HSH Market Trends

“Recession Over” and Mortgage Rates

September 18, 2009 — With economic news sporting a warmer glow for the past couple of months, Federal Reserve Chairman Ben Bernanke boldly claimed that the “recession is very likely over.” It’s not unreasonable to assume that many people would respond with the query “So when does the recovery start?”

There is little doubt that the numbers, facts, and figures which define and describe the nation’s output have taken a decidedly firmer tone as Summer progressed and that the Gross Domestic Product readings will likely turn positive before long. However, there is plenty of doubt that this new firmness will grow into a full-fledged growth pattern soon — or without significant ongoing government support.

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In different times, rosier data would push mortgage rates higher, demands for credit and concerns about inflation being what they are. However, those investor demands for higher compensation are keyed off the belief that higher growth and higher inflation are coming, and the present stance of soft interest rates just doesn’t suggest that belief has formed to the degree necessary to press rates higher.

The overall average rate for 30-year fixed-rate mortgages tracked by HSH’s Fixed-Rate Mortgage Indicator (FRMI) shed another four basis points (.04%) this week, landing at a flat 5.50%. The corresponding overall average for 5/1 Hybrid ARMs shed three basis points and came in at 4.84%. Conforming FRMs drifted down a bit, putting the average comfortably under 5.25%.

While there’s nothing to suggest that a sharp turnaround in rates is in the cards, it’s worth noting that consumers have been lulled to sleep before in the face of gently falling rates, only to discover that the market can turn fickle in short order. If you have designs on refinancing, you should recognize this opportunity to do so.

Low mortgage rates have helped revive the housing markets from the truly awful state earlier this year. However, there’s little fuel to stoke that fire, and the coming expiry of the $8,000 “first time” homebuyer tax credit may actually dampen the coals to some degree. Housing starts have largely plateaued over the Summer, and came in at an annualized rate of 599,000 in August, about the same as July and June. Typically erratic multifamily starts bounced up to keep the figure level, as single-family initiations declined by 1.5%. Competition from foreclosures reduces the need for much brand-new housing, and demand for homes remains pretty weak in any event. Building permits, a harbinger for future activity, also remained at about the same soft level seen since June.

That leveling of activity did produce just a slight bit more optimism among the nation’s homebuilders. The National Association of Homebuilders index of member sentiment moved a notch higher to 19 in September, well above March’s nadir of 9 but way, way below a level which suggests an optimistic outlook. Builder and other groups are lobbying for an expansion of the expiring tax credit to $15,000 and to extend it to all buyers, but with no luck so far. It’s possible they may succeed in extending the $8K break which expires in November, but even that’s uncertain. To the extent that demand for new homes is reliant on that break, that’s how much decline can be expected when it expires. Until then, we could get a late blast of sales before it goes.

Stepping back to July, the broadest measure of stockpiles in the nation’s supply chains was again drawn down. The 1% decline in aggregate business inventories for the month means inventories are moving closer in line with final sales, and that’s starting to improve the outlook for the nation’s factories, as at least some replenishment must eventually happen.

That seems to be the case in the Philadelphia and New York Federal Reserve Districts. Localized measurements of factory activity in those areas found better-than-expected gains; the Philly Fed’s reading of 14.1 for September was in sharp contrast to February’s minus-41.3 mark, an impressive turnaround in a fairly short time. New York bested forecasts, putting up a second positive month in a row. Joined with other regions, they served to boost Industrial Production for August, which sported a 0.8% rise. Coupled with July’s fill 1% gain, it represented the first back-to-back gains since late 2007. To be fair, the government sponsored CARS program probably goosed the figure somewhat, so we’ll need to see how much strength remains when September’s figure comes calling. With the increase in IP, the amount of factory floors in active use turned slightly higher and now stands at 69.6%.

Retail sales for August, also influenced by the CARS program, rose by a stout 2.7%. Auto and gasoline sales pushed the total higher for the month, but solid back-to-school shopping left even the “core” rate of sales at 0.6%, the highest reading since February. Improvement in final demand by consumers should also help to produce some upstream reorders, so factory activity may have a bit of a steadier bid as the year comes to a close.

One issue which tempers the brightness of the outlook concerns the continuing high levels of unemployment. While the improvements noted above should produce at least some additional hours for some employees (possibly even driving up productivity further), there doesn’t appear to be enough momentum to significantly improve layoffs, let alone foster any new hiring. Another 545,000 applications for unemployment benefits were filed at state windows for the week ending September 12, and while that’s a much better number than earlier this year, we have a long way to go — perhaps 200,000 or more — just to get to a point where we’ve staunched the bleeding.

If there’s one dubious benefit to so many unemployed persons — that is, a slack labor resource pool — it’s that there aren’t enough people working to develop significant inflationary pressure. Although the Producer Price Index leapt by 1.7% in August, way above estimates, prices measured at this level are still down by 4.3% compared to last year. At its core, PPI firmed by 0.2% last month to a mild 2.3% over the past year.

That was much the same with the Consumer Price Index. The 0.4% lift in costs was mostly due to costlier energy and food, but that “headline” measurement still represented a decline of 1.4% over the past 12 months. The “core” CPI moved a scant 0.1% higher, and has risen a meager 1.5% over the past year. Inflation isn’t a problem right now and probably won’t be for at least a while, and that is good news on the interest-rate front.

Just as investors don’t seem to believe that the recession’s technical end means a measurable shift in the market, consumer attitudes seem to be darkening. The weekly ABC News/Washington Post poll of Consumer Comfort dipped another tick during the week ending September 13, edging closer to its all-time low of -54. Perhaps Mr. Bernanke’s declaration this week will provide some cheer next week, but probably not.

To be fair, Mr. Bernanke did note that it’s going to be a long slog to get us back to where we’d all like to be: with appreciating homes, rebuilt retirement assets, and more souls around the water cooler. Hopefully, that comes sooner than later.

Mortgage rates have been very well-behaved over the past couple of months, and that will probably continue to be the case. With firmer economic data becoming more evident, it does seem unlikely that we’ll continue to see this pattern of regular gentle decreases continue. The closer we get to refi “trigger levels” (an average for conforming loans below 5% with low or no points) the more that activity will produce some firmness in rates. We’re not quite there yet, but we’re getting closer.

The recession’s technical end does give the Fed some leeway (and possibly political pressure, too) to begin to draw the curtain on its many support programs. Can the market fly on its own? At this moment, the answer isn’t “yes,” and perhaps not even more than “maybe.” If nothing else, the next 2-6 months are going to be interesting, to say the least.

Our expectation for a slight rise in average rates didn’t come true this week. Perhaps a little reverse psychology might work? If that’s the case, we think rates might move a couple basis points lower again next week (wink wink).

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