May 10, 2013 — There were not many fresh additional economic signals out this week to work with, but with the better-than-hoped for April employment report driving stock markets higher, less might actually be better, since rising equity prices often drag interest rates upward with them.
That was much the case this week, as popular market indicators like the Dow Jones Industrial Index posted new record highs. Given the optimism already expressed here, it does make one wonder what will happen when the economy really begins to fire on all cylinders.
Regardless, the chase for returns higher than the puny ones seen on safe-haven Treasuries is a bit of a siren song for cash, and money flowed out of bonds and into stocks this week, lifting rates. A portion of the late winter-early spring decline in rates was erased this week, and some more seems likely.
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 seven basis points (0.07%) to 3.68%, rising from 2013 lows. Meanwhile, the FRMI’s 15-year companion managed a just five basis point lift (0.05%) to 2.91% for the week. FHA-backed 30-year FRMs followed along with a five basis point increase of their own, trekking to an average rate of 3.31%, while the most popular ARM — the 5/1 Hybrid — stayed closer to last week’s all-time record lows with just a two hundredths of a percentage point (0.02%) blip to 2.59% for the week.
See this week’s Statistical Release and Mortgage Trends Graphs.
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A reinforcing shot of good news about the labor market did come this week, as weekly claims for new unemployment benefits came in at a new low for the recovery. During the week ending May 4, just 323,000 new applications for benefits were filed at state windows. Coupled with the prior week, we have the best two readings here since about 2007. That may suggest that the economy is improving enough to promote both retention of existing employees and that more need to be added, all good news for the economy at large.
If money is the economy’s lubricant, the several-year effort of the Fed to help gears mesh more smoothly may be starting to pay off. The latest survey of Senior Loan Officers found an acceleration in the easing of underwriting standards for Commercial and Industrial loans, continuing a now five-quarter trend. Demand for these kinds of financing was improving, too, so cheaper money may be becoming easier to get for business concerns.
The Fed’s survey also noted another easing in standards for “prime residential mortgages”, with about 8 percent of respondents to the survey noting easier terms and conditions. Given that something on the order of 90% of loans today kowtow to the still-stiff standards of Fannie Mae, Freddie Mac and the FHA, this leads us to a few thoughts, speculations and conclusions.
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First on the thought list is that non-conforming terms (jumbos, etc.) are the most likely to be starting to open up. Of course, that can also be true for ARMs, since lenders tend to like to put them on their books directly and so have more complete underwriting control. Despite the regulatory mess which the result of yet unformed/unclear/uncompleted Dodd-Frank rules, non-conforming and jumbo securitization markets are picking up steam, making lenders more confident in their ability to shed risk by selling products (rather than keeping them).
The second is that even with tight standards, many lenders had instituted “overlays” — add-ons to minimum credit requirements, downpayments and the like — and some of the loosening might be coming in the form of a reduction or elimination of them, so somewhat more marginal borrowers can get a crack at today’s rock-bottom mortgage rates.
The last is perhaps a combination of factors, ranging from more competitive stances by lenders who are trying to keep marketshare and profits flowing (a slowdown in business due to a bump in rates earlier this year is probably a harbinger for what lies ahead). It also may be that, now years after the crisis, that sufficient analysis has been done so as to better understand what constitutes a truly “risky” borrower. As well, a strong run of mortgage-banking profits may play a role, as with home prices again rising, the risk of loss (both present and future) is diminished.
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Fannie Mae reported record profits this week, too, making true reform of the GSEs somewhat less likely anytime soon, since those profits are all being turned back to the Treasury. However, with fantastic profitability comes pressure to do more for beleaguered homeowners and homebuyers, and it wouldn’t surprise us at all to see some tweaking to their underwriting guidelines before long. With so many housing markets now recovering, it is becoming increasingly unjustifiable to charge an “Adverse Market Delivery Fee”, a 0.25 point surcharge added to all mortgages when the markets collapsed several years ago. The original fee first targeted certain areas experiencing trouble, and was later expanded to the entire market. Since the entire market is no longer “adverse”, the fee should go.
Terms may be easier for certain kinds of credit, but that doesn’t necessarily create strong desire to obtain it. Consumer borrowing rose by a modest $8 billion in March, the least amount added to household balance sheets since last September. Although auto sales eased during the month, some $9.7 billion in installment loans for items like cars and education were taken, but that was the smallest amount since last July. Consumers remain wary about adding to their credit card balances, too, and retired about $1.7 billion over the month. Without strongly rising incomes or fresh borrowing, it will be hard for the economy to gain all that much traction, so a muted path seems the most likely course.
Inventory levels at the nation’s wholesalers rose by 0.4 percent during March. We already know that March was the slowest month of the first quarter, and this was reflected in a 1.6 percent decline in sales during the period. Despite the increase in stockpiles and slump in sales, inventory levels remain pretty lean, with just 1.21 months of available supply to move to downstream buyers. Given uncertain final demand levels, all stations of the supply chain have been very cautious about adding to inventories throughout the recovery and that yet continues.
Our Statistical Release features charts and graphs
|Current Adjustable Rate Mortgage (ARM) Indexes|
Consumers may have grown a bit more pensive of late, too. The weekly Bloomberg Consumer Comfort Index stormed higher in early April, but since then has wandered aimlessly, backing and filling, almost uncertain as to how to move next. For the week ending May 5, a reading of minus 29.5 was recorded; that was a 0.6-point decline, but roughly the same as those was seen over the last four weeks. This may signal that the unexpected spurt in hiring for April may be the cause of the upward blip, but that there hasn’t been another one since then.
Mortgage rates moved upward this week a little, and seem poised to do so again next week. We are presently about (n basis points) below the peak for rates so far this year, and while we won’t retest them in the coming week, we may wander back there before too long, should the good economic news persist. Although that may trim the value of a refinance or two, the big picture isn’t changed or diminished: rates will remain near record low levels, and if the Fed can be believed, may be becoming easier to get, too.
For planning purposes, you should figure on another 5-6 basis point lift in the FRMI next week.
For an longer-range outlook for rates and the economy, one which will take you up until late May, have a look at our new Two-Month Forecast.
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