HSH Market Trends

Ten Week Low for Mortgage Rates;
Economic “Spring Awakening?”

March 5, 2010 — The Federal Reserve’s review of regional conditions found three quarters of the country in economic recovery, and that with some expressions of growth muted by February storms. Given that winter’s end is just a few weeks away, the next Fed “beige book” will probably add another district or two to the “expanding” side of the ledger.

This week, the overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI sported a decline of six basis points (.06%), ending HSH.com’s survey week at 5.34%, the lowest such average since mid-December 2009. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The average interest rate for the FRMI’s Hybrid 5/1 ARM counterpart lost a full tenth-percentage point (.10%) during the latest survey cycle, closing the survey week at 4.48%.

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The all-important 30-year fixed conforming average slipped to 5.07%, also a ten-week low point.

Production-led gains are boosting the economy, and there are clues that the labor picture might just be starting to brighten, too. The February survey from the Institute of Supply Management (ISM) remained in solidly positive territory for a seventh consecutive month, ringing in with a value of 56.3 for the period. In the ISM survey series, any value over 50 indicates expansion, and while the index did ease slightly from January’s 58.4, there appears to be considerable momentum for manufacturing to keep the recovery moving forward. The measure of employment in the index continued to move higher even as present production and new orders settled back somewhat.

The ISM index of service businesses bounced higher, climbing from a barely-positive 50.5 value in January to a more solid 53.0 in February. The expansion does seem to be slowly bleeding over into other parts of the economy, bringing with it more job growth. The February reading was the highest value for the indicator since October 2007, and while employment trends haven’t yet broken the breakeven level they are getting closer to doing so with steady increases over the past three months.

Part of the recent manufacturing production gains have been due to somewhat better auto sales. That said, autos and light trucks moved off the showroom floor in February at an annual 10.4 million rate, a little less than January’s figure. Harsh weather and Toyota’s issues may have deterred some sales; if so, they would be bumped into March’s figures. A little further back, Factory Orders for January rose by 1.7%, and February’s output numbers (when they come later this month) will probably find additional gains.

Personal Incomes rose by a meager 0.1% in January, dragged down by lower dividends and other concerns. Wage growth put in its best showing in some time, rising by 0.4%; however, revisions to previous months wiped out some of those gains. Spending rose by 0.5%, and the combination of lower income and higher outgo means that the nation’s rate of saving slipped back to just 3.3% for the month. In the report, it was mentioned that disposable income ratcheted back by 0.4%. Perhaps this explains the increase in consumer borrowing for the month as noted by the Federal Reserve, which reported a $5 billion increase in consumer loan balances, the first such rise in over a year. Revolving credit balances continue to be paid down, with outstanding obligations shrinking by $1.7 billion for the month, but installment-type borrowing, used for car loans and such, rose for the second straight month. If an increase in borrowing — in actuality, commitments made against future income — is starting to happen, the economic recovery may be boosted more quickly because of it. Although one month doesn’t make a trend, it could be an encouraging sign of things to come.

With the residential market storm still fully underway, and now joined by commercial market troubles and weak state revenue positions it’s little surprise that construction spending continues to lag. The overall downturn of 0.6% in January was caused solely by declines in commercial and public outlays; the 1.3% increase in spending for new residential projects continued a pattern of fits and starts but did manage to put in its first increase since last October.

Productivity continues to show very strong gains. The revised figure for worker productivity in 4Q09 was lifted to a gain of 6.9%. The last three quarters have produced outstanding gains in worker output, a situation not uncommon when exiting a recession. These gains mean better profits for businesses and better wages for workers (see above) but do come at the expense of workers not presently employed. That said, there are limits on gains in outputs by existing workers; generally, an expansion of the workweek would start to show, and the followed by the hiring (or re-hiring) of workers to meet production goals. We’re not there yet, but do seem to be moving in the right direction.

New claims for unemployment benefits settled back during the week ending February 27. The decline of 27,000 applicants left the weekly figure at 469,000 and seeming to trend more toward expected levels. Still, the month of February didn’t show the kind of decline in claims which has been expected, but we do again seem to be moving in the right direction after a difficult month.

This being the case, it’s tough to know what to make of the 36,000 decline in payrolls described in the February employment report. Some analysts speculated that the repeated snow events on the East Coast probably produced a downward bias to the data, while others weren’t so sure. Even the Labor Department couldn’t provide much insight into the effects of the storms on payrolls, so clarity in the jobs picture will need to wait another month. The unemployment rate held steady at 9.7%; measured by a different process than the payroll survey, the number will probably rise as soon as hiring starts to happen, since more workers will enter the labor pool.

But when will that be? It’s hard to know for certain. Small clues, like those in the ISM surveys above, seem to suggest “before too long.” Other indicators, like online “help wanted” wanted advertising tracked by Monster.com, point to increases. Our best guess at this point is that a positive reading for hiring is perhaps two months away, and once we see back-to-back gains (possibly by June) the Fed will start to nudge interest rates higher. That might happen in July, but sooner if labor market gains come more quickly.

Consumer moods remain dark. The weekly ABC News/Washington Post poll of Consumer Comfort rose a single tepid tick to -49 during the week ending February 28.

Mortgage rates eased back this week despite a pretty good tone for the economic data. Friday’s employment report did nudge the 10-year Treasury about seven basis points higher, suggesting that the decline in rates could reverse somewhat during next week. Rates might also be boosted by comments made by House Financial Services Chairman Barney Frank, who noted that holders of Fannie and Freddie debt should not consider their investments to be 100% backed by the US government, even though the companies are now under Federal control. He went on to say that when the companies are ultimately restructured, he wants to reserve the right to have debt holders take a “haircut” (a reduction in the value of their investments). If private-market investors choose to sell their holdings of Fannie and Freddie debt or not buy newly-issued debt, the GSE’s cost of funds would rise, and so would mortgage rates. Of course, the Treasury continues to provide unlimited support to these entities; perhaps Mr. Frank hoped to spook investors in order to make Fannie and Freddie even less private and more beholden to the government than they already are? It’s hard to know if that was the intention, but it could certainly be the effect.

Residential mortgage rates will probably firm up a little bit next week. How much depends upon how investors ultimately perceive Mr. Frank’s remarks, but we expect a couple of basis points increase even without those effects.

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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 this year.

Our latest two-month forecast offers our predictions for the immediate future.

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