HSH Market Trends

Rates Holding, But Activity Slips

October 30, 2009 — Mortgage rates held fairly steady again this week, as the economy showed its first tentative signals that the recession is being replaced by at least a technical recovery. The good news about the economy couldn’t prevent a stock market rout on Friday, but at least that selloff did produce somewhat lower Treasury yields; that could potentially help mortgage rates ease next week.

The overall average for mortgage rates as measured by HSH’s Fixed-Rate Mortgage Indicator (FRMI) ticked just three basis points higher, so the average price of all loans this week — conforming, jumbo and agency jumbo — rose to 5.45%. The FRMI’s 5/1 Hybrid ARM companion was unchanged at a 4.69% average rate for the week. Thirty-year Jumbo FRMs put in their third week out of the last four just below the 6% level.

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At the prodding of any number of special interests, Fannie Mae and Freddie Mac will continue to be allowed to purchase mortgages up to a maximum of $729,750 for all of 2010. The “temporary” program allowing the GSEs to do so was slated to expire at the end of 2009, and would have been replaced with a maximum limit about $100,000 lower.

Recall that the $729,750 limit was originally developed as part of the Housing and Economic Recovery Act of 2008 — using late 2007 home values. Some two years later, home values have fallen appreciably in many areas of the country, including so-called “high-cost” areas, and these “expanded conforming” limits were supposed to be adjusted to reflect those changes in home prices. With Congress setting a permanent floor under the traditional Conforming maximum loan amount of $417,000, the new limits — based on the median home price in a given metropolitan area times 1.15, and subject to maximum amount no more than 150% of the traditional $417,000 limit — would have been capped at $625,500 for 2010. With the decline in home prices, the number of areas in which the program is available and viable would have diminished greatly, too, which is why we didn’t think that it warranted being extended for another year.

Not to belabor the point, but these “expanded conforming” loans are presently priced at about one-eighth percent higher than traditional conforming — roughly the historical spread between true conforming and true private market jumbo prices. With the Fed’s continuing support for conforming loans, these products are presently about 0.75% below private market jumbos. If the Fed’s support comes to an end in late March, and conforming rates rise to more “normal” levels as a result, the price differential will largely vanish, but Fannie and Freddie will still be allowed to compete against the private market for these loans — all at a time when banks and others desperately need high-value, high-quality loans to buttress their books. It’s by no means clear that so many borrowers have taken advantage of these loans to suggest that the market cannot function properly without them.

There are of course concerns that the availability of supports (or lack of same) will continue to distort the market. Concerned about the coming expiry of the $8,000 tax credit, it would appear that at least some sales were moved up into September, at least in terms of lower-priced existing homes — those which appeal primarily to “first time” borrowers. It seems that this spurt came at the expense of New Home Sales, which were expected to rise in September but instead slipped by 3.6% for the month. The pace of sales was sufficient to keep inventory levels at 7.5 months, and the actual number of units built and ready to go slipped back again. However, after recovering modestly from the terrible levels of earlier this year, there are no signs that there the new home market is getting any kind of traction as yet.

Extending and expanding the “tax credit” is likely to occur, if the rumblings from capital hill are any indication. However, the distortion caused by the expected conclusion of the program probably contributed to the decline in mortgage applications being filed. According to the Mortgage Bankers Association, activity measured here fell to the lowest level since early September.

Some building is going on, and along with a boost from the CARS program, it served to created a positive reading for GDP. The advance estimate of the nation’s output for 3Q09 rang in at 3.5%, putting an unofficial end to the worst recession since the 1930s. However, we’ve noted that this does seem like a “technical” recovery; we’d bet you would be hard-pressed to find a man on the street who could tell the difference between the old recession and the new expansion. The rebuilding of inventories after an overcorrection, a pick up in housing investment after a terrible period, the one-time CARS program, and other factors boosting the economy are fine, but there is to date very little to be seen in the conditions which foster a self-sustaining recovery. Until we start to see those, expect rough-and-tumble conditions to persist.

With employment numbers still bleak, income growth remains quite weak. There was no improvement in income strength in September, and incomes are some 2.8% below last year at this time. Distorted by the expiring CARS program, personal consumption expenditures slipped by 0.5% during the month and has increased by a meager 1.4% over the past year. Puny income gains and tougher credit standards make it difficult to have extra cash to spend, and the difficult economic environment makes if difficult to want to spend. Saving, though, is in vogue, and the nation’s saving rate bumped back up to 3.3% for the month. Higher saving and lower spending levels will make it hard to keep powering GDP forward, at least at the levels noted above.

