HSH MarketTrends

New Lows for Mortgage Rates, Barely

September 21, 2012 — A week has passed since the Fed’s latest bold move to stimulate the economy and nurture the housing recovery, but anyone expecting a huge downturn in mortgage rates would be disappointed by the initial response. Mortgage rates did trickle lower this week, enough to step into new record low territory, but it was by just a whisker for the most popular kind of loan.

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 a single basis point (0.01%) to 3.82%, a new record low for the series; as well, the FRMI’s 15-year companion held at a record low of 3.10% for the week. FHA-backed 30-year FRMs downshifted by seven basis points, and the most viable option for credit- or equity-impaired borrowers dipped to a new low of 3.35%, while the overall average rate for 5/1 Hybrid ARMs finished the weekly survey at 2.70%, shedding three hundredths of a percentage point to establish a new record low.

The Fed’s influence in the market should produce lower rates, but gently, and over time. We believe that the cumulative benefit of the Fed’s action to be valued at perhaps a quarter of a percentage point. Of course, this is a moving target, since at any time it is relative to where rates would be, absent the Fed’s manipulation of the market.

See this week’s Statistical Release and Trend Graphs.

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Troubled though it is, housing has been one of the brighter spots in the economy this year. Refinancing has lowered household obligations and is supporting both savings and spending, while home sales have perked up enough to produce at least some wide-ranging economic benefit.

Reflecting the improving market, the National Association of Homebuilders index of member sentiment continues to edge higher, with the reading of 40 for September the highest such value since June of 2006. Even with the continued gains, readings here below 50 indicate a sub-par climate, although considerably less so than at any time in more than six years. Sub-indexes in the report covering present single-family sales levels moved up (+4 points, to 42), but traffic at showrooms and model homes climbed just a single point to a still-weak 31. Given these minor rises, it is hard to reckon how the measure covering expectations for the next six months jumped eight points to 51, indicating actual optimism about the future, but it is an encouraging sign, regardless.

Some of the gain in builder moods was no doubt due to the 2.3% rise in housing starts in August. Construction initiation of new homes rose to a 750,000 annualized rate and stands a whopping 29% above year ago levels. Starts of single family homes firmed up a bit even as multifamily construction slipped a little. Permits for future activity eased by 1% but are still relatively solid, closing August at a 803,000 (annualized) rate.

Construction and sales of new homes compete to some degree with sales of existing homes. Existing home sales increased by a stout 7.8% in August, rising to an annualized rate of 4.82 million units. This was a substantially better pace than was expected, and the rise in sales was accompanied by other encouraging news, too. Despite a 2.9% rise in listings for the month, inventory levels held at a fairly normal 6.1 months of units available, and prices continue to show signs of recovering, with August’s median home price some 9.5% above year-ago marks.

Part of the Fed’s hope in manipulating mortgage markets is to spur home sales but also to cause inflation… specifically, inflation in home prices, which would represent a recovery of equity for many homeowners, not to mention trim losses for lenders, investors and taxpayers alike. Of course, there are limits to the benefit low interest rates can provide, absent fiscal policy which supports them more fully. Those fiscal policies might foster increased employment growth, which in turn would produce some additional homebuying demand, which would further the Fed’s goals.

Unfortunately, there are many economic challenges and few attempts at solutions, so we slog along. Hiring has been rather weak of late, with the latest indication from new unemployment claims suggesting no imminent or significant improvement in sight. During the week ending September 15, some 382,000 new applications for unemployment benefits were filed, little changed from the week prior, with both weeks rather above the figures seen in August. It’s too soon to say that another ugly employment report is on tap in just two weeks’ time, but it sure looks that way at the moment.

There is little doubt that the downturn in Eurozone economies and China have trimmed exports, hurting our manufacturing base. Local reports on the state of factory activity by the New York and Philadelphia Federal Reserve Banks both found poor conditions in their respective surveys. The New York Fed’s Empire State index slipped to minus 10.4 during September, a second consecutive negative reading. Just six months ago, this indicator was at a pretty strong 20.2, so the downturn has been both swift and sharp. Over in the Philadelphia Fed’s district, things weren’t quite so bleak, even as their gauge put in a fifth consecutive month in negative territory. The -1.8 September reading was actually an improvement over August and part of a three month upward trend, and new orders turned positive for the first time since April. Still, there was little positive news to be taken from either report.

All the news about the troubled economy filling the headlines makes the general improvement of late in consumer moods seem all the more out of place. The weekly Bloomberg Consumer Comfort Index is case in point, since it has been in an improving trend for weeks now, despite rising gasoline prices and headlines reporting little but trouble. Perhaps it is the resurgent stock market which is promoting sunnier dispositions, but whatever the case, the indicator rose to a seven-week high of minus 40.8. That said, this is still a very dark reading, well below recovery highs or levels which would be considered normal, but also fairly above recession lows, too.

Those improving moods maybe tempered somewhat if the index of Leading Economic Indicators is correct. The 0.1% decline in the LEI for August was a considerable retreat from the 0.5% rise in July, and may point to some additional economic slowness in the months ahead. However, the LEI may better reflect the period in which its components were gathered, so it might simply be saying that it was a pretty poor August we endured, rather than to expect any new downturn in the coming months.

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 Sep 14 Aug 17 Sep 16 6-Mo. TCM 0.13% 0.14% 0.04% 1-Yr. TCM 0.18% 0.19% 0.10% 3-Yr. TCM 0.33% 0.40% 0.35% 5-Yr. TCM 0.68% 0.78% 0.91% FHFB NMCR 3.66% 3.67% 4.62% SAIF 11th Dist. COF 1.094% 1.116% 1.338% HSH Nat’l Avg. Offer Rate 3.83% 3.90% 4.38%

At the moment, we would appear to be in a bit of a holding pattern. The buildup to a hoped-for move by the Federal Reserve has come and gone, and the new program in is place. There is no additional fiscal stimulus coming to join the Fed’s move, and limited though it will likely be, the Fed’s move will take time to have more beneficial effect. In the meanwhile, we can do little but sit and hope that the economy continues to hold steady or even grind higher.

Next week brings a few indicators of note, including new home sales, the final look at second quarter GDP, a couple of readings on consumer moods and more. Mortgage rates eased into new record space this week, and that’s probably going to be the case next week, too, as the Fed continues to push its way into the market.

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

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