HSH MarketTrends

Rates Tip Backward; Stimulus and More Coming

February 13, 2009 — A weeks-long run of rising mortgage rates ended this week despite vague pronouncements from the new Treasury Secretary about forthcoming plans for the second $350 billion of TARP money. Bond markets couldn’t seem to make up their minds, alternately rallying and then selling off amid legislative actions and stock market swoons.

For the week, HSH’s overall average for the cost of mortgage money — our Fixed-Rate Mortgage Indicator (includes conforming, jumbo and ‘expanded conforming’ interest rates) — dropped by eighteen basis (.18%) points to land at 5.76%, the lowest such average in a month. As mortgage rates have risen over the past few weeks, there has been a corresponding slide in applications for home loans, according to the Mortgage Bankers Association of America. Among other factors, at least some of the increase can be attributed to lenders pricing ‘defensively’ to temper an unmanageable crush of business, and it would seem that the crush has subsided enough to warrant an attempt to attract more business.

The FRMI’s 5/1 Hybrid counterpart also eased, shedding thirteen basis points (.13) to close the week at 5.54%. Conforming 30-year FRMs led the charge downward, falling to 5.26%, while jumbos managed a decline of fourteen basis points.

December’s poor economic numbers continue to wander out from their respective sources, but that month’s truly poor showing is fading further in the rearview mirror now. That said, the latest measures of inventory stockpiles at wholesalers, retailers and manufacturers all sported declines during the month. This would be a good thing if the drawdown was due to an increase in demand, but the fact of the matter is that sales have been declining faster than stockpiles are being depleted. This means that the ratio of goods available relative to sales continues to increase… and that means there’s no need for any new orders to be placed at the moment.

However, that gloom must be tempered, at least a little, by the unexpected 1% increase in Retail Sales in January. Typically a low-volume month, forecasts called for another decline in sales to be added to a six-month string of declines, but the expected 0.8% drop was handily beaten by the gain. With the exception of furniture and building-related outlets, increases in sales were fairly across the board; even after excluding auto and gasoline sales, the “core” retail sales figure boasted a gain of 0.8%. Falling prices, big sales events, gift cards and other factors probably contributed to the increase, but after six months of closed purses, it could just be necessity buying which drove sales upward. Whatever the reason, it is warming news amid a cold retailing winter.

The nation’s imbalance of trade remained fairly steady in December, held down by near-like declines in both imports and exports. After running between $50 and $60 billion though October, the collapse of oil prices and the global economy narrowed that gap by about one third, and December’s $39.9 billion difference was almost identical to November’s $40.4b figure.

On Friday, the House passed a revised $787 billion spending plan to stimulate the economy, and the Senate is expected to continue its work through the weekend. How much the economy is improved and at what speed is a matter of conjecture, but we will be seeing billions and billions of dollars loosed in the weeks, months, and years ahead. Only about a third of it will come in the form of tax relief to most Americans, who will see a tax cut of $13 per week.

Bowing to political reality transformed the bill that was supposed to be about jobs into a massive spending spree that even many of its proponents concede may not provide much of a stimulus to the economy.

One of the provisions of the bill will move the upper limit for the “expanded conforming” mortgages eligible for purchase by Fannie Mae or Freddie Mac back to $729,750, just weeks after the old program expired and was replaced by a $625,500 limit. Since jumbos make up a fractionally small proportion of the market anyway, and given last year’s limited success of the program (we estimate perhaps $25 billion of expanded loans written by Fannie, Freddie and the FHA — out of perhaps $700 billion total), and that the ‘maximum maximum’ will be available in just a handful of markets anyway — we wonder why so much concern is being expended to a truly small portion of the marketplace. We’re sure the politicians have their reasons, but it does re-confuse matters for mortgage originators.

Weekly unemployment claims numbers eased back a little after spiking to 631,000. For the week ending February 7, some 623,000 new applications for benefits were filed at state windows. Of course, increasing unemployment would tend to batter consumer psyches, and that does seem to be the case. The preliminary February reading for Consumer Sentiment by the University of Michigan saw a decline from January, sliding to 56.2 from the prior 61.2 mark. A less marked decline was seen in the weekly ABC News/Washington Post poll of Consumer Comfort, which lost a single tick to -53 during the week ending Feb 8. Whipsawing markets and a charged political environment are probably contributing to the darkening of moods.

With some form of “loan modification/foreclosure prevention” plan due in “weeks,” several of the nation’s largest banks announced a three-week moratorium on foreclosures. Treasury Secretary Geithner re-emphasized that some $50 to $100 billion of the remaining TARP money would be put to work, but released no details of the plan. The markets roiled in disappointment at seeing few concrete plans for the so-called TARP II money, since they had hoped that the new administration had been working on such plans since the election. At present, we can only sit and wait for details to come, much as we’ve done for weeks now.

The on-again, off-again nature of the government’s eventual forays into the private sector makes it hard to have a firm sense of the direction or even shape the markets will be in from day to day. If consumers can be said to be lacking confidence, these markets can be said to be lacking leadership, or at least a clear sense of how the marketplace will be changed by new and expanding Federal influences.

Monday is a bank (and HSH) holiday for President’s Day. Three-day weekends haven’t been exactly kind to the markets in recent months. After that, we do get a few key pieces of new data, including the builder sentiment index, plus housing starts and building permits (can’t imagine much cause for optimism in these at the moment), but the minutes of the last FOMC meeting may be revealing.

Rates unexpectedly eased this week, but we’ll bet that decline’s over for now, and that rates won’t move much in either direction next week (absent government influence, of course).

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

And for today’s top stories, see our HSH Finance blog. For a longer-term analysis, check out our Two-Month Forecast.

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