HSH Market Trends

Firmer Rates, Barely

July 31, 2009 — Subtle signs of economic improvement are gaining in number and frequency, but it’s all too easy to confuse a move back toward flatline growth as actual recovery, or to conclude that a rising trend is wholly sustainable. While we’re encouraged by the momentum away from emergency panic levels, risks to any nascent economic recovery remain, and real improvement is still in our future.

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The Federal Reserve’s report on regional economic conditions, known as the ‘beige book’ for the color of its cover, reflected those risks in the summary which accompanies the release. Overall, while the tenor of the report was somewhat warmer than the last couple, about the best they could muster was that “most Districts indicated that the pace of decline has moderated.” None noted any uptick in activity, but four of the twelve regions saw signs of stabilization, albeit at lower levels of activity. That said, there were some spotty improvements noted in residential real estate, and improved optimism about manufacturing. Those were offset by worsening commercial real estate markets and very weak labor markets.

Hopes for fast improvement and concerns about inflation drove mortgage rates from low levels in late spring to highs which proved unsustainable, given the continuing recession. As the picture isn’t bleak enough to foster runs down to those winter and spring levels, we’ve instead settled back into a middle range between those two extremes, waiting to see where we go from here.

As such, mortgage rates have been flat now for about a month, with a modest upward bent. The overall average for 30-year fixed-rate mortgages, measured by HSH’s Fixed-Rate Mortgage Indicator (FRMI), rose by three basis points (.03%) this week, landing at 5.73%. The FRMI’s counterpart for hybrid 5/1 ARMs notched a two-basis-point increase, ending the survey week at 5.14%. The average conforming 30-year FRM moved four basis points higher, still squarely in the middle of the high/low range seen during the April-mid June period.

Although long-term rates remain stable, short-term rates are declining. Common values for LIBOR, a source of ARM-reset concern in 2007 when rates rose to near 6%, and still troublesome in that regard as recently as last October (mid-4% range), have now retreated to record-low levels. One-month LIBOR holds a present value of just about 0.25%; adding standard ARM margins of about 225 basis points, and you’ve got yourself an mortgage with an eye-popping 2.5% interest rate. Turns out that those “risky” products have an less-documented upside, too.

We’ve never believed that ARMs are a “dangerous” product, even if certain audiences have had poor experiences with them at times. In fact, we’ll explore that concept in a little more detail in a new article on our website. It’ll be up next week; drop by the blog for the intro and link, see what you think of it, and don’t be shy with your feedback.

Low interest rates and tax credits are starting to foster some new home sales. After the report on existing home sales showed some life last week, the report covering New Home Sales in June backed that up, rising by 11% from May. The 384,000 annualized units sold was well above forecasts, and caused a substantial drop in inventory levels, which declined to 8.8 months, the best in some time. The actual number of completed-and-for-sale units eased to 281,000, down another 8,000 in June, the same as in May. Prices dipped by more than 5% on a month-to-month basis and are about 12% below year-ago levels overall. The improvements here are encouraging, but for perspective should be contrasted against the better than 1.3 million annualized levels at the height of the boom. Even though that was abnormal, “normal” remains about 200,000 annualized sales north of where we are today.

The first look at Gross Domestic Product for the second quarter of 2009 revealed a mild negative reading of -1%. Estimates were all over the board, ranging from -2.5% to as much as a +1% reading. Revised figures for the first quarter were moved steeply downward to a -6.4% rate of decline, but there is no doubt that the severity of the recession is waning. We’ve now had four quarters in a row of declining growth, five of the past six (Q208 boosted by one-time tax rebates) and we’re now in the longest such string of decline since at least the Great Depression. The move to a lesser GDP decline was fostered by less drag from imports and exports, and government outlays increased by better than 5% during the period as “stimulus” funds began leaking their way into the economy. More of that seems likely to nudge growth higher, and we may crest over zero for the first time in the third quarter if improvements continue.

