Slight Slip for Mortgage Rates

June 26, 2009 -- A big late-week rally in Treasuries helped mortgage rates to slip back by a just a whisker as they retreat closer to the center of a four-week range. The completion of a huge $104 billion debt offering by the Treasury went very well, allaying for now fears that the market won't be able to absorb the voluminous new debt being issued.

Overall, fixed mortgage interest rates declined by a single basis point to 5.90% according to HSH's Fixed-Rate Mortgage Indicator, