HSH Market Trends

Thanks, for Low Mortgage Rates

November 27, 2009 — A holiday-shortened week was nonetheless packed with economic data. While there is a nascent recovery forming, it seems likely to be a slow, grinding affair.

Full recovery — one which involves wider swaths of the economy — may not occur until next year some time. In the interim, prominent government support for the nation’s housing markets does seem to be having some beneficial effects, and low mortgage rates are chief among those supports.

This week, HSH.com’s overall average for mortgage rates, as measured by our Fixed-Rate Mortgage Indicator, or FRMI, rose by a lone basis point (0.01%) this week, so the average price of all loans — conforming, jumbo and agency jumbo combined — ended the short week at 5.29%. The overall average for 5/1 Hybrid ARMs rose by three BP, and the alternate to the traditional FRM finished the period at 4.61%.

Last month, the $8,000 “first time” housing tax break was coming to a close. Coupled with slipping mortgage rates during that month, lots of people hit the markets to grab a home. An annualized sales pace of 6.1 million was the result, a 10.1% increase in sales over September and the fastest sales pace since March 2007. That spurt in sales drew down some inventory, and at the present sales level there would be a near-normal 7 months of supply available.

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New home sales posted a surprising 6.2% gain in October, but all of that came from a big (23%) sales spurt in the southern region of the US while sales fell in the other regions. Still, 430,000 homes left the inventory rolls, reducing the available supply to 6.7 months nationwide.

It’s a reasonable guess that sales will fall back in November, since there was very likely some future demand pulled into the October sales figures. Although the tax credit was re-authorized and expanded, there will be at least a one-month dip in sales strength, possibly more, all due to the off-again, on-again nature of the credit’s availability.

The housing market has certainly improved relative to where it was earlier this year. Low mortgage rates engineered by the Federal Reserve have been a key support, but for homebuyers, falling prices — and the subsequent improvement in affordability — are the winning combination. The tax credit is perhaps the proverbial “icing on the cake.”

Low mortgage rates will be with us at least until the Fed’s MBS purchasing program comes to a close in March, when they will probably firm somewhat. How much rates firm squarely depends upon the private market’s appetite for these kinds of investments, which still have considerable risk attached with them. Aside from mortgage rates, low market interest rates should remain with us for a while. The minutes of the November 3-4 Federal Reserve meeting reveal that the members continue to support the Fed’s large-scale asset purchase programs, which would have the Fed purchase $1.25 trillion of agency MBS by the end of the first quarter of 2010. While there was some discussion of possible exit strategies, none of the members seemed to feel that any action was imminent.

The estimate of third-quarter Gross Domestic Product was ratcheted backwards. Initially reported as a rise of 3.5%, the preliminary estimate of Q3 GDP was trimmed to a more-likely 2.8% rise. We’re of the opinion that the increase in GDP is still more “technically” driven, due largely to a resumption of activity after too great a curtailment following the financial market collapse last year. As well, there seems to be little follow-through forming in the fourth quarter. The Chicago Federal Reserve’s National Activity Index, a tool which follows some 85 economic indicators, eased back in October. The -1.08 reading is slightly more negative than was September and suggests a weakening growth pattern relative to the summer.

Some of that “technical recovery” is evident in the nation’s manufacturing sector, which is benefiting from the beginning of an inventory rebuilding stage and a weak dollar, which boosts export growth. New orders for manufactured durable goods fell by 0.6% in October, a little more than forecast, and due to a dropoff in motor vehicle (think ‘cash for clunkers’) and aircraft orders, but in line with the back-and-forth pattern we’ve seen since spring.

In the Richmond Federal Reserve district, factory activity slid back in November, as the effects of a summer surge of activity waned. After falling to as low as -51 in February, then running as high as 14 for July, August and September, the indicator has cooled all the way back to a reading of 1 in November, just about a breakeven level. The Kansas City district, on the other hand, reported that its production index jumped 11 points to 17 in November, trumping a much milder 6-point increase last month. The KC index now stands at its highest level since July 2008.

The economy can’t really get moving until the employment picture improves. A decline in weekly unemployment claims — to 466,000 for the week ending November 21 from 501,000 the week before — continues to show the same agonizingly slow improvement that we’ve seen since they peaked several months ago. The four-week moving average is now below 500,000, the first time that’s happened since last year. Still, we need to see the employment scenario improve drastically before any semblance of normalcy is within reach.

For those still working, we’re seeing a continuation of the weak improvements of recent months as personal income rose 0.2%
for October. Spending rose, however, posting a 0.4% uptick, but much of this can be attributed to new-car purchases. No doubt the nation’s retailers are hoping to see some of that cash come their way during the already-underway holiday-shopping season. We note that the most important gauge of the season, Black Friday, is starting early this year as many retailers have announced that they’ll open their d0ors in the evening of on Thanksgiving Day.

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 Nov 13 Oct 16 Nov 14 6-Mo. TCM 0.17% 0.16% 0.87% 1-Yr. TCM 0.33% 0.36% 1.12% 3-Yr. TCM 1.37% 1.47% 1.63% 5-Yr. TCM 2.30% 2.36% 2.41% FHFB NMCR 5.16% 5.25% 6.46% SAIF 11th Dist. COF 1.272% 1.412% 2.693% HSH Nat’l Avg. Offer Rate 5.35% 5.42% 6.74% ARM indexes, APOR rates, usury ceilings, & more — all available from ARMindexes.com. Email and webservice delivery are available. Sources: FRB, OTS, HSH Associates.

Of course, bleak employment prospects will beat up the psyche,
The Conference Board’s measure of Consumer Confidence for November nudged higher, rising by 0.8 points to 49.5 for the month. The indicator has nearly touched 55 twice in 2009, but is presently only about half its level of two Octobers ago, just before the market crisis took hold. Consumer comfort as measured by ABC News/Washington Post fell two points to minus-47, while the University of Michigan consumer sentiment index went the other way, falling to 67.4 from 70.6 in October. The as-yet-unofficial end of the recession may have cheered folks, but the official over-10% unemployment rate has them worried.

Happy Thanksgiving from all of us. Even though there are many troubles here and across the world, it’s a good time to pause and give thanks. Despite trying times, we do live in a great country of generous and generally prosperous people.

If you’re doing OK in these difficult times, consider making a donation to your local food bank or Salvation Army. There are unprecedented demands on these folks this year… and they can use all the help they can get.

While you’re counting your blessings over the holiday, take a minute to include our servicemen and servicewomen who serve the US, both domestically and abroad. These folks have volunteered to champion freedom, both here and around the world.

Finally, If you have a job and still have equity in your home, you may be able to take advantage of some of the most attractive refinancing conditions ever. If you want to buy a home, affordability is at levels you may not have experienced in your (adult) lifetime. Consider taking advantage of these opportunities as they won’t last forever.

Mortgage rates will wander aimlessly next week and are just as likely to rise a few basis points as to fall by a like amount.

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

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