HSH MarketTrends

Mortgage rates continue record-breaking streak

June 8, 2012 — Mortgage rates continue to set new record lows, as the Federal Reserve reported that economic activity expanded at a moderate pace across its 12 districts.

HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages fell by four basis points (0.04%) for the week to 3.99%, a new record low. The FRMI’s 15-year companion shed two basis points (0.02%), landing at 3.27%. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages moved deeper into record lows, decreasing by another four basis points to 3.64%, while the overall average rate for 5/1 Hybrid ARMs finished at 2.90%, another record low for the survey period.

The Fed’s own survey of regional economic conditions pointed to moderate growth in the six weeks leading up to May 25. The so-called “Beige Book” had a slightly more optimistic tone than the previous edition, but only slightly so. With more dark clouds forming both domestically and abroad, “contacts were slightly more guarded in their optimism,” according to the report.

See this week’s Statistical Release and Trend Graphs.

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With the troubles here and overseas so evident, there are some new calls for central banks to do more to spur growth, including our own Fed. The Fed’s present program of exchanging its short-term debt for long-term debt (Operation Twist) is slated to expire at month’s end, and it is not clear what, if anything, might replace it. As noted in our last Two Month Forecast, our own expectation is that the Fed will extend the program to the end of the year. Rates at or near record lows have no doubt provided some economic support; however, if already record-low rates aren’t enough to spark serious demand it seems unlikely that even lower ones will.

Low rates are great, but their benefit is limited to those who want or need to borrow. That want or need is narrowed down to thosewho actually can borrow, which is controlled by underwriting standards. Those who are well-aligned with today’s more rigorous standards are certainly enjoying the benefits of financing or refinancing debt at fantastic rates. That said, there remains a sizable group of would-be borrowers who cannot successfully overcome the hurdles to get access to today’s great rates, and so their beneficial economic effect becomes muted.

More direct and beneficial stimulus comes from jobs, wage gains, tax rebates or credits, or a material change in the costs of regularly-purchased goods, like food or gasoline. In this regard, falling gasoline and oil prices should eventually provide some additional support for the economy. Late in the recession/early in the recovery (in June 2008), gasoline prices rose to a record of over $4 per gallon. Although prices did retreat for the remainder of 2008, it was too late to keep that spike from crushing economic growth, which retreated from a positive 1.5% rate in the second quarter to a negative 6.4% by the first quarter of 2009, a full nine months of declining growth.

Gas prices hit a relative rock-bottom of under $2 per gallon at the end of 2008 and early 2009, which provided a spark of growth. By late 2009, just about nine months later, growth had rebounded to a 5% rate. During that early stage of the expansion, gasoline prices had risen and stabilized at a moderate level of about $2.70 per gallon and held there for about nine months, supporting GDP growth, which held at nearly a 4% rate through mid-2010.

In October 2010, another spike began to form, with prices rising from the $2.70 range above to almost $4 per gallon by May 2011. As you might expect, this again crushed growth, which dwindled to a 0.4% rate for GDP by the first quarter of 2011.

As gas prices declined for the remainder of the year, GDP growth perked up. The more than 70-cent-per-gallon slide boosted growth from a 0.4% rate in the first quarter to nearly a 3% rate by years’ end. However, the economic wind was taken out of the sails by a spike in gas costs which peaked at nearly $4 a gallon again in March and April of this year. They have again started retreating, shedding about 30 cents per gallon so far, but the damage seems to have been done.

This recent experience suggests two things: first, the slowing of GDP growth from a spike in gasoline prices to near- or record levels takes several quarters to be fully realized, as does the inverse, which is the benefit from falling costs. We may only be experiencing the middle portion of the spike-induced slowdown at the moment, which may take the rest of the summer to fully overcome. The benefit from falling prices would accumulate thereafter, but the decline in prices has so far been less than half of the increase from the late 2011 bottom, and while very important given the soft state of the economy at the moment, the additional lift to GDP later this year might only be a mild one.

Provided the economy does nudge higher, the latest report on worker productivity suggests that companies will need to do some hiring to meet that increase in demand. Worker productivity slumped by a revised 0.9% in the first quarter of 2012, as exhausted workers putting in longer hours failed to raise output. The 0.9% decline was accompanied by a muted 1.3% increase in labor costs, and any wage-generated inflation remains tame.

Perhaps the best available measure of the nation’s service-related business activity comes from the Institute for Supply Management. The latest ISM survey of non-manufacturing concerns showed a slight increase in activity, with their gauge rising to a reading of 53.7 in May from 53.5 in April. Although orders firmed up after a soft April showing, the sub-index for hiring fell to just above flatline. Perhaps the pickup in new orders will lead to some additional hiring as we move into summer. That activity firmed somewhat is encouraging, given all the challenges
facing the economy.

We already know that factory activity slowed a little in May. Arguably, that was fostered by a 0.6% decline in new orders in April. Factory orders have seen declines in three of the first four months of 2012, as cautious business investment and some of our trading partners’ economies in recession are fostering a slow period.

Consumer moods have been brightening a little of late. The latest Bloomberg Consumer Comfort Index rose to four year highs earlier this year, then slumped back to recession-range values in May. After increasing to a four-week high minus 39.3 reading during the week ending May 27, the latest value of minus 37.6 continued the upward trend.

Although the relationship is tenuous at best, happier consumers are thought to spend more. To spend more, one must earn more income, use savings or take on new debt. Consumers have been adding more debt this year, but the increases in consumer credit have largely come in installment-type lending, as a spike in new student loans has added to a rebound in auto-related borrowing. In April, consumers increased borrowing by 6.5 billion, with installment debt rising by 9.96 billion, while credit card debt decreased by 3.4 billion, the first decline since January.

More borrowing and more spending will come when the job market improves. That being the case, conditions haven’t been improving this spring, where initial claims for new unemployment benefits have been firm at a rather elevated level. For the week ending June 2, some 377,000 new applications were filed for assistance, down from 383,000 the week prior. In late spring, claims were routinely moving downward and even cracked below the 360K mark for a short time before bouncing higher again. We will need to see claims descending in a regular basis again before we can say that the job market is on the mend at last.

The U.S. trade deficit narrowed to $50.1 billion in April. Pricier oil had helped widen the gap earlier this year, but those effects have settled somewhat. For the month, imports fell by 1.7% to 233 billion, while exports fell by 0.8% to $182.9 billion, a sign that economies overseas are damping demand for our goods and services.

Given all the issues at hand, there is little reason to expect mortgage interest rates to move very much. There’s also little reason to expect them to continually set new lows day after day, week after week. That said, a little bit of optimism being expressed in stock markets this week should prove enough to keep them from falling to any great degree, too. Next week, we get fresh looks at Producer and Consumer Prices, Retail Sales, Industrial Production and a couple of other reports. Absent new headlines of a collapsing European economy or two, we think that mortgage rates might just move upward a couple of basis points.

For an longer-range outlook for rates and the economy, one which will take you up until late June, have a look at our new Two-Month Forecast.

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