August 1, 2008 -- There's nothing like some weak economic news to help mortgage rates to retreat from recent highs. Rates stormed higher in recent weeks on inflation concerns, ongoing credit market troubles, and some spotty signs of firming growth, but aside from credit market difficulties, the other two factors have changed course somewhat.
The overall average noted in HSH's Fixed Rate Mortgage Indicator (FRMI), the overall average interest rate for 30-year FRMs of all stripes -- including conforming, jumbo and expanded conforming offerings -- shed a full tenth-percentage point, landing at a flat 7.00% for the week. The overall average for 5/1 Hybrid ARMs continues to be erratic, declining by 16 basis points to close the survey week at 6.68%.
Conforming 30-year fixed-rate mortgages slid by 10 basis points (.10%), backing off 12-month highs, while 30-year FRM Jumbos eased by nine basis points. The slip pulled jumbos back from a 7-and-a-half-year high, but we're only just barely below those levels.
A bill to help stabilize the housing markets was signed into law this week, the centerpiece of which is the ability for lenders to pull bad mortgages off their books, take an immediate loss, and refinance borrowers into an FHA-backed loan. Some $300 billion was made available by Congress, and some predict that as many as 400,000 homeowners may ultimately be helped. However, the plan is voluntary, and lenders will need to cull through their loan books on a loan-by-loan basis to determine if such a plan (or a loan modification, or even a foreclosure) represents the best chance to recover their money. As such, the process may be a slow one, but loans already in the mid-to-late stages of foreclosure may be immediately affected, provided borrowers can qualify for the new mortgage. Our guess is that it will help some homeowners, but like other initiatives will fall well short of hoped-for goals. Still, it may help to clean up lender loan books more quickly, and that could in turn help promote some additional healing in borrowing and lending processes.
Other features in the new law are designed to subject Fannie Mae and Freddie Mac to more regulation, to make changes to other aspects of the FHA program, and more. One of those aspects dictates that Fannie and Freddie will have commit 4.2 basis points of each loan to an "affordable housing fund," so the cost of mortgage money for conforming loan borrowers has risen somewhat, and the other changes to overhead regulations may boost them, too. We'll need to see how this all comes in to play over time.
These additional changes come to the markets in difficult times. The Fed has extended certain of its lending programs through the end of the year and then some, and is now also offering 84-day loans via the Term Auction Facility in addition to the 28-day facility already in place. The Fed noted "continued fragile circumstances in financial markets," and longer-dated money (as well as a new "options" arrangement) should help keep liquidity flowing in the markets and spread out bank demands for funds somewhat. Recent auctions of money have been well "oversubscribed," meaning the demand for funds has been much greater than their availability. Essentially, the Fed is doing what the private markets cannot (or will not) do: make funds available at a price which can help banks lend money at a profit.
After stumbling below 1% for several quarters, the measure of Gross Domestic Product bounced up to a 1.9% level. That was, however, considered a disappointment, since the market expected as much as a 2.4% clip. Revisions to the last couple of readings noted a greater downshift in the economy, with Q407 now sporting a -0.2% decline in growth. Still, those revisions did leave a 0.9% increase in the first quarter of this year, and the Q2 report was higher still, so perhaps the late-2007 dip was only a temporary stall in the economy. More revisions are sure to come, but we still have a chance to skirt the classic "two quarters of negative GDP growth" which constitutes an actual recession. During the latest quarter the drag of the poor housing market eased a little, subtracting only 0.6% off GDP, as the 16% decline in the housing component of the report was the smallest dip in a year. As far as inflation goes, "core" prices rose by 2.1% during the April-June period, while the overall price index kicked 4.2% higher. Price pressures remain a concern.
However, higher economic costs aren't resulting in higher wage demands, at least so far. Weak employment markets seem to have influenced the Employment Cost Index into just a 0.7% increase during 2008's second quarter, down from a 0.8% clip in the first. In the report -- perhaps the best measure of the total cost of keeping an employee on the books -- wages rose by 0.7% while benefits by just 0.6%. Over the past year, the ECI has risen by just 3%, a fairly tame number. As costs detailed here aren't rising, the Fed may feel a little less need to start raising rates too soon to address inflation, which is running 'hotter' than the Fed is thought to prefer. Regardless, higher prices have manifested themselves in commodities and largely in food and energy costs, areas which monetary policy can't directly address. The Fed next meets on Tuesday to discuss the state of the economy; no change to interest rates is expected.
And employment markets remain weak. The nation's rate of unemployment ticked two tenths higher to 5.7% during July, and weekly state unemployment claims popped up to 448,000 during the week ending July 26, goosed by the re-filing of people whose benefits had previously expired but may be eligible for a federally-backed 13-week extension. Finding a new job continues to be difficult, as new hiring declined by 51,000 in July, the seventh consecutive decline in available jobs. While the decline was milder than expected, and earlier recorded declines we also revised downward, the net loss of nearly a half-million jobs since the beginning of the year points to an economy in or near recession status.
Sales of new automobiles are already at recession levels; the annualized 12.5 million rate of sale during July returned the market to a dismal pace not seen since 1990. The downturn here has been dramatic, as a 16.5 million rate of sale was seen as recently as last August, and we began this year at just under 16 million. Car sale and especially light truck sales have cratered as gas prices skyrocketed.
There were a few less-bleak areas to look at. Manufacturing activity remains uneven at best, aided by the weak dollar's influence on export growth. However, with Eurozone and other major economies showing signs of slowing, even the tepid news here may not hold in the months ahead. In the New York region, a local purchasing managers group found a deceleration in growth, while a Chicago-area one found a little push higher. The Federal Reserve's Kansas City branch saw an unlikely leap in their index, which went from a -13 in June to a +21 in July, a change well out of the recent pattern.
Overall, the Institute for Supply Managements measuring tool came in a a perfectly flat 50.0 reading, indicating zero expansion (but thankfully no contraction) during July. That represented a 0.2 easing from June, and surprisingly, somewhat fewer respondents (although still an overwhelming majority) noted that they paid higher prices for goods. Leveling fuel costs probably helped in this regard, and the recent decline in oil prices seem to be having some additional effect at the pump, so perhaps overall price pressures may get a chance to settle, too.
That would have some beneficial effect on consumer moods. The Conference Board's look at Consumer Confidence ticked a little higher in July, rising to a reading of 51.9 from June's 50.4 level. Attitudes remain quite dark, and if the weekly ABC News/Washington Post poll is any indication, the improvements seen in recent weeks may not persist. During the week of July 27, this indicator slipped six points to -47, all but erasing steady gains made over the past two months. Economic worries and poor employment conditions continue to weigh on psyches.
Looking back to June, construction spending slipped by 0.4%, as the 1.8% drag in spending on new residential projects coupled with a 0.2% decrease in public outlays overwhelmed a 0.8% increase in private commercial building expenditures. Public spending is also said to be being affected but the considerable downturn in miles being driven by Americans; fewer purchases of gasoline mean lower tax receipts for the nation's highway programs, so some projects may go lacking for funds.
Back around to mortgage rates and financial markets, we can't help but hope that with the passage of the housing bill this week, and with Congress taking summer recess, that we might finally find a period we could consider to be the "summer doldrums," where market activity is light and some measure of quiet takes hold. Markets of course remain unsettled, but it has felt a little that way as this week progressed. In addition to the Fed meeting, reports covering personal income, spending and productivity are on tap next week, but it seems unlikely that there will be any significant market movers among them.
This week's 10-basis-point decline in average rates seems likely to be met with another smaller decline next week. Call it a four (perhaps five) basis point retreat at most.
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