HSH Market Trends

Rates Touch New Lows, Will Rise

December 4, 2009 — Mortgage rates have been easing a bit lately due to both softer demand for credit and, most recently, some flight-to-quality purchases of US Treasuries related to financing troubles at Dubai World, a state-backed corporation which asked to forego payments on its outstanding debts for at least six months. That action is simply more fallout from the global financial crisis, which is still causing troubles at banks around the world.

These troubles first came to light last Thursday. After considerable initial concern, it seems that Dubai World’s effect on global finance markets is contained for the most part, so some of that move of cash into a safer haven began to unwind as the week progressed.

Some surprising economic news came late in the week, and if the again-influential yield on the 10-year Treasury is any indication, mortgage rates seem certain to rise in the days ahead. The 10-year Treasury climbed from a Tuesday low of 3.21% to an estimated 3.48% by Friday’s market close; mortgage rates haven’t yet fully reflected all of that move, but from Tuesday’s low of 4.83%, the all-important 30-year Conforming interest rate had risen to 5.06% by Friday.

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For the week, HSH.com’s FRMI, our overall average for mortgage rates (including conforming, jumbo and agency jumbo), downshifted by five basis points, closing the survey period at 5.24%. Both conforming and jumbo rates declined this week, with conforming 30-year FRMs slipping to a 4.91% weekly average. At the same time, the overall average for 5/1 Hybrid ARMs managed a five-basis point slip of its own, landing at 4.56% for the week. Some aggressively-priced 5/1 ARMs can now be found in the market with rates starting as low as the mid-3% range.

Friday’s employment report was perhaps the most positive piece of economic news seen in some time. The decline in November payrolls of just 11,000 people was by far the smallest decline since the job market turned negative way back in January of 2008. The fact that fewer people are losing their jobs is truly a good thing and a welcome sign that, perhaps, the recession is finally coming to an actual close. Payroll losses were also revised to smaller numbers for October and September, lending a little additional cheer.

Although much was also made of the slight decline in the nation’s unemployment rate, from 10.2% in October to a flat 10% in November, it’s important not to read too much into it; the improvement was more about head-counting methodology than about any spate of new hiring going on.

The unemployment figure is produced by a separate survey of households who are asked if they have a job or are looking for work. If those within a household want a job but can’t find one, they are counted as unemployed. However, if those unemployed household members have given up looking, they aren’t counted; in fact, they’re removed from the estimate of the nation’s potential pool of workers. This “labor force participation rate” slipped back to a flat 65.0% in November, a 24-year low, indicating that many, many folks have simply given up hope of finding a job at this point. At the moment, with over 15 million people actually unemployed (about 40% of them for longer than six months already), the job picture remains bleak. However, it does seem to have stopped worsening, for now.

It’s a safe bet that, once the economy does begin to improve, people sitting on the fence may again count themselves among those looking for work, and that in turn will goose the unemployment rate back up again. Some forecasts call for a peak of perhaps 10.7% at some point in 2010.

Those folks that have jobs are working longer and harder at them. The average workweek noted in the report rose by 0.6%, its first expansion in some time. Separately, the measure of worker productivity for the third quarter of 2009 was revised downward to a still-gaudy 8.1% for the period. More output from fewer workers means they can work more hours and be paid more without any undue effect on inflation, but it also means that businesses can continue to get by without adding any new or even calling back workers to return to their posts. Sizable productivity increases and a pick in the hiring of temporary workers are often harbingers of better times yet to come, and we seem to be heading in that direction at the moment.

The Federal Reserve’s review of regional economic conditions, known as the “Beige Book” for the color of its cover, found that economic skies had brightened somewhat in eight of the 12 Federal Reserve districts. “Conditions have generally improved modestly” said the summary, but four districts found that things “were little changed and/or mixed.” We remain a good distance from healthy, but the improvement is encouraging, overall.

With a weak dollar fostering exports and inventory rebuilding getting underway, manufacturing is doing its part to pull us out of recession. Factory Orders rose by 0.6% in October, as noted in the Institute for Supply Management survey of conditions in November. The ISM indicator presently stands at 53.6, still solidly on the positive side of the ledger, if slightly less so than in October.

Some of the lift for factories came from improving sales of cars and trucks. According to AutoData, an annualized 10.9 million vehicle sales took place in November, an increase from the 10.4 seen in October and, leaving out the CARS-induced flare in sales this past summer, the best pace in over a year. The improvement is of course welcome, but sales remain well below the levels needed to restore the health of many auto manufacturers and their supply chains.

Measured against September, construction spending was flat in October. Declines in commercial real estate and public works projects — one suffering from bad market conditions, the other from weak state fiscal positions — overwhelmed a 4.4% increase in residential spending. There have been irregular increases in spending for housing projects this year after a long run of declines, but even the latest improvement still leaves outlays almost 22% below last year’s already-meager pace.

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 27 Oct 30 Nov 28 6-Mo. TCM 0.14% 0.17% 0.50% 1-Yr. TCM 0.27% 0.39% 0.93% 3-Yr. TCM 1.22% 1.51% 1.40% 5-Yr. TCM 2.12% 2.41% 2.06% FHFB NMCR 5.02% 5.16% 6.17% SAIF 11th Dist. COF 1.259% 1.272% 2.769% HSH Nat’l Avg. Offer Rate 5.29% 5.45% 6.46% ARM indexes, APOR rates, usury ceilings, & more — all available from ARMindexes.com. Email and webservice delivery are available. Sources: FRB, OTS, HSH Associates.

Weekly unemployment claims seem to have begun their annual holiday distortions a week ago, when they unexpectedly dropped to 466,000. The latest week, covering the period though November 28, seems also to be of the same ilk, with another outlier number of just 457,000 new applications filed at state windows. Before the last two weeks, we had been hanging at just above the 500,000 mark, and such a rapid downturn in actual claims seems unlikely, or exacerbated by imperfect seasonal adjusting. Whatever the case, claims are easing, and that’s good news, whether we’re getting a true, clear picture or not. We’ll go with “not,” and don’t expect solidly believable numbers until mid-January, at least.

While improvements at factories noted above continue along, there has been some waning in non-manufacturing activity. The ISM’s survey of service-oriented businesses slipped back into a mildly-contracting stance in November, retreating after just two back-to-back positive months this year. Service-oriented business are probably more affected by discretionary spending, and with consumers working with more limited resources this year (and the holiday season now fully upon us) there are only so many dollars to spread around for both goods and services.

Holiday bargains do seem to have improved moods somewhat. For the week ending November 29, the ABC News/Washington Post poll of Consumer Comfort moved two ticks higher, to -45. Earlier this year, the index got as “high” as -42, but has remained in a range between that and record lows since that peak in early May.

Readers and visitors who regularly follow our work know that fluctuations in mortgage rates are a regular recurrence, and that rates rise much more quickly than they fall. This being the case, we always advise borrowers that when they’ve got a mortgage in place that makes their purchase or refinance deal work, they should lock in the interest rate, rather than trying to guess at any kind of bottom in the market.

Our educated readers also know that 30-year FRMS holding tightly to either side of a 5% threshold is a great deal, whether it’s upper 4% or low 5% on the bottom line. Interest rates will kick a little higher next week, probably all the way back to (yawn) early November levels, when they were only outstanding.

There are many issues still facing the economy, so the enthusiasm fostered by this week’s better numbers probably fades to some degree next week. A fairly light economic calendar should have all eyes on Friday’s retail sales numbers. Still, the flare in underlying rates should push mortgage rates higher, and we’ll probably move about an eighth-percentage point higher than this week.

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

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