July 6, 2012 — Given the increasingly bleak economic data, no one should be very surprised that mortgage and other interest rates are finding some additional space to fall, even if that fall is measured in only hundredths of a percentage point.
With each report, it becomes more clear that the US economy is close to stall speed, and that the slowdown in the economies of our trading partners is having a considerable effect. Several central banks took action this week to lower interest rates, which may ultimately help, but there is little immediate benefit to be seen.
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 declined by two basis points (.02%), easing to a new record low of 3.96%. The FRMI’s 15-year companion also managed a decline of two basis points, landing at 3.25%, just a lone basis point above a record low. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages shed eight basis points to slide to an incredible 3.58%, while the overall average rate for 5/1 Hybrid ARMs finished at 2.88%, a decline of a just 0.01% but enough to set a new low.
See this week’s Statistical Release and Trend Graphs.
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The American economy cannot lift the world if so many people remain unemployed. Job growth in June was a meager 82,000, capping off a quarter where the total of new jobs created (225,000) wasn’t even as strong as February’s monthly gain (259,000). The nation’s official rate of unemployment remained at 8.2% but many potential workers have simply stopped looking for work and aren’t even counted.
Pointing fingers about who is to blame is always in vogue during an election year, and this one is no exception. However, the overhang of pending but yet unwritten financial regulations, a “fiscal cliff” of tax increases and automatic spending cuts slated for 2013, the unclear effects of universal healthcare, the impending election and the Eurozone debt crisis are all contributing to the stasis in which we find ourselves. With no clarity as to the path ahead and uncertain prospects, who can blame businesses for a cautious stance on adding new employees?
While there is little hiring, at least layoffs aren’t skyrocketing. The outplacement firm of Challenger, Gray and Christmas tabulated 37,551 announced layoffs in June, down from 66,887 and a return to trend after a bump higher in May. Weekly unemployment claims settled a little lower in the week ending June 30, with the 374,000 new applications for benefits the lowest figure since the week of May 19. Unfortunately, weekly revisions have all been upward in recent months, and a portion of the 14,000 drop for the week seems certain to be revised away.
HSH has several lengthy series of statistics dating back to the 1980s for FRMs and ARMs, Conforming, Jumbo and FHA products. These can be licensed for use — interested parties should inquire here.
Manufacturing has played a vital role in moving the economy from recession to recovery. However, a fair bit of goods produced here are sent overseas, and with those economies struggling, factory activity has cooled appreciably. As recently as April, the Institute for Supply Management’s report covering manufacturing strength was at a solid 54.8 level; two months hence, and we have dipped below breakeven to a 49.7 mark in June. New orders have dried up quickly amid uncertain times. There is not much momentum from manufacturing to push us forward as we enter the second half of the year, but at least the employment sub-index held steady, so optimism about the future hasn’t yet been crushed despite the downturn.
If factories cannot pull us forward very strongly, then service-related businesses must. There was a loss of forward progress here as well, as the ISM non-manufacturing survey shed 1.6 points in June to end at a mildly-positive 52.1 for the month. While still in the black, it was the lowest level for the gauge since January 2010 and is part of a four-month slump.
Not all the latest news was dark or at least as dark by comparison. Construction spending rose by 0.9% in May, pressed higher by a full 3% gain in spending on residential projects. Commercial building rose by 0.4%, but public outlays continue to dwindle, losing another 0.4% as cash-strapped governments continue to trim projects. Spending for public projects — schools, roads, bridges and the like — has now declined for five consecutive months.
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Sales of new vehicles rose to an annualized 14.1 million units in June, according to AutoData. That was a lift of 200,000 from May, and pretty solid, if below recent peaks. That auto sales are holding up fairly well does provide some support for manufacturing, where there are plenty of headwinds at the moment. Also providing some support was a 0.7% rise in May in the broadest measure of factory orders, which reversed a like decline in April. Both durable and non-durable goods orders edged higher during the month.
It would be hard to expect consumer moods to improve by much, given all the troubles in the headlines. That said, they are holding up reasonably well, as least those reflected in the weekly Bloomberg Consumer Comfort Index. The CCI did have a slight decline in the week ending July 1, slipping 1.4 points to a minus 37.5 mark. Despite the decline, the indicator still compares favorably to values notched at its bottom in the low negative 50 range, which occurred not all that long ago.
There’s not a lot of good news to report. Undoubtedly many homeowners and homebuyers are happy to see mortgage rates at new record lows. For us, we would trade slightly higher rates for some additional economic growth, a sliding unemployment rate or even some regulatory clarity. All would collectively be healthier over the long haul, and it is worth remembering that these record low interest rates are a symptom of a still-sick economy and floundering financial system.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
With regards to the financial system, we were asked this week about any effect that the LIBOR scandal might have on adjustable rate mortgages. While we cannot foresee any, excepting perhaps stronger oversight of the proceedings of the rate-setting group, it could be noted that it is the one financial scandal which may have benefited consumers, as any bias in the indicator which may have occurred was to the downside, not the upside. To the extent that any mortgages came to a reset point during the period when the manipulation of the key interest rate is alleged to have occurred, that reset rate would have been lower than if LIBOR had not been tweaked.
The issue is probably a fairly moot point from a homeowner’s perspective. ARMs have not exactly been in favor in recent years, and the popular ones have fixed rates for a while before resetting. Lots of ARMs have already been refinanced into fixed rates and closed. Many, many of the ARMs originated when they commanded a sizable portion of the market (five, six, seven years ago) have failed already (notably subprime ARMs). Additionally, although the size of any lower bias to the LIBOR isn’t known, interest rate rounding provisions found in many ARM contracts could have wiped out some or all of the change between a manipulated rate and an unmanipulated one.
It would be hard to expect that there will be much news out next week that will move rates by much; after the employment report today, they will at least start the week headed into new record territory (again). The minutes of the Fed’s last meeting could shed some light into any potential plans for more extraordinary support to come, but there will probably not be much to work with at this point. Consumer credit trends, the producer price index, international trade and consumer sentiment readings round out the news. Lower rates seem in the offing for next week, but you probably already guessed that.
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.