HSH MarketTrends

Home Mortgage Rates Flare Higher

January 23, 2009 — It was a historical week in many ways, but certainly not for mortgage rates. Word of more troubles for already-supported banks, a wobbly stock market, and other looming issues removed a little bit of the enthusiasm produced by the inauguration of Barack Obama as the nation’s 44th President. Clearly, there is much work to be done by the new administration.

Holiday-shortened weeks such as this one have not been friendly to the market over the past year or so. Coupled with a week light on economic data — not to mention the full-on focus on the myriad problems the new administration will have to tackle — the market had plenty of time to brood and survey what remains a bleak landscape.

HSH’s Fixed-Rate Mortgage Indicator — inclusive of conforming, jumbo and ‘expanded conforming’ interest rates — rose by 23 basis points, landing at an average 5.89%. HSH’s FRMI has a long history, as well as a 5/1 Hybrid ARM counterpart, which featured a seven-basis point increase this week, and a survey-closing average of 5.64%.

Conforming 30-year FRMs — which, by some measures, dipped below the 5% mark last week — rose to an average 5.34%, while 30-year FRM jumbos tracked just 11 basis points higher.

The National Association of Homebuilders reported that its index of member sentiment rang in at a new low reading of 8 for January. Despite the headline decline from December’s already-low 9, there was some mildly encouraging news in the sales-office traffic and six-month sales expectations components of the index. Related to that, word came this week that Toll Brothers, a luxury-home builder, would be offering 30-year fixed-rate mortgages at 3.99% with zero points to certain purchasers of its homes. Builders are employing various efforts to clean out excess inventories including discounts and cut-rate financing opportunities.

With inventory levels low and likely to go lower, it just may be that it is becoming increasingly difficult to move the remaining, possibly least desirable, new homes still on the market. Also, these homes must compete with cut-price foreclosure homes which likely include plenty of “nearly new” homes built during the recent boom.

Stockpiles of new homes will, of course, continue to slowly diminish over time, and new stock isn’t coming on line any time soon. Part of the reason for the low NAHB number is that builders have nothing to do amid weak demand, a dour outlook for the period ahead, and difficulty securing financing for even viable projects. Housing starts cratered to a record low of 550,000 total units initiated, of which single-family starts totaled 398,000. That was a 15.5% decline from November and the lowest monthly figure since this series began in 1959. Permits for future activity slumped too, to just 549,000, so there’s little likelihood of a fast rebound in building anytime soon.

As mortgage rates ticked higher over the past few days, mortgage application activity has backed off somewhat, according to the Mortgage Bankers Association of America. Part of the reason for the firming in interest rates may be due to some capacity constraints forming in the marketplace. If rising rates are an attractant for new business — and they obviously are — a lender may choose to increase its rates somewhat as a way to discourage new business that they not be prepared to handle. If this is the case, rates will generally firm to whatever level is needed to generate a constant manageable flow of business, but that process is an imperfect one. More likely, rates will overshoot whatever that natural balancing point is on the upside as well as the down. Whatever the case, refinancing activity is still doing well, while purchase applications seem to be finding somewhat firmer footing relative to where they’ve been over the last few months.

The prospect of homebuying is diminished, though, as the job market weakens. During the week ending January 17, new applications for unemployment benefits reverted to the pre-holiday trend, rising to 589,000 for the week. The holiday-influenced dip now past us, an all-too-clear picture of poor labor markets is back in full view.

Consumer feelings about the economy turned downward again in the week ending January 18. The ABC News/Washington Post poll of Consumer Comfort dropped considerably from -49 to -53, again nearing a record low after several stable weeks. The survey revealed that some 95% of those polled had negative feelings about the economy. President Obama’s team will need to provide a large dose of enthusiasm if the expected $1 trillion stimulus package is to do the most good.

With the MLK holiday and the inauguration balls and parties behind us, a full week of work is on tap for next week. Among those working will be the Federal Reserve Open Market Committee, which conducts its regularly-scheduled meeting on Tuesday and Wednesday. While it won’t feature a change in interest rates (for the first time in quite a while), we do expect a bit of revelation about the new asset-backed support facility that’s coming on line very soon. Along with that, we’ll probably see a brief synopsis which details a very shaky economy and a Fed which is both looking for and working with the new Administration to develop or expand appropriate programs to lend support.

The Fed meeting comes in a week with a slew of new economic data — everything from new and existing home sales, various local measures of factory health, the Index of Leading Economic Indicators, the first look at 4th quarter 2008 GDP (ouch) and other important considerations. We don’t expect anything in the data to produce enough surprise to move mortgage rates upward to any degree, and certain of the news could be sour enough to pull them down somewhat. We’d opt for “down somewhat,” and wonder if home sales (especially existing) will beat forecasts.

For our latest long range view, take a look at our new two-month forecast.

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