HSH Market Trends

Mortgage Rates and the “Unofficial” Start of Summer

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May 22, 2009 — Summer may not officially start for several weeks yet, but mortgage rates seem to have entered the summer lull rather early this year; we’ve had another week without any considerable move in interest rates, a flattening that has been with us for about six weeks now.

With Memorial day arriving earlier than usual this year, the traditional ’spring housing season’ seems to be enjoying some marginal improvement. Would-be buyers enjoy rising affordability and plenty of opportunities to buy, but that’s offset by tighter lending requirements and weak labor markets. Still, even a simple comparison reveals that 30-year conforming interest rates remain more than a full percentage point below figures seen at the same time last year, offering considerable opportunity for those with good credit to scoop up cut-price homes or refinance at near 50-year low rates.

It’s worth noting that last year’s season began in the wake of the forced takeover of Bear Stearns by JPMorgan and ended with the failure of Fannie Mae, Freddie Mac, and Lehman Bros, as well as other assorted troubles. It does seem likely that this summer will be quieter and much more stable on balance, but the economy remains troubled, if on a lessening basis.

Low mortgage rates are among the bright spots in the economic landscape, promoting greater solvency among banks and lenders, and helping households to recast their obligations into more favorable terms.

HSH’s Fixed-Rate Mortgage Indicator (FRMI), a gauge of the overall cost of 30-year mortgage credit which includes conforming, jumbo and “high-limit” conforming data, rose by three basis points, landing at 5.46% for the week. The FRMI’s hybrid 5/1 counterpart sported a single basis point move, closing the survey period at 5.05%.

Both conforming and jumbo 30-year FRMs wandered just a few basis points; conformings moved up by one, and jumbos just two.

In the wake of housing’s long downturn, we started to observe signs of a trough forming a few months ago. The market has meandered along since then; improvements have been spotty, but there are accumulating signals that the worst is falling behind us. For example, the National Association of Homebuilders index of member sentiment climbed to a reading of 16 on May, the highest reading since last September and fully double its low value. That said, it remains in dismal territory, but is finally firming after a couple of years of more or less continual declines.

With Housing Starts for April ringing in at all-time lows of 460,000 annualized units, you might think that optimism among builders might be hard to gin up. However, the headline figure’s decline masked a minor improvement in single-family starts, a levelling which suggests that low mortgage rates and sizable tax credits are having the desired effect on consumer demand (or at least have stanched the bleeding). Of course, inventory levels — last noted at about 310,000 available units — are starting to come more fully in line with demand, and that means that new building opportunities are beginning to appear on the distant horizon. Planning for an eventual upturn is a much more optimistic endeavor than is scaling back to address a downturn. Along with gradual improvement in credit markets, the not-all-that-distant future may just be beginning to brighten, even if building permits, a measure of future potential activity, did decline slightly during the month.

With regards to future activity, the index of Leading Economic Indicators sported a stout 1% increase in April, erasing the past five months of declines. The LEI is supposed to forecast the direction of the economy as much as six months’ hence, but probably better reflects the environment in which the indicator was created. For example, a stronger stock market in April provided a boost for the indicator, but there’s no certainty that equity prices will be stronger in September than today. Still, an improvement is a welcome change in a sea of declines, even if all it does is put us roughly on par with last fall’s weak outlook.

The minutes of the last Federal Reserve Open Market Committee meeting at the end of April noted that they are following the muted-but-tangible signs of improvement with great interest. The Fed’s staff noted that various financial market sectors were described as “improved somewhat” and “less strained”, and revised upward its outlook for economic activity in the second half of 2009 and for 2010. Beyond that, and in light of very stimulative policies in place, the expectation is that in 2011 “real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core PCE inflation would stay in a low range.” However, that’s tomorrow; for today, FOMC participants noted that recent information simply “provided some tentative evidence that the pace of contraction in real economic activity was starting to diminish.” Members also noted that it’s far from clear that we’re out of the woods yet, in that “economic downturns [that] had been triggered by financial crises generally concluded that such contractions tended to be more severe and protracted than other recessions.” Essentially, even with improvement in the economy, we’re a long way from zero, let alone any growth in GDP.

That sort of concept is reflected in the latest regional survey from the Philadelphia Federal Reserve. Its indicator of activity in its district rose from to a seven-month high of -22.6 in May; while improved over the past period, it only represents a less-severe pace of decline than any sort of increase in activity.

‘Improved but still lousy’ is an idea we should get used to, since we’ve been seeing some of that sort of thing for the past couple of months and there is likely a lot more of it to come as we grind our way out of the economic trough. For example, the ABC News/Washington Post poll of Consumer Comfort managed a string of gains to bring it to a several-month high recently, then gave back three points during the week ending May 17 to settle closer to the middle of a recent range than at the edges of it. While the -45 reading is improved compared to recent bottoms, we last saw a positive reading here in March of 2007 and we’re well below positive at the moment. The sharp ’summer driving season’ increase in gasoline prices is probably to blame for the decline in comfort this week, even if prices are way, way below last year at this time.

It would be wonderful if jobless claims were also way, way below last year, but that’s not the case. However, the 631,000 new applications for benefits filed in the week ending May 16 were in the middle of a new somewhat lower range we shifted into a few weeks ago. It’s probably too soon to say, but we may be past the peak for at least initial unemployment claims, but as “continuing” claims — folks who have not yet found new jobs — continue to rise, it will be hard for the economy to gain much headway very quickly.

Of course, under- or non-employment does make it considerably harder for people to take advantage of great affordability for homes or even chances to refinance. As well, with the economic situation in flux, at least a portion of potential entrants into the housing and mortgage market remain content to wait on the sidelines for a clearer picture. And with more-rigid underwriting standards in place, some borrowers will need time to get their profiles square with these new market realities. With that in mind, it’s more likely that mortgage applications and home sales will feature a “fits and starts” kind of pattern, and makes even more valuable the Fed’s ongoing commitment to keep mortgage rates low. How long this program can continue is unknown, but it should be at least though the end of the year. As we move forward, and as the economy and markets improve, it may be possible to keep rates lower than they otherwise would be, but it is less likely that that will be at or near 50-year lows.

A three-day weekend is on tap (and HSH is closed on Monday), but the ensuing short week ahead brings important data on new and existing home sales, several measures of consumer moods, a couple of regional manufacturing surveys and a revision to Q109 GDP. More of a “better grade of lousy” may be on tap, but that’s to be expected, especially if we hope to see improvements before long. Mortgage rates continue to have no reason to go anywhere far at the moment, so more wandering is expected.

What might happen to markets and rates over the next couple of months? Read our latest two-month forecast to find out.

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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