It’s too soon to make any claims to that degree since data from July (the first month of the current quarter) are just beginning to show. While plenty of them will come in the weeks ahead, including next week’s employment report, there’s little compelling evidence so far of an accelerating recovery.

Localized evaluations of manufacturing and economic activity, taken in New York, Chicago, Richmond and Kansas City, for example, canceled each other out to a degree. A strong move upward in Richmond’s gauge, from 6 in June to 14 in July (3rd consecutive positive reading) was offset by a deceleration in the KC region, which slipped from 9 in June to 2 in July. The manufacturing picture in the New York area was virtually unchanged from June’s low level, but a shift to a lesser grade of poor was seen in a Chicago-area purchasing manager’s report. If the consumer stance remains weak, business must lead the charge to recovery, and that doesn’t yet appear to be the case.

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 Jul 24 Jun 26 Jul 25 6-Mo. TCM 0.28% 0.32% 1.93% 1-Yr. TCM 0.47% 0.48% 2.33% 3-Yr. TCM 1.54% 1.72% 3.01% 5-Yr. TCM 2.48% 2.66% 3.44% FHFB NMCR 5.09% 4.88% 6.04% SAIF 11th Dist. COF 1.832% 1.380% 3.111% HSH Nat’l Avg. Offer Rate 5.70% 5.90% 7.10% ARM indexes, APOR rates, usury ceilings, & more — all available from ARMindexes.com. Email and webservice delivery are available. Sources: FRB, OTS, HSH Associates.

However, some of that leadership may be forming. Although the report covering Durable Goods orders did sport a sizable -2.5% decline for June, the report’s proxy for business-related spending rose by 1.4%, the second month on the positive side of the ledger. It’s worth noting, too, that the ‘normal’ pattern for durable goods orders seems to be a back and forth swing between positive and negative, and we seem to be re-establishing this kind of pattern now (after six straight declines from August 08 to Jan 09).

Business can’t do it alone, though. Aside from the usual economic and (perhaps growing) regulatory headwinds, uncertainty about the coming tab for any health-care reform is probably doing little more than forestalling even minor improvements in hiring patterns. Until consumers have jobs it will remain hard for them to provide any boost to the economy. Since there are substantially fewer employees on the books these days, it’s little wonder that a measure of the collective costs of keeping an employee working remains quite subdued. The Employment Cost Index rose by 0.4% during the second quarter, with wages rising by 0.3% and benefit costs by 0.4%, respectively. Over the past year, the 1.8% rise in the ECI was the slowest in the history of the series, which dates back to 1982. Obviously, it’s hard to demand wage increases given the huge pool of talent available for hire at a moment’s notice.

More folks joined the ranks of the “available” during the week ending July 25. Some 584,000 new applications for unemployment assistance were filed at state windows, a return toward recent trends as seasonal distortions fade from the calculation. Expectations for next Friday’s July employment report are looking for perhaps a sizable improvement from June’s 467,000 decline, but it may turn out to be only slightly below June’s figure.

Consumer moods remain quite gray. The weekly ABC News/Washington Post poll of Consumer Comfort moved upward by three ticks to -47 during the week ending July 26, its highest reading since early June. Perhaps the recent stalemate in Congress over the administration’s ambitious health-care program was the catalyst? Hard to say, but there was nothing in the indicator’s components which suggested any reason for any improvement in moods.

Nor was any better mood evident in the Conference Board’s report on Consumer Confidence, which slipped back in July by 2.7 points to land at 46.6 for the month. While considerably above the rock-bottom levels seen in February, we’ve yet to regain even the subdued levels of last Summer, prior to the deepening financial market crisis, when the index was approaching (then-record) lows.

Mortgage rates have firmed slightly over the past few weeks, but of late are in more of a backing-and-filling pattern than not. After another huge round of debt sales to push the market around this week, markets calmed somewhat and yields pulled back. That should serve to help mortgage rates start next week on a lower note, but with a fair cascade of first-week-of-the-month data due out starting Monday, surprises to the upside may ultimately push mortgage rates upward somewhat. We’ll hedge a bit, and call for no significant change one way or the other.

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

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