Stability For Fixed Mortgage Rates

May 9, 2008 -- The overall average for 30-year fixed rate mortgages eased by two basis points this week as HSH's Fixed-Rate Mortgage Indicator (FRMI) slipped to an average rate of 6.53%. The FRMI includes rates for conforming, jumbo and the new "expanded conforming" mortgages. Meanwhile, the overall average for 5/1 Hybrid ARMs shed 20 basis points, dipping back to 6.16%, the lowest such average in about two months.

Conforming 30-year fixed rates moved slightly closer to 6%, sliding by five basis points to close the survey period at 6.03%. Jumbo rates, though, kicked two basis points higher, so the differential between the two series widened back to 115 basis points.

While we may be teetering on the edge of a recession (or, as some claim, may already be in one), the new economic data out this week was pretty fair, on balance.

After three consecutive months in "declining" territory, the Institute for Supply Management's report on activity levels at service-oriented businesses popped over the 50 mark in April, signaling a return to growth. Since the US economy is predominately a service-led one, improving activity here may serve to offset declines in manufacturing-related industries, which were struggling but steady at last report. Costs, however, continue to rise, and the 'prices-paid' subindex of the ISM Services report nudged higher during the month.

Although the Mortgage Bankers Association reported a 15% lift in applications this week, those inquiries face higher and more hurdles to clear to be accepted in this market. The Federal Reserve's second-quarter survey of Senior Loan Officers noted that credit standards are still rising at the nation's banks and thrifts. According to the report, almost 63% of respondents raised the bar for "prime" mortgage borrowers, almost 78% did for subprime borrowers, and about 76% for those seeking "non- traditional" (such as interest-only and PayOption ARM) mortgages. Despite those challenges, demand for mortgage loans actually improved somewhat, declining at a slower pace than that seen in the first quarter of the year.

While inflation of course remains a concern, what with food and energy prices roaring, the good news is that those price pressures haven't yet begun to seep into wages, which would cause even bigger headaches for the Fed. One key offset to inflation is increasing worker Productivity, which flared higher by 2.2% in the first quarter of 2008, an unexpected increase from Q407's 1.8% gain. With the move higher, the cost of labor included in each measured unit of production also edged 2.2% higher, and that was actually down from 2.8% in the 4th quarter. Rising productivity means that businesses can pay more without needing to raise prices, but it also means that fewer new workers are needed to produce the same amount of goods.

One reasonable proxy for actual retail sales is the monthly report which covers the sales of major "chain store" retail concerns. After a half-percent decline in a tough March, April chain-store sales moved 3.6% higher, powered by a 9.2% gain at warehouse clubs. Concerns that consumers would retrench, thus worsening the downturn, were at least party allayed by the report. That increased spending was probably "put on plastic" if the latest Federal Reserve report covering Consumer Credit is right. In March, borrowing on credit cards and non-real-estate installment loans expanded by some $15.3 billion, a near-tripling of February's draw. Non-revolving credit (auto loans and such) rose by $9 billion while credit card balances grew by $6.3 billion.

That unexpected gain in sales and spending resulted in a decline in stockpiles at firms which sell goods at wholesale to retailers. Wholesale Inventory levels declined in March by 0.1% as sales moved 1.6% higher during the month. That moved the ratio of goods on hand relative to sales back to a cyclical low of 1.09 months of available supply. With a little luck and faith, this should result in an increase in orders to manufacturers and provide some lift to that sector of the economy.

There should soon be a little goose to retail spending from the "economic stimulus" checks, the first of which hit the mail this week. The hope is that recipients will spread those dollars around, and not just use them as a gasoline or food subsidy for the summer. We'll see.

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Manufacturing has largely been living on exports for the last year or so, as the weak dollar has made our goods much more competitive in world markets. The recent firming of the dollar may slow that somewhat, but for the moment it seems to also have served to slightly narrow our imbalance of trade. In March, the gap between what we imported and what we exported closed a bit, and now stands at $58.2 billion. Although slowing economies in other places saw our exports ease by 1.7%, the more pronounced domestic slump saw imports fall by 2.9% for the month. One reflection of the reduced demand here was that imports from China (with whom we run our largest deficit) fell by over $2 billion.

Weekly unemployment claims started May on a better note, with a 18,000 decline in new application for benefits. The 365,000 new entries filed during the week ending May 3 was about square in the middle of the recent range and seems to suggest some leveling out for layoffs, at least for the moment. However, hiring remains non- existent at the moment, so those laid off may have a tough time trying to find new employment opportunities.

The steady drumbeat of higher gasoline prices continues to crimp enthusiasm among consumers. The ABC News/Washington Post poll of Consumer Comfort set a new cycle low of -46 for the week ending May 4. It's a fair bet that moods measured here will continue to darken until prices improve, but with oil cresting over $125/barrel this week, and the "summer driving season" nearly upon us, it's not likely to happen any time soon.

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With the economic news mostly stable and price pressure fresh in everyone's mind, there's little reason to expect any sort of strong downturn for mortgage rates anytime soon. In fact, some slight upward pressure is in place at the moment, and a slew of new data is out next week covering Retail Sales, inflation, Industrial Production and Housing. If we're approaching some form of economic stability (or even slowing in the rate of decline) as we started the second quarter of 2008, we should see it reflected here. If it does indicate that, the overall FRMI should nudge a couple basis points higher.

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