HSH MarketTrends

Mortgage Rates Flat; Summer of Same? Plus New Two-Month Forecast

June 22, 2012 — With another weak of relatively disappointing economic news to digest, mortgage rates drifted aimlessly, collectively bouncing slightly off recent lows, if moving at all. Meanwhile, the Federal Reserve held a two-day meeting to decide what, if any, additional support could be put into place to help the economy. In the end, the response was simply more of the same as they will continue both Operation Twist and buying mortgage-backed securities through the end of the year.

Since broad-market interest rates and mortgage rates are both lower than when the Fed began Operation Twist, it seemed logical that they would continue the process. We thought that would be the case all the way back in April’s two-month forecast, when we said that we believed the Fed would vote to continue the program until the end of the year. We’re pleased to see that they agreed with our assessment.

Mortgage rates are both lower than they would be and more stable as a result of the program.

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 was unchanged, holding at a record low of 3.98% for the week. The FRMI’s 15-year companion added three basis points (0.03%), rising off last week’s new bottom to 3.27%. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages shed a single basis point, landing at 3.66%, while the overall average rate for 5/1 Hybrid ARMs finished at 2.90%, a rise of just 0.01%.

See this week’s Statistical Release and Trend Graphs.

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Low and stable mortgage rates are a key component to the gradual revival of the housing market. For most homebuyers, the monthly “carry cost” — mortgage payment/taxes/etc — is of chief concern. Affordability is enhanced when one of two things happens: home prices fall and/or mortgage rates do. Home prices have already collapsed, causing tremendous damage to household balance sheets and creating losses throughout the economy. At this point, suffice it to say that few people would really want to see lower home prices. That said, everyone (excepting perhaps fixed-income investors) seems to love lower mortgage rates, and mortgage rates low enough can help spur demand and even foster firmer home values.

A lower mortgage rate can offset a higher home price, since it produces the same monthly payment. A borrower who can afford $1000 a month to buy a home arguably doesn’t care what combination is needed to achieve that $1000 carry cost, provided it is available at both the start and end of a transaction. Reliably low interest rates are crucial in this regard.

For the most part, home sales and homebuilding markets have responded. To be sure, there is no substitute for an improving job market, which is the largest hindrance to substantial improvement, but considerable opportunity is in play for those who are gainfully employed.

The National Association of Homebuilders index of member sentiment continues to wander in weak territory, but the value of 29 posted for June is a new recovery high. Sub-indicators for single-family sales also moved to new highs, while present traffic levels and expectations for activity six months down the road held firm during the month. A reading of 29 remains well below even a mere break-even level of 50, but the indicator is now more than double last June’s reading, so at least some sluggish improvement is evident since then.

The modest improvement for the month came despite a downturn in housing starts in May. New residential construction was initiated at a 708,000 annualized clip during the month, down 4.8% from May (itself upgraded by about 4% in the latest revision). Single-family starts were stronger during the month, and the highest since December 2011, while multi-family cooled to its weakest setting since then. Housing starts are also measurably above year ago levels, and could be considered to be in “fair” territory for much of this year relative to the last couple of years. Permits for future building activity climbed by a stout 7.9% during the months to an annualized 780,000, so the future appears to be brightening somewhat further, too.

Existing homes sold at an annualized 4.55 million clip in May. Although this was a 1.5% decline from April’s pace, it was about average for this year to date. The downturn in sales means an upturn in available supply, which moved up by a tenth of a point to 6.6 months of unsold inventory. Prices, though, are another story. Boosted by somewhat fewer sales of low-price “distressed” properties, prices rose by another 7.9% in May after a 7.8% gain in April. The National Association of Realtors reported that 25% of sales in May were of the “distressed” variety, down from about 31% in the same month a year prior. It is expected that another cascade of low-priced forecloses homes will hit the market soon, but when is anybody’s guess at this point.

Federal Reserve members did update their forecasts for economic growth, which were downgraded from April’s projections. The Fed now expects GDP to run between 1.9% and 2.4% for the whole of 2012; the range was moved down my a full half-percentage point. With almost half the year already gone, the expectation is that growth is unlikely to get much better than that muted pattern which we are presently enduring.

The extension of Operation Twist will encompass an additional $267 billion dollars as the Fed exchanges short notes for long ones, and having a regular buyer reliably in the market should serve to keep influential long-term Treasury rates pretty stable. The continuing MBS purchasing program should do the same for mortgage rates, for the most part.

The Fed did also move upward its expectation for the unemployment rate over the next year or so. There can be no doubt that employment growth has turned down in recent months, and jobless claims have moved upward as well. During the week ending June 16, another 387,000 applications for benefits were processed at state offices, continuing a string of elevated readings which began in mid-Spring and has generally gotten worse in the last month.

Businesses are wary of hiring for a number of reasons. The economic malaise overseas is no doubt among them, let alone an unclear tax and regulatory environment coming up. The latest report from the Philadelphia Federal Reserve covering manufacturing activity in its district failed to find much of it, as their index moved from -5.8 in May to -16.6 in June. Perhaps concerns in the Philly district are more affected by trade to Europe than other regions may be, or perhaps this is a harbinger of a broader slowdown. We get a wider national look at factory activity in about ten days’ time, but this report was pretty discouraging about the amount of forward momentum the economy has.

The future will be brighter, if the latest index of Leading Economic Indicators can be believed. The forward-looking indicator moved 0.3% higher in May and suggests that at least moderate economic growth should persist as we wend our way more deeply into Summer. The LEI isn’t a perfect forecasting tool, though, and may better reflect the conditions in the month its components are gathered than future ones.

Consumer moods turned a little darker during the week ending June 17. The weekly Bloomberg Consumer Comfort Index shed 1.5 points to move to minus 37.9 for the period. The value is about the same as a couple of weeks ago, and is in the middle of a recent range, so there’s no discernable trend to see at the moment.

At the very least, we’re in a soft patch in the recovery. There are plenty of risks which might further derail economic growth, with a number of them outside of anyone’s direct control. The conditions which foster needed confidence to move the economy forward don’t seem to be in play at the moment and it is an open question whether they will to any degree in the near future. Meanwhile, the Federal Reserve and other central banks are doing what they can to address individual and collective problems which aren’t insurmountable but will require protracted solutions. There is no quick fix for any these issues, and so we are likely to continue to stumble along. That said, we think there are some pretty powerful supports for the US economy forming, lower energy prices among them, but those also will take time to work. At this point, it seems like it’s going to be a long, slow summer to us.

A few notable points of economic data are due next week. New Home Sales are of interest, as is the final revision to first quarter GDP and the final June report covering Consumer Sentiment. It’s hard to expect any kind of marked improvement over recent trends for any of these. Mortgage rates should be roughly the same by the end of next week.

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

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