HSH Market Trends

Mortgage Rates Bump Up
New Two-Month Rate Forecast at HSH.com

December 18, 2009 — Year-end market machinations, mix-and-match economic news, and holidays in full swing helped mortgage rates to move higher this week. Fortunately, relatively few borrowers are actually affected, since those aforementioned holidays, frantic shopping and last-minute travel plans provide plenty of distraction, leaving little time to consider a home purchase or refinance.

The eight-basis point move in the average rates tracked by HSH.com’s FRMI left the overall measure of conforming, jumbo and expanded conforming loans at 5.37%. The FRMI’s 5/1 Hybrid ARM companion nudged four basis points higher, finishing the survey week at 4.65%. Conforming 30-year fixed rates ticked back over the 5% mark, the first time that level has been breached in a month.

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The Federal Reserve wrapped up its last two-day meeting of 2009 on Wednesday with perhaps the most upbeat review of conditions in well over a year. “Economic activity has continued to pick up,” noted the Fed, “and the deterioration in the labor market is abating.” Compared to some of their characterizations of the economic situation earlier this year, this qualifies as a sunny outlook. The Fed feels confident enough about the prospects for recovery that they announced the timelines for the sunsetting of a number of financial market support programs which proved crucial to ameliorating the effects of the financial market collapse. Many of these have become little used in recent months, as private markets have regained their moorings.

The spurt of economic activity which pushed the measure of Gross Domestic Product into the black over the last six months doesn’t appear to be gaining much strength, and a mixed bag of signals denotes a still-erratic recovery from recession.

Much was made over the 8.9% increase in housing starts for November, but that sizable headline jump was merely a recovery from an awful October reading, dragged down by the “expiring” homebuyer tax credit. Not only did it not expire, it was expanded and is partly responsible for the rebound. That said, the 574,000 (annualized) new units starting construction during the month wasn’t very different than the figures seen on a monthly basis since May of this year, and so the figure didn’t represent a breakout number of any kind from a still-soft pattern. Permits for future building did pick up a little bit, to 584,000 annualized, indicating a bit more optimism about market conditions next year.

That said, members of the National Association of Home Builders found little to be optimistic about in December. Although a slight increase was expected, given the renewal of federal supports denoted above, the NAHB’s index of member sentiment slipped back to 16, as traffic failed to increase and forward-looking six-month outlooks all stepped back. Though greatly improved from the worst levels of the year, housing has a long path yet to recovery.

Aided by growing exports and a weak dollar, manufacturing has largely been the engine powering recovery. In November, the measure of Industrial Production rose strongly, rising by 0.8% for the month as manufacturing and mining pushed the index higher. The percentage of factory floors in active use ticked a bit higher again, as well, lifting to 71.3% usage. Before the recession kicked in, closer to 80% in use was common, and the difference between that and the present level is a portion of the “resource slack” which allows the Fed to continue to keep rates “exceptionally low” for an “extended period” of time.

In the context of recovery, two local reports covering manufacturing seemed at odds with one another. A considerable slowdown in activity was seen in the New York Federal Reserve’s local report covering the Empire State; its indicator slipped from 24.5 in November to just 2.6 in December and showed a continuing retreat from an October’s 34.6 peak. The Philadelphia Fed’s region reported better news where its measuring stick of local factory health posted its best reading since 2005. Even the employment index contained in the report moved higher. Looking at the two reports, its not hard to conclude that economic recovery is uneven at best.

Another form of “resource slack” is the weak job market. During the week ending December 12, some 480,000 new applications for benefits were filed. Although that was a slight increase from last week, we do seem to have broken the 500,000 level for good, even if we remain perhaps 200,000 applications above the levels which signal an improving job market. Reports over the next couple of weeks will suffer from new seasonal adjustment issues, and the next clear indication probably will come after December’s employment report, delayed until January 8 by the New Year’s Day holiday.

Aside from resource slack, one other factor which makes the Fed comfortable about its policy stance is that they expect “inflation to remain subdued for some time.” However, the weak dollar’s effect on commodity prices is starting to show. The Producer Price Index, a measure of costs upstream of the consumer, rose by a stout 1.8% in November, more than double what was forecast. Even removing the typically volatile fuel and food components left a 0.5% increase for the month. Headline prices changes have been erratic for much of this year, but have all been lower when compared to last year. However, the latest bump in prices has now moved us from deflating to inflating.

The Consumer Price Index didn’t move as much as the PPI, but there was a 0.4% lift in costs for November. “Core” inflation, excluding food and energy as above, was unchanged for the month. However, measured against last year, prices are 1.9% higher (headline) and 1.7% higher (core) and are pretty close to what is believed to be the Fed’s preferred rate of change. Rising prices aren’t necessarily a bad thing, but excessively rising ones are, and if the pattern continues to repeat, there is a risk that market interest rates will move higher, whether the Fed moves short-term rates or not. In this way, long-term interest rates — including mortgage rates — can be a leading indicator.

Speaking of leading indicators, the Index of Leading Economic Indicators sported a gaudy 0.9% increase in November, its eighth consecutive increase. However, with the big upsurge seen in April fading behind us, the more recent pattern for the index suggests that a more moderate pace of recovery is coming, if the LEI’s forecasting ability is correct. Whether it is or not, we are in a moderately improving pattern, overall, and that’s good news.

Good news continues to be in short supply, at least according to the weekly ABC News/Washington Post poll of Consumer Comfort. Still backing and filling, the indicator rose to minus-45 during the week ending December 13, about where it’s been for months. Perhaps the spirit of the holiday season will push optimism higher in the coming weeks, but challenging economic times for many families will continue to temper this to a real degree.

Mortgage rates have bumped a little higher and are now perhaps an eighth percentage point off their recent lows. While this shouldn’t be enough to deter any plans to purchase a home, it does take a little of the shine off the value of refinancing for some. Next week has a three-day workweek on tap; since the 10-year Treasury yield settled as the week progressed underlying credit markets seem to like the levels they are at now. This being the case, we don’t expect to see much by way of movement next week for rates but could shave a couple basis points of this week’s averages.

With so many issues facing housing and mortgage markets in 2010, we’re working on a 2010 Outlook. We’ll let you know when it comes, but until then, HSH’s new two-month forecast is out.

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