HSH Market Trends

Better Data Equals Higher Rates – Maybe

August 7, 2009 — An economy moving steadily back toward flatline — perhaps even actual growth at some point — continues to be glimpsed by the improving tenor of economic reports.

At the very worst, we are now pulling away from the depths of the recession. How much forward momentum can be created, much less sustained, remains to be seen. Starting from such a deep hole, it’s likely that that momentum will be slow to build, and may require a widespread and lasting boost either from some yet-unproposed “stimulus” or from a better form of letting taxpayers keep more of their money via payroll tax modifications.

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There’s little doubt that one-time increases in outlays to one group or another really do work. Personal incomes rose by a stout 1.4% in May, with virtually all of the increase due to a transfer of wealth to Social Security recipients. In June, without that boost, Personal Incomes dropped by 1.3%. In May, a good portion of that cash went right into the bank, as the nation’s rate of savings rose to 6.2%; in June, a small rise in consumer outlays of 0.4% coupled with that drop in income meant that the saving rate moved back down to just 4.6% for the month. Wages and salaries continue to decline and are now 4.7% below a year ago. Higher spending to support the economy only comes in a couple of ways: wage increases, borrowing, or a lower tax burden.

It goes without saying that businesses struggling though the recession can’t pay their employees more. It’s also true that most means of borrowing for consumers — credit card and home equity capabilities — have dried up. That leaves two options: trim taxes, or wait until employment and final consumer demand improve business profitability. At a time of record government outlays, lower taxes just aren’t going to happen. In fact, Congress is feverishly seeking ways to increase taxes… and that means that we could face a slow economic slog in the months ahead.

With regard to one-time “targeted” outlays, the CARS program (aka “Cash for Clunkers”) can claim some success. According to AutoData, an annualized 11.2 million autos were sold in July, easily the best figure of the past nine months. Congress voted another $2 billion for the program, but it’s not clear whether the incentive has simply gone to those who could afford to buy a new car anyway, and may have simply advanced some of the potential demand from the future. If that’s the case, what happens when the program expires? Auto sales will simply ‘collapse’ as a result. There are also valid concerns about the damage the program is doing to small businesses — auto repair shops, used part concerns, and others — for the benefit of a small group.

When GM and others were failing, we looked at the billions being spent and postulated that, if the idea was to boost the sale of cars to help save the domestic auto industry, millions of borrowers could have got direct $10,000 subsidy checks from Uncle Sam to spend on a domestically produced auto. Of course, that one-time program would have the same effect: a one-time boost, leaving an unsupported mess of a market in its wake.

That’s also a concern to some degree for the housing industry. Although directly supported to a lesser extent, the $8,000 “first time” homebuyer tax credit does seem to be helping sales to firm. Construction spending nudged 0.3% higher in June, lifted by a 0.5% increase in residential spending, now a positive contributor in two of the past three months. Spending on public works projects rose by a full 1%, a fifth consecutive increase. To the extent the $8,000 is firming demand, a similar decline should be expected when the program expires later this year (unless it’s extended).

Of course, there has been extraordinary support for mortgage markets during the downturn. The Fed’s purchases of MBS — the trade publication Inside Mortgage Finance noted over $1 Trillion dollars’ worth has been bought so far, equivalent to 108% of all the loans bought by Fannie, Freddie and Ginnie Mae this year — continues to help keep rates in a comfortable range.

The overall average for 30-year fixed-rate mortgages, measured by HSH’s Fixed-Rate Mortgage Indicator, slipped back by a lone basis point (.01%) this week, landing at 5.72%. The FRMI’s counterpart for hybrid 5/1 ARMs shed four basis points (.04%), ending the survey week at 5.10%. Despite the relative calm of the weekly average, it’s worth noting that rates moved higher mid-week and Conforming 30-year FRMs climbed to an average 5.55% on Friday.

After some truly awful numbers in the end of last year and the beginning of this year, manufacturing is nearly back to the positive side of the ledger, according to the latest figures from the Institute for Supply Management. The 48.9 July reading in its activity index was the highest figure since last August, and several subcategories of the index have solidly broken into ‘expanding’ territory. If the headline index should crack the breakeven level of 50, it will do so for the first time since last July, itself a short-term blip in a string of below par readings.

