark. As far as moods go, the overall review seems to indicate that while things aren’t getting much worse, they certainly aren’t getting better, either.

Mortgage rates were influenced down in November and December though the sheer muscle of the Federal Reserve. The resulting flare of business activity for lenders clearly overwhelmed them, and the recent increase in rates isn’t all that unexpected given that the pipelines and systems are jammed with business. All that volume will need to be absorbed downstream, and even if downstream means Fannie Mae or Freddie Mac, there will still be some increase in the supply of issued Fannie or Freddie debt or new MBS at a time when there’s little corresponding increase in demand for such things. Too much supply and too little demand, and you’ve got ingredients for an increase in prices. At the same time, some lenders use price increases as a means to temper demand — after all, there’s no reason to run a sale when the store is full of people — and that suggests to us that rates again have some space to fall as the pipelines empty out again.

Next week brings us the first-of-the-month data — ISM indexes, the Employment Report, personal income and spending, auto sales and more. The Senior Loan officer opinion survey is also due, and we’ll be interested to see if underwriting standards for residential loans are still tightening or if that process has leveled off. There’s little reason for economic optimism at this point, but probably no real reason for rates to fall, either. Call it a wash, with perhaps a little upward pressure for rates, if any.

For our latest long range view, take a look at our new two-month forecast.

And 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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