The influence of the initial blast of various stimulus programs has waned somewhat as the Summer came to a close. The Chicago Federal Reserve reviews some 85 economic indicators, and the National Activity Index they produce helps to show if the economy is growing at or near its potential. The gauge moved a little further away from showing that in September; after staging a good rebound to near breakeven in April-to-July period, the last two months have featured modest declines again. Even with the weakening, though, the minus-0.81 for the index is much improved from even six months ago. Still, it does suggest that positive economic momentum is still hard to come by.

Orders for durable goods did kick higher in September, rising by 1%. That seemed to produce some lift in regional factory activity measures for October. A Chicago-area purchasing manager’s trade group saw their indicator jump to the positive side of the ledger, and there was a move higher in the activity measured by a New York group too. That should bode well for a positive reading from the Institute for Supply Management on Monday, and the fortunes of the nation’s manufacturing sector should continue to improve.

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 Oct 23 Sep 25 Oct 24 6-Mo. TCM 0.17% 0.20% 1.56% 1-Yr. TCM 0.39% 0.41% 1.66% 3-Yr. TCM 1.50% 1.51% 1.84% 5-Yr. TCM 2.38% 2.41% 2.64% FHFB NMCR 5.16% 5.25% 6.46% SAIF 11th Dist. COF 1.412% 1.473% 2.698% HSH Nat’l Avg. Offer Rate 5.42% 5.49% 6.71% ARM indexes, APOR rates, usury ceilings, & more — all available from ARMindexes.com. Email and webservice delivery are available. Sources: FRB, OTS, HSH Associates.

That said, at least two Federal Reserve districts reported a deceleration in manufacturing activity during October. The Kansas City regional gauge eased from 16 to 6 during the period, while the Richmond Fed reported a reading of 7, down from 14 in September. Coupled with the local ISM reports above, it’s safe to say that while factories may be working again, production and output remain muted at best.

With jobs still so hard to come by and incomes so pressured, it’s going to be hard to find ways to generate income or much economic heat, unless the Obama administration starts to consider ways to get more money in the hands of Americans via payroll tax cuts or credits. Until that happens, those with jobs will continue to ask employers for raises, but the challenging environment for profits means they will be small, if they come at all. The Employment Cost Index — a good measure of the total cost of keeping a worker on the books — rose by a scant 0.4% during the 3rd quarter of 2009, the same as the second quarter. Wages grew by just 0.4% (about 1.5% over the past 12 months) and benefit costs rose by 0.3% for the period.

Even small increases in costs make it more difficult to keep workers employed. During the week of October 24, another 530,000 new applications for unemployment benefits were filed, about the same lousy level we’ve been holding near for several weeks now. The October employment report is due out next Friday, and the present expectation is that about another 200,000 jobs will have been shed.

It’s hard to generate any enthusiasm when your prospects are dim, or when you’re watching family, friends, and neighbors endure hardships. As such, optimism among consumers has waned in October. The final reading on Consumer Sentiment from the University of Michigan slipped back to 70.6 for the month, giving back about half of September’s gains; the Conference Board’s review of Consumer Comfort was expected to rise, but instead fell back to July levels, and the weekly ABC News/Washington Post poll of Consumer Comfort has fallen steadily all month. Stimulus plans which haven’t stimulated individuals much, the battle over health insurance and firming energy prices have all likely contributed to the increasingly negative atmosphere, and that leaves out the influence of the culture of negativity which surrounds each election cycle, whether national or local.

We cannot wait for the day when a supposedly growing economy feels like an actually growing economy. The National Bureau of Economic Research — the official arbiters of the recession’s beginning and end — probably won’t weigh in with the official end date for some time yet. Hopefully, by the time they do, we won’t actually care to look backward or quibble over what it means, since a real expansion featuring strong job markets, firming home prices, and rising incomes will be the focus of our days again.

That’s not coming tomorrow or the day after, and probably not for some time. Until then, we can content ourselves with a cascade of first-week-of-the-month data, including two ISM reports, auto sales, construction spending, worker productivity, the employment report, consumer borrowing numbers and more. Did we mention that there’s also a two-day Federal Reserve meeting, too? If you liked the volatile markets of this week, next week will probably be your cup of tea, too.

The scary market on Friday drove some money in Treasuries, so mortgage rates are likely to start the week on a slightly softer note. How they finish the week, though is hard to predict. We’ll wager that they ease back somewhat by the time the week is through.

If there’s an election in your neck of the woods, get out and vote! If not, have a Happy Halloween!

Looking at the longer term? you’ll need to read our latest two-month forecast.

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