Of course, if the ISM figure is moving higher, it’s a fair bet that orders are improving, too. Factory Orders rose by 0.4% in June, the third positive reading in a row, and the proximate source of the ISM’s improvement.

The ISM’s non-manufacturing index failed to match the improvement in its factory counterpart. In July, the ISM service activity index slipped back slightly to 46.4, defying expectations of a continued increase. May’s sizable jump in the index — three full points — may have been related to the bump in Social Security payments noted above.

Much was made of the improving employment situation. New claims for weekly unemployment benefits eased back to 550,000 during the week ending August 1, and that un-seasonally distorted claim is an encouraging sign that layoffs are finally beginning to fade behind us, if slowly. Over time, more are still likely to come, just at a lesser pace. The increase in the “announced layoffs” figure tracked by Challenger, Gray and Christmas suggests that we’re by no means out of the woods. The outplacement firm recorded some 97,373 layoffs in July, about 23,000 more than those announced in June. Still, the number is about 6% below year-ago levels and so represents an improvement.

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 31 Jul 03 Aug 01 6-Mo. TCM 0.26% 0.34% 1.91% 1-Yr. TCM 0.49% 0.53% 2.30% 3-Yr. TCM 1.67% 1.59% 2.88% 5-Yr. TCM 2.63% 2.50% 3.31% FHFB NMCR 5.09% 4.88% 6.04% SAIF 11th Dist. COF 1.599% 1.832% 2.918% HSH Nat’l Avg. Offer Rate 5.73% 5.81% 7.00% ARM indexes, APOR rates, usury ceilings, & more — all available from ARMindexes.com. Email and webservice delivery are available. Sources: FRB, OTS, HSH Associates.

Even more hoopla was heard after Friday’s employment report showed a job loss of “just” 247,000 for July, and a decline of one tick in the nation’s unemployment rate. Before we break out the champagne, it’s worth considering that this was the nineteenth consecutive month of job losses (if the smallest since last August) and we remain a far cry from positive, let along making a dent in the millions of jobs which have been lost over that nearly two-year period. Without employment growth, it’s going to be hard to get the economy fully up to speed, and “full employment” — reflected as an unemployment rate of perhaps 5% or below — remains a very distant hope at this moment. Still, any improvement, any lessening in the rate of decline, means we are moving closer to actual recovery.

If things are actually getting better, watch for improvement in consumer moods. If the weekly ABC News/Washington Post poll is any indication, we continue to stumble around in dark territory. For the week ending August 2, a reading of -49 in the Consumer Comfort index was calculated… just five ticks above all-time lows and not reflective of any fast improvement.

One thought did occur to us this week beyond the conventional wisdom. It’s a given that an improving economy will of course drive interest rates higher, as demand for credit and prospects for inflation increase. Usually, this has a corresponding effect on mortgage rates (particularly fixed-rate mortgage rates). With so many of the troubles in housing and mortgage financing so evident over the past couple of years, and the risks of making loans so clear and persistent, we’re left to wonder:

If there are presently substantial “risk premia” built into interest rates — add-ons to the base costs of credit, built into the interest rate and fees to offset the possibility of loss to the lender/investor — then would improving mortgage-specific fundamentals in the form of jobs, firming home prices, and eventually subsiding foreclosures — foster a decline in those built-in cost kickers? If so, will this cause mortgage interest rates to rise less than they otherwise would, or even help them to fall in the face of an improving economy?

If poor fundamentals = higher risks = higher rates is true, than could better fundamentals = lower risks = lower rates also be possible? Just something to consider and ponder as we grind toward recovery.

Next week, though, we’ll at least start with the old paradigm. A better economy has produced a rising stock market, and that’s coming at the expense of low yielding investments like bonds and mortgages. The Fed will continue its part to help keep rates low, but even relatively small amounts of investor appetite — private money — are needed to keep rates from rising much. We’re on a upward path for next week, at least to start, and will move a little higher in the recent range as a result. Call it an 8-10 basis point move higher in the FRMI, and check back next week for our new two-month forecast.

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

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