HSH Market Trends

Mortgage Rates Downshift, Match Year’s Low

November 20, 2009 — Although one might have thought that everyone knew that a sluggish economic recovery is on tap, a reiteration of this by Federal Reserve Chairman Ben Bernanke on Monday seemed to push some investors out of equities and back into bonds, driving yields and mortgage rates downward.

HSH.com’s overall average for mortgage rates, as measured by our Fixed-Rate Mortgage Indicator FRMI, declined by seven basis points (0.07%) this week, with the average price of all loans — conforming, jumbo and agency jumbo combined — slipping to 5.28%. The overall average for 5/1 Hybrid ARMs eased by three basis points, finishing the week at 4.58%. Conforming 30-year fixed slipped below the 5% mark, the 5th time they’ve done so this year, and have now matched 2009 lows. This is occurring despite an improving economy, which usually brings somewhat firmer interest rates.

Certainly, the economic news out this week didn’t suggest that Mr. Bernanke’s assessment was incorrect. Growth seems to be weakly inching forward in a still-fragile way, no matter what the last GDP report had to say.

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The key to the recovery is housing, which remains in poor shape. According to the Mortgage Bankers Association of America, mortgage delinquencies are again at record highs for the third quarter as generation-high joblessness continues to pressure homeowners. All this is coming despite unprecedented levels of support for housing. The MBAA also noted that the level of applications for mortgages to buy homes has declined for the past six weeks. This may be because the tax credit for “first time” homebuyers expired; if so, the resumption and expansion of the credit into next year may revive some demand, but that probably won’t occur until we get past the holiday season.

The National Association of Home Builders index of member sentiment held steady in November at a reading of 17. The high reading for the year was 19, back in August, but there’s been little indication that lasting improvement is coming soon. Builder moods probably failed to improve since activity likely got quieter again in October, as Housing Starts declined to just 530,000 for the month. What with competition from cheaper existing and foreclosed housing stock, financing for projects is still quite tight and these factors will continue to limit new construction opportunities for at least a while yet. Permits for future activity fell back to the lowest level since mid-Spring.

We’ve been of the opinion that the positive GDP number is best characterized as a “technical recovery” led by marginal resumption of economic activity after a period of production cutbacks far in excess of the fall in demand. The rebuilding of stockpiles from depleted levels seems to be helping to boost the economy, and the quite-weak dollar is supporting export growth. These improvements may be seen in the various reports covering manufacturing strength, where the recovery is most evident.

Industrial Production nudged 0.1% higher in October, less than expected. A rise in utility output was the strongest portion of the report, but it’s worth noting that the percentage of factory floors reported to be in use continues to creep upward, even if the present 70.7% rate of utilization remains historically puny. Still, that’s marginally off the bottom of 68.3% seen in June and a slow trend in an improving direction.

Factory activity flared higher in the Philadelphia Federal Reserve district in November and now stands at its highest level since mid-2007. The indicator has moved generally higher since August. That said, there was somewhat less momentum seen in the Empire State Manufacturing survey performed by the NY Fed, but its four-month trend is very similar, climbing into solidly positive territory after a long negative spell.

That inventories continue to be drawn down does suggest that the process of liquidation isn’t quite over yet, but it has slowed considerably. Overall stockpiles of goods slipped back another 0.4% in September, so the drawdown continues, but retailers boosted their inventories by a surprising 0.6%. That was almost solely due to the replenishment of automobiles after the CARS program came to a close.

You might have thought that anyone who wanted a vehicle would have bought one when the $4500 tax credit was available. However, Retail Sales figures for October were pushed 1.4% higher, largely on the surprising strength of vehicle sales during the month. Excluding auto and gasoline sales left a “core” retail sales rate of 0.3%, the same as September. Those “core” sales have been in the black for three months now, and are also starting to close in on levels no worse than a year ago. Erasing the deep declines seen in spending this year would certainly put a smile on a retailer’s face, especially with what is expected to be a difficult holiday season slated to kickoff with “Black Friday” next week.

Weekly unemployment claims continue to hang just above the 500,000 mark. During the week ending November 14, some 505,000 new applications for benefits were filed, the same number as the week prior. We’ll crack the 500,000 level before long, possibly next week; after that, seasonal distortions will start to make the number more unreliable and hard to evaluate.

One of the reasons the Federal Reserve can keep interest rates at exceptionally low levels is because inflation remains tame. While that’s likely to continue to be the case, commodity price inflation may work its way up the price chain, much as oil prices did last year. Presently, the headline indication of inflation seen in the October’s Producer Price Index rose by just 0.3%, and prices are still some 1.9% below last year at this time (although that’s the smallest differential of 2009). However, prices are firming upstream of the top line report at earlier stages of production.

Still, pricing power among businesses remains weak. The Consumer Price Index also moved 0.3% higher for the month, but this simply continues a string of mild readings seen in 2009. “Headline CPI” is only 0.2% below last year at this time, and the last few months have made it clear that any widespread deflation concerns should be fading behind us.

Conversations about inflation are still couched in the future tense, and how strident they become will largely depend upon how and at what speed the Federal Reserve removes the considerable “policy accommodation” presently in place — to say nothing of its other varied support programs.

Speaking of the future, things may be somewhat brighter if the index of Leading Economic Indicators can be believed. The 0.3% lift in the LEI in October marks the seventh consecutive positive reading, but the decline from a 1% rate of gain in September suggests that somewhat more muted activity is likely to come in the next few months. The LEI is probably a better mirror for the October economic climate than binoculars into the future, but good news is always welcome.

A year ago next week, the Federal Reserve weighed into mortgage markets, initiating a (since expanded) program to purchase Conforming and FHA mortgage-backed securities. In the ensuing weeks, 30-year conforming mortgage rates dropped by almost a full percentage point, and have largely remained at low levels ever since (a late-Spring flare higher excepted). As we close in on the anniversary of the program, it could be argued that there has been no support program more meaningful for homebuyers and refinancers since the housing crisis began. The blasts of refinancing which have run though the market this year have helped families recast their balance sheets, and are probably more responsible for increases in consumer spending than any other government program, subsidy, tax credit or support.

A year later, and the housing mess is still with us. Seriously underwater borrowers who haven’t been able to refinance and who don’t want to walk away from their properties have a difficult road ahead of them, a topic we’ve explored in greater detail in our weekend blog post, Home Equity: Why 2015 is the New Zero.

Slower holiday demand for mortgage credit could see interest rates move a little lower in the days and weeks just ahead, but even slight additional dips may bring in enough business to lenders as to keep rates fairly steady. As we’ve noted in the past, there no reason to run a sale when the store’s already full of customers.

Next week’s a holiday-shortened one. Mortgage rates probably don’t do much of anything in the three-day period, and bond markets and HSH are closed on both Thursday and Friday.

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

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