January 22, 2010 — Mortgage rates continued to edge downward this week, but the movement was less related to economic conditions than it was to a number of broader market concerns.
To the benefit of Treasuries and mortgages, stock markets continued to crater amid less-than-stellar earnings reports, with the downturn exacerbated by new rounds of populist bank-bashing, this time via a unique taxation proposal from the Obama Administration.
This week, the overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI slid back by five basis points (0.05%) as our indicator of the costs of conforming, jumbo and expanded conforming mortgage loans closed the week at 5.41%. A Hybrid 5/1 ARM counterpart to the FRMI eased by three basis points, finishing the week at an average 4.65% Conforming 30-year FRMs nudged closer to 5% to their lowest average in about a month, so that should cause some pick up in refinance activity when applications are tallied by the Mortgage Bankers Association next week.
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The Administration unveiled a proposed tax this week to penalize large banks, particularly those who accepted (or were required to accept) TARP funds, even though it would also ensnare those large banks who eschewed the “offer of assistance” from Uncle Sam. The levy would apply even to those firms which have already paid back TARP funds with interest, and is supposed to rake in some $9 billion per year. The fact that some firms which got plenty of TARP money — such as auto makers and insurance firms — are exempted from the tax makes one wonder whether banks are being unfairly targeted. That being the case, and without getting into the specifics of how the fee is levied, we are simply left to wonder: Does anyone really believe that any such new costs won’t ultimately be borne by businesses and consumers? Will there be no effect on lending? We’ll need to see where this all goes, but can’t imagine that it’ll provide any economic help.
Perhaps any proposed fee might be dedicated instead of sinking into the black hole of spending which is Washington. Nine billion dollars per year would modify a lot of mortgages — allowing for the principal balances of thousands of mortgages to be written down, for example. It’ll still cost new borrowers more, but maybe this would be better way to chastise banks.
Of course, who knows what the mortgage market we’ve known for so long will look like in the future. House Financial Services Committee Chairman Barney Frank called for the abolition of Fannie Mae and Freddie Mac this week, saying that the committee will recommend “coming up with a whole new system of housing finance” which might feature “some kind of subsidy for affordability” after market liquidity and secondary market structures are upended. “I don’t know anybody who thinks Fannie and Freddie should continue,” said Mr. Frank. Perhaps he might ask some folks who work in and around this market; they might offer some clarity. There is little doubt that the public-private GSE model is flawed and has been used to the advantage of those who ran Fannie and Freddie as well as Congress, but the securitization function of the entities plays a valuable role in promoting homeownership. If it didn’t, why would Congress have quietly allowed the GSEs to borrow unlimited funds or rack up unlimited debts, as happened at the end of 2009?
Promoting and fostering homeownership matters, at least if there’s any hope of getting past the economic quagmire in which we still find ourselves. Homebuilders became more depressed again at their prospects for recovery, a reflection seen in the January reading of sentiment from the National Association of Homebuilders. Their index slipped back to just 15 for January, a low reading last seen in June 2009, not that readings since then have been all that much stronger. Single family sales and showroom traffic levels declined, and forward expectations remained at subdued levels.
Daily FRMI rates are available on HSH.com.
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Of course, their disillusionment in January was probably caused by a decrease in housing starts in December. Starts slipped back to an annualized 557,000 new units, foiling expectations of a minor increase. Essentially, housing starts have been pretty flat for months now, wobbling in a narrow range since about last May. Some optimism about the future was expressed, however, in the form of an 11% rise in building permits, which rang in at an annualized rate of 653,000, so there may be better times ahead.
Guiding us to a better future will require a deft hand. Unfortunately, the re-appointment of Federal Reserve Chairman Ben Bernanke is suddenly in a bit of doubt. Although Mr. Bernanke was never much of a politician, and is said to have apparently “favored Wall Street over Main Street” during his career, we think that without his invaluable leadership here and abroad, as well as innovative responses to continual market crises, the country might have entered an even worse recession or perhaps even a depression. Furthermore, replacing the Chairman of the Federal Reserve in still-troubled economic times needlessly injects even more uncertainty — more risk — into financial markets at a time when it isn’t welcome. Among a slew of other things, this will surely be a topic at next week’s Federal Open Market Committee meeting, the outcome of which will perhaps provide some clarity as to any change in status of Fed’s MBS purchase program.
Getting back to the economy for a moment, the index of Leading Economic Indicators powered ahead for a ninth consecutive month. The December value improved by a full 1.1% after a 1% November gain. If nothing else, the continued uptrend of the indicator suggests that the recovery is starting to develop some firmness to it as the worst of the downturn fades behind us. That said, the recovery isn’t much to write home about at this point, and the indicator has a long, long way to go to get anywhere close to the peaks of a couple of years ago.
Although a growing economy might produce some additional inflation, that’s still more tomorrow’s problem than today’s. The Producer Price Index bumped 0.2% higher in December, a much tamer reading than the 1.8% lift in November. The sub-measure of producer prices, which excludes the most volatile components (”core PPI”) was unchanged from the previous month. Deflation is fading but core PPI has risen by just 0.9% over the past year, while headline has climbed a more stout 4.7%. Last week’s Consumer Price report was also expressed in muted tones.
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Sources: FRB, OTS, HSH Associates.
Rising gasoline prices and a falling stock market are a common prescription to increase misery. The weekly ABC News/Washington Post poll of Consumer Comfort continued to show signs of post-holiday hangover, with the indicator slipping back to -49 for the week of January 17, near recent lows. Just a few weeks ago, 15-month highs in Comfort were noted, but there is clearly no strong upward move happening here. Of course, the downturn may be inflamed by an upturn in weekly jobless claims, which leapt by 36,000 new applications for benefits in the week ending January 16. That sizable increase in claims may have been some residual post-holiday seasonal adjustment issues, and we think the pre-existing trend should actually have us around 450,000 weekly claims and fading slowly.
You can read whatever you wish into Tuesday’s Republican win in Massachusetts. For our part, we subscribe to the credo that “all politics are local” — and local conditions in the Bay State are economically pretty poor, just as they are in many other places. Jobs and concerns about family finances are foremost in many minds, and voters who pulled the lever for change a year ago obviously didn’t get the kind they wanted, and so voted for change again. We think the message is pretty clear; there are lots of issues which need attention, but above all that: “It’s the economy, stupid!” Elected officials who continue to ignore this do so at their own re-election peril.
The remaining measure of economic health we saw this week was the Philadelphia Federal Reserve’s local indicator of manufacturing activity. Although it slipped from 20.4 in December to 15.2 in January, it remains solidly positive and contained several hopeful signs that broader and more economic growth may be coming as the spring nears. Let’s hope so.
Mortgage rates continued their downward slant this week, but it appears that the bulk of the decline is done, at least for the moment. We could see a downward move for rates of another couple of basis points next week — late week Treasury values suggest as much — but with all of the above to consider (and more), and it being unlikely that the stock market will have an equally lousy week, we think that rates might hold steady or even tick up a couple of basis points instead.
It’s never too late to look ahead. If you’ve got a couple of minutes, you should check out our 2010 Outlook for Mortgage Markets and Rates. It covers what we think are the ten most important considerations for the market next year.
Our latest two-month forecast offers our predictions for the immediate future.
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