June 12, 2009 -- After rising for several weeks, the storm for mortgage rates may be abating. With an intra-day run-up which saw its yield above 4% for a time, the mortgage-influential 10-year Treasury downshifted to 3.79% by late Friday, shedding more than 20 basis points (0.20%) off the week's peak. That may not presage a huge fall in mortgage interest rates, but should be sufficient to stop and at least partially reverse the upward trend.
The strong flare in rates -- attributed to a number of concerns, from inflation potential, undisciplined fiscal policy, and a moderating recession -- serve as a reminder that even in this great period of government intrusion, private markets still retain considerable power.
For this week, HSH's overall measure of the cost of mortgage credit -- our Fixed-Rate Mortgage Indicator (FRMI), inclusive of conforming, jumbo and "high-limit" conforming data -- moved 22 basis point higher to land at 6.04%, the highest such reading since November 28, 2008, the week when the Federal Reserve first began its programs to manipulate mortgage rates. For 5/1 Hybrid ARMs, the overall average moved 20 basis point upward, finishing the survey week at 5.44%.
Conforming and FHA-backed loans make up the majority of the marketplace. For those, the increase this week was 29 and 36 basis points respectively, with a zero-point 30-year Conforming loan averaging 5.80%.
The rise in rates has certainly put a damper on refinancing plans. According to the Mortgage Bankers Association of America, applications for refinancing have slumped sharply over the past couple of weeks. However, a low interest rate is just one of the components of a successful home purchase transaction, and applications of purchase-money mortgages continues to firm slightly from very low levels. It's worth noting that the lift in rates may push more homeowners over into the "loan modification" camp, since payment relief can't be obtained by refinancing in the open marketplace.
We've been talking about signs of an improving economy since perhaps March, what with clues here and there suggesting at least a slowing in the rate of economic descent. However, even with actual improvements starting to show -- including lessening job losses, stabilizing home sales, firming auto sales and other signs -- we are by no means in an economic condition which provides support for rising or "high" interest rates.
The second quarter is rolling to a close and we'd be surprised if the decline in GDP for the period is any better
than about minus-2.5%. That's still a fairly deep hole, even if it is improved from truly awful levels in the 4th
quarter of 2008 and the first of 2009.
That said, we are no longer in the global financial panic which drove certain
Treasury yields down to zero percent levels just a few months ago. The great American mattress, stuffed with the world's
cash, is starting to see some withdrawals as money is moved from safe-haven positions back into the broader economy.
Without that panic and subsequent flight-to-safety buy of Treasuries, we are less likely to revisit the 50 (or more)
years lows for yields and fixed mortgage rates.
There is, to be sure, concern about inflation, but there is scant evidence that it's an immediate problem. Tremendous resource slack throughout the economy is a tempering force on price pressures, even if ballooning Federal spending and recurring massive deficits are likely catalysts for tomorrow's troubles. As well, there seems to be growing pressure to rein in Federal outlays, as least beyond those needed to get the economy back to a more fully-functioning stance. Should those calls be heeded -- even just acknowledged -- the markets may react positively. For that, we'll need to see what develops.
The economy is feeling a little better, but perhaps only slightly. The Federal Reserve's survey of regional economic conditions (called the "beige book" for the color is its cover) noted that all 12 Fed districts "remained weak or deteriorated further during the period from mid-April through May", but five of them noted that "the downward trend is showing signs of moderating." Several respondents noted that expectations have improved, but that they don't expect a substantial increase in economic activity before year's end. Perhaps the brightest note in the report was that eight districts noted an uptick in home sales activity, citing seasonal factors, low interest rates, declining house prices, and tax credits for first-time buyers.
After the surprisingly low number of job losses in May's employment report, we wonder if a reasonable upward revision might be coming next month. Weekly claims for new unemployment benefits have moved down from lofty levels but still have yet to crack the 600,000 level, let alone move toward territory which suggests that hiring may be on the upswing. The 601,000 new applications filed during the week ending June 6 ranks among the lowest figures for the year; even if the direction is hopeful, the abatement in layoffs is moving downward quite slowly. The number of ongoing claims for benefits -- folks who remain out of work -- continues in a steadily-rising pattern in record territory.
Retail Sales moved 0.5% higher in May. With three of five months this year sporting positive numbers, the pattern is
much improved over last year. However, the vast majority of the increase in outlays was due to price increases for
gasoline (+3.6%), and the "core" rate of spending for stuff outside of that narrow category rose a very muted 0.1% for
the month. Core retail sales are 2.9% below last year at this time.
Overall, prices for imported and exported
goods are rising mildly. Goosed by rapidly firming oil prices, the aggregate cost of goods brought into the US rose by
1.3% during May, the third consecutive increase after a seven-month string of declines. Absent the energy influence, a
rise of 0.2% remained. After touching the mid-$30 bbl range, oil prices have climbed into the $70bbl range. Increases in
energy costs tend to act as a drag on economic growth, and gasoline's recent rise is certainly sapping at least some
consumer buying power. Goods priced for export rose by 0.6% during the month.
A little further back, the lift in energy costs probably accounted for the slight widening the nation's imbalance of trade, which expanded from $27.6 billion in March to $29.2 billion in April. Imports declined by 1.4%, but exports by a larger 2.3% during the month.
With uncertain final demand, businesses are content to let stockpiles of goods continue to dwindle. Manufacturers, Wholesalers and Retailers all continued to reduce inventories in April, with declines of 1%, 1.4% and 1% reported respectively. Inventory levels, as measured by the ratio of goods on hand relative to sales have begun to ease from their peaks but haven't yet thinned to the point where a spate of new ordering is likely.
Consumer moods continue to tread water. The weekly ABC News/Washington Post poll of Consumer Comfort took back the two points it lost during the last week of May and moved back to a -47 level for the week ending June 7. The preliminary report of Consumer Sentiment from the University of Michigan saw a 0.3 rise in their initial June report to a 69.0 mark so far this month.
After a long decline, even modest economic improvements can feel substantial, even if they aren't yet solid. Things are somewhat better, but not yet good by any stretch of the imagination. In the same fashion, an opportunity for a wider and longer view of the climate comes after a period of myopic panic; however, that doesn't mean that the weather has improved all that much. The economy remains troubled, crucial supports for the economy and financial markets are still required, and it will be a while yet before they can be removed without causing additional distortions. However, we're rapidly approaching the point at which the Administration will need to reveal how -- or even if -- the government plans to extract itself from these markets, and under what circumstances it might remain. If we could couple that with a glimmer of spending restraint, and perhaps even a plan for reducing massive deficits in the future, we might just have ourselves a path for a return to normalcy over time.
If history is any guide -- and it is untrustworthy, at best -- mortgage rates have overshot on the upside, just as they overshot on the downside. In general, the see-saw should balance somewhere between those two points and we would expect to see some movement toward center as we go. However, there are a lot of things which could produce further upset, including an inability of the private market to continue to absorb wave after wave of new Treasury debt coming into the market.
Still, it does seem that the rise in rates is done, at least for now. We should begin to ease back some next week, but probably just a little.
This page is copyrighted by http://rereport.com. All rights are reserved. Republication or redistribution of this content, including by framing or similar means, is expressly prohibited without prior written consent.