HSH Market Trends

Encouraging News, So Rates Rise

July 24, 2009 — A good rule of thumb to use when trying to discern the direction for mortgage rates is simply this: Bad economic news generally brings lower rates, while good economic news presages higher rates. Informed by concerns about inflation, and with varying degrees of intensity and duration, it’s as solid a guide as any you can find.

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It’s also true that enough collective wishing, or overreacting, on the part of market players is more than sufficient to influence rates to real degrees at various times, both upward and downward. More of a doom and gloom outlook than present data warrant? Rates retreat. More of growing sense of warm optimism than conditions suggest? Rates climb.

The overall average for 30-year fixed-rate mortgages — revealed by HSH’s Fixed-Rate Mortgage Indicator — increased by four basis points, closing the survey week at 5.70%. The FRMI’s 5/1 Hybrid ARM counterpart rose by five basis points, closing at 5.12% for the week, while conforming 30-year FRMs moved a like amount higher. While small, any rise seems to dampen refinancing activity somewhat, and that will probably be the case next week as well.

The Dow Jones Industrial Average cracked the 9000 mark this week after flirting with that benchmark a few times over the past month. Fairly positive earnings reports lifted investor moods, pushing the average to levels last seen in January. At that time, things were trending downward, culminating in a nadir near 6500. Of course, even with the improvement, the index has only gained back some of its losses, but it’s at least closer to the mid-point than any peak or valley. The rebuilding of financial asset values is one of the keys to an improving economic picture, as it serves to promote the “wealth effect” which improves confidence.

Confidence could use a boost, battered as it has been from home-value and job losses. The University of Michigan Survey of Consumer Sentiment slipped back in July, sliding 4.8 points to land at a more subdued 66.0 for the month, breaking a four-month string of improvement. The more dour outlook has been reflected in the weekly ABC News/Washington Post poll of Consumer Comfort; despite a one-tick improvement to -50 for the week ending July 19, there has been no consistent improvement here and the indicator remains just four ticks above its all-time low. Real improvements in consumer moods aren’t likely to occur until jobs and wages show signs of shifting to an upward trajectory, and that’s not likely to occur for perhaps as much as a year. Job growth lags economic improvement, and we’re not even to the economic improvement part of the recovery yet.

While the Chicago Federal Reserve’s National Activity Index put up its best showing since October 2008, the actual reading of -1.80 for June still points to a continuing, if lessening, recession. Also buttressing the argument that the depressed economy is grinding to life was the latest reading of the Leading Economic Indicators. The LEI rose by 0.7% in June, capping a strong quarter and possibly pointing to a recession which has nearly run its course. The last quarter which matched this one in terms of strength came in 2003, as the last recovery finally took hold. With the first look as second quarter GDP due out next week, we’ll get a better sense of how fast the recession’s fade actually is. Our guess is that after a -5.5% figure for the first quarter, we’ll probably come in closer to -2.3% or so for the second, and if the LEI is right, we might just break the zero-growth barrier in the third quarter. However, there are still two months of this quarter to go, but July has provided at least some reason for cautious optimism.

That optimism has been extended somewhat by the June report for Existing Home Sales. For a change, it was a case of good news all around; sales rose by 3.6% for the month, landing at a 4.89 million (annualized) rate of sale; home prices rose by 0.5%, their second consecutive gain, and inventory levels dipped to 9.4 months at the present rate of sale — still elevated, but the lowest stockpile since last December. Improving affordability and tax credits are serving to foster some demand, at least enough to pull sales levels back from the abyss. Next week, we’ll get a look at new home sales to see if these improvement are spilling over into that market, and they should be, at least to some degree.

After a couple of seasonally-adjusted untrustworthy readings, weekly unemployment claims nudged back closer to recent trend, rising from 524,000 to 554,000 during the week ending July 18. The July 4th holiday, coupled with earlier-than-usual auto plant retooling shutdowns have distorted the figures. Next week comes the first outside of those adjustments, and we’ll then start to see if the slip below 600,000 can remain in place. As noted above, high levels of unemployment will likely be with us for some time, but it would be good indeed if we could stop adding to the ranks of the unemployed with such velocity.

On one hand, it’s hard to want to cheer the economy on, since that will mean that low, favorable mortgage rates will more quickly disappear from the marketplace. Of course, the poor economy means that fewer borrowers can actually take advantage of low rates, especially those suffering from income or asset “dislocations” due to the significant downturn. As well, it would be hard to find even the most jaundiced refinancer seeking rock-bottom rates who would trade a chunk of their 401k assets for another crack at a high-4% 30-year fixed rate mortgage.

Next week, aside from the GDP report above, there are a few readings of localized manufacturing health due out, the Employment Cost Index and a couple of other metrics we’ll be watching. Most keenly, we’ll be waiting for the Fed’s latest survey of regional economic conditions, which should provide a more grass-roots view of whether or not the apparent improvements are real and widespread. More likely, the account will detail a still-shaky but somewhat better set of conditions.

Upward pressure for mortgage rates seems to have been erratic but firm this week, and that will likely lead to some additional upward pressure for rates come next week. Just as with last week, expect at least a few basis point increase in rates for next week… the last time the 10-year Treasury was near present levels, we hovered at about a 5.5% average for 30-year Conforming loans.

What lies ahead? Read (and let us know how we did on) our new, just-posted two-month forecast.

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