HSH MarketTrends

Mortgage Rates Close Record First Half of 2012

June 29, 2012 — The first half of 2012 has come and gone, leaving in its wake a legacy of record low mortgage rates. Over the last six months, we did repeatedly see those, and expect to continue to see them occasionally as we roll though the summer, as noted in our latest Two-Month Forecast.

The still-slow economy, troubles in euro markets and Federal Reserve policies are all serving to keep mortgage and other interest rates low and stable. At the moment, there seems nothing on the immediate horizon which would change this to any great degree.

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 a third consecutive week. The FRMI’s 15-year companion was also unchanged this week, continuing to stand three basis points off record lows at 3.27%. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages also held firm at 3.66%, while the overall average rate for 5/1 Hybrid ARMs finished at 2.89%, a decline of a just 0.01%.

See this week’s Statistical Release and Trend Graphs.

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We’ve noted on a number of occasions that low and even record low interest rates are great, but it is that they are reliably available which is most key to the recovery of the housing market. That rates can be relied upon to be attractive enough to entice a borrower in at the beginning of a transaction is of little use to them should they no longer be available to complete it. Arguably, this is more important to would be home buyers, as that process can take many months to come to fruition.

We are starting to see some of the benefits of durably low rates, though. New Home Sales rose by 7.6% in May, climbing to a 369,000 annualized rate of sale. While still well below boom-year peaks, and even what would be considered normal, they are also well above the absolute dismal bottoms we saw during the bust. Better still, perhaps, is that homes that are being built are being snapped up, so inventory levels remain quite lean, with just 145,000 units built and ready for sale, about a 4.7 month supply at the present rate of absorption. To meet demand, builders will need to keep building, which in turn is an important support for the economy.

There can be no doubt that the economy began the latest quarter on a soft note, and we have probably downshifted from there. The final reading on first quarter 2012 Gross Domestic Product was unchanged at 1.9%, about 50% less than the level we need to see for a economy which can become self supporting over time. Worse, all indications are that the second quarter is even slower, perhaps running at a 1.4% GDP, but even our first estimate is still a month away.

On that front, economic data from May and June continue to point to sluggish growth at best. The Chicago Federal Reserve’s National Activity Index plummeted from a positive 0.08 in April to a minus 0.45 in May. This amalgam of some 85 economic indicators serves to benchmark whether the economy is growing above or below its natural rate, thought to be about 2.6% GDP or so, and so we are trending downward and away from that level more quickly at the moment.

Orders for durable goods rose more than expected in May. More than double expected gains, the 1.1% gain lends some hope that manufacturing will continue to provide some economic momentum. Orders by businesses rose during the month, another welcome signal. For all that, though, the process is certain to be an uneven one. Reports from two Federal Reserve districts bear this out, with the Richmond Fed’s indicator of activity moving to a negative 3 in June, down from a positive 4 in May. Meanwhile, the Kansas City Fed’s gauge eased from 9 to 3 over the same period, but is still holding in the black with a 9-3-9-3 pattern over the last four months. Meanwhile, a Chicago-area purchasing manager trade group found a slight uptick in their yardstick, which moved from 52.7 in May to 52.9 in June, still holding onto moderate growth. In the first three months of 2012, readings were in the 60s but mid to low 50s is all we have seen over the last three. The national Institute for Supply Management report on manufacturing activity comes out Monday, and perhaps we’ll find a small improvement there, as well.

New claims for unemployment benefits continue to hang at troublesome levels. During the week ending June 23, another 386,000 applications passed through state windows. Readings in the 380-390,000 range have now been with us for five consecutive weeks, and suggest that employment gains for June will be meager at best. The national employment report is due out next Friday; the last two reports have been very disappointing and there’s little reason to believe that this one will be any better. If forced to pick a number, we’d settle on perhaps 82,000 new hires for the month, and even that figure would be an improvement on the last two.

Those with jobs didn’t make any more money in May. Personal incomes did rise by 0.2% for the month, boosted by rising rents and dividends and such; wages, however, were unchanged. Unfortunately, spending was also unchanged in May, the slowest reading since last November. With slightly more income than outgo for the period, the nation’s rate of savings rebounded by two tenths of a percentage point to 3.9%. Some additional purchasing power should come in the form of lower gasoline prices, but that may be partially offset by more driving, which is common during the summer months.

With troubles so evident, it’s little wonder that consumers are finding it hard to generate much enthusiasm. The weekly Bloomberg Consumer Comfort Index did bounce 1.8 points higher, landing at minus 36.1 for the week ending June 24 and continues to move higher as gasoline prices move lower. However, there was clearly less optimism seen in the Conference Board’s measure of Consumer Confidence, which shed 2.4 points to land at a reading of 62.0, its lowest figure since last November. Also, the final June report on Consumer Sentiment from the University of Michigan gave up 6.1 points, falling to a 73.2 level. The decline broke a string of increasing values which began last September, so there can be little doubt that the continual onslaught of bad news is starting to take its toll on consumer psyches. We’ll be interested to see how or if the Supreme Court decision on the ObamaCare law changes moods for better or worse when the next set of reports comes.

So the first half of 2012 has come and gone. We are still in a glass-half-full at best kind of economy, arguably no better nor worse that we started the year. Federal Reserve programs are still in play, financial markets are still in various forms of flux, unemployment is about the same, give or take a little, and there’s no easy or clear path ahead. We remain on a stumbling economic path and seem likely to remain here for some time to come yet.

However, every day that we escape the formation of a new or deeper downturn means a job which isn’t eliminated, even if few new ones aren’t forming with any speed. Each day that interest rates remain low presents an opportunity for a household to recast its balance sheet with a mortgage refinance, or for someone to get a chance to buy a home. Each decline in gasoline or natural gas prices frees up billions of spendable dollars which can be used to support the economy going forward. The siruation at present couldn’t be characterized as great, not by any means, but it still beats the alternative.

A midweek holiday interrupts the important first-of-the-month flow of data. The ISM surveys are on opposite sides of the Independence Day holiday, as are auto sales and weekly jobless claims. All will be overshadowed by Friday’s employment report. Mortgage rates could move lower if a number of these miss the mark, but expectations are pretty low to start with, and the summer holiday season has begun, with its thinly populated and traded markets. We don’t think there will be much by way of change for rates, but a wander of a few basis points upward can’t be ruled out.

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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