HSH MarketTrends

Mortgage Rates Still Rising

August 17, 2012 — As the economic news has turned somewhat less dire over the last couple of weeks, interest rates in general have firmed. That’s been less the case for mortgages, but they aren’t immune to overall trends, and have nudged off historic bottoms, if marginally so.

The mixed bag of data continued this week. While it’s too soon yet to be sure, there are some signs that the beginning of the third quarter of 2012 began on a stronger path than the second quarter. If the economy even continues to show signs of stability, let alone outright growth, the likelihood of mortgage interest rates firming somewhat increases.

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 rose by two basis points (0.02%) to 3.90%. The FRMI’s 15-year companion increased by one basis point, rising to 3.16%. Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages rose by six basis points to 3.51%, while the overall average rate for 5/1 Hybrid ARMs finished the weekly survey at 2.81%, unchanged from last week.

Of course, the present ground remains shaky at best, and it wouldn’t take much of a scare of any kind to drive cash back to safety, which in turn would push rates back downward, too. With the nascent optimism in the market, the influential 10-year Treasury yield has moved from a daily low of 1.43% on July 25 to a present 1.73% as money has moved from safety to riskier and hopefully more profitable places, but even that increase in yield has translated into only a slight move in long-term fixed mortgage rates.

See this week’s Statistical Release and Trend Graphs.

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Mortgage and other interest rates would also be pressured to move if inflation seemed to be becoming a problem. At the moment, however, it is headed in the opposite direction. Prices measured at the producer level rose by 0.3% in July, a slight uptick from June. The ‘core’ producer price index for finished goods rose a bit more, gaining 0.4% for the month, but earlier stages of production feature declines which will eventually affect final costs in a beneficial fashion. Headline PPI has risen just 0.5% over the past year, while ‘core’ PPI rose by 2.6%.

Consumers don’t pay producer prices, though, but the trend of inflation at the consumer level is pretty steady. For the second consecutive month, the headline CPI was unchanged, registering 0.0% for July. Over the last year, headline CPI now sports a meager 1.4% rise, well below the Fed’s preferred speed limit of 2%. That’s less the case with core CPI, though. Excluding volatile components like food and energy, prices are a little stiffer yet, with the 0.1% rise in July leaving a 2.1% annual rate. The trend for core CPI is one of slight easing, but just barely.

In the early stages of the recovery, it was a growing factory sector which led the way. Lately, though, trouble in overseas markets amid meager demand here at home has dragged manufacturers back to no better than breakeven, for the most part. A couple of regional reports on factory health bear this out, as both are standing in negative territory in July. The report filed by the New York Federal Reserve about the conditions in the Empire State found a contraction in activity, with their index sliding from +7.4 in July to -5.8 in August. Next door, the Philadelphia Federal Reserve reported a slightly less negative stance for manufacturers, as their indicator rose to minus 7.1 in August from a minus 12.9 hole in July. With the national ISM index just below breakeven in July, there is little if any contribution to GDP from manufacturing at the moment.

Industrial Production powered ahead in July, rising by 0.6%. Manufacturing contributed the least, with just a 0.5% gain, but mining and utility output were up strongly during the month. Perhaps as important, the percentage of factory floors in active use continues its slow, steady creep upward; before the recession, we routinely held in the low 80% range, and the 79.3% we now stand at continues to slowly approach that. More usage means more people to run equipment and processes, so there should be at least some hiring happening as we move back toward normal levels.

Given manufacturing’s woes, it is a good thing, then, that the consumer has come to life, at least somewhat. After a string of three negative months, retail sales rebounded in July, rising by 0.8% for the month. Gains were seen across the board at retailers of all stripes, and July is the start of the back-to-school shopping season for many areas of the country. It may also be that the fading of euro-worries from the headlines over the last couple of weeks has let a little expression of optimism shine through.

Some of that expression is showing in the housing market, which has moved from being a drag on the economy to contributing to it. Housing Starts did ease by 1.1% in July compared to June, but the 746,000 annualized rate of ground breaking for new homes was above levels seen as recently as this spring and certainly way above year-ago levels. Single family starts did ease a little in July while multifamily construction rebounded nicely after a soft couple of months. Permits for future activity rose by 7.1% to an annualized 812,000 in July, an encouraging sign that the housing market is slowly healing.

That being the case, it’s little wonder that builder moods continue to improve, too. The National Association of Homebuilders index of member sentiment moved to a five-year high reading of 37 in August, as sales of single family homes, traffic in showrooms and expectations for the next six months all moved upward. The increase in the headline index came despite a sharp decline in activity in the Northeast and a more mild one in the west. Low mortgage rates and low prices are producing strong affordability, and at least some buyers are taking advantage of the opportunity.

More would surely do so if they had regular, gainful employment. However, an unemployment rate stuck north of 8% precludes that, even if layoffs have settled back into an area which suggests modest new job creation is to be expected. During the week ending August 11, another 366,000 new souls put in applications for unemployment benefits, a figure virtually unchanged from those seen the last three or four weeks. As the July employment report surprised on the upside with 163,000 new hires, the present level of layoffs suggests a similar figure might be in the offing for August, too.

Our Statistical Release features charts and graphs for 11 products, including Hybrid ARMs. Our state-by-state statistics are now here. Current Adjustable Rate Mortgage (ARM) Indexes Index For the Week Ending Previous Year Aug 10 Jul 13 Aug 12 6-Mo. TCM 0.14% 0.15% 0.07% 1-Yr. TCM 0.18% 0.20% 0.11% 3-Yr. TCM 0.36% 0.36% 0.35% 5-Yr. TCM 0.71% 0.63% 0.99% FHFB NMCR 3.67% 3.78% 4.74% SAIF 11th Dist. COF 1.116% 1.118% 1.360% HSH Nat’l Avg. Offer Rate 3.88% 3.91% 4.53%

Rising gasoline prices and back-to-school madness seem to have ruined consumer moods of late. The weekly Bloomberg Consumer Comfort Index continued a downward run in the week ending August 12, putting in a fifth consecutive decline. Another 2.5 points disappeared from the indicator, and the minus 44.4 value is closer to recession lows than to recovery highs. That said, a less dour outlook was seen in the latest survey from the University of Michigan, where their Consumer Sentiment index put in its best showing in three months. The 1.3 point uptick in the indicator to 73.6 in the preliminary August report suggests that even if things aren’t improving much, they are not deteriorating, either. If nothing else, consumer sentiment has stabilized at least, albeit at levels well below 2012 peaks.

Even if present times aren’t perceived as great, perhaps things will get better before long. The latest index of Leading Indicators rose by 0.4% in July, recovering from a 0.4% drop in June. If the LEI’s forecasting prowess can be trusted, the economy should be improving over a period as long as the next six months. However, the LEI is arguably better at reflecting the economic conditions in which its components were gathered and is an imprecise forecasting tool. That said, it is fair to say that the third quarter of 2012 began much improved over the end of the second.

At the moment, mortgage rates continue to wander around aimlessly. That’s to be expected in a time of mixed economic messages, where both sunny and cloudy patches hold sway at different times. At the moment, we’re more in a partly sunny environment, with modest optimism and greater attention to positive over negative news, but there are plenty of clouds which could easily blot out the sun at a moment’s notice. For the moment, there’s no reason to expect much movement in mortgage rates, and we’ll probably see a couple of basis point wobble in the averages at most over the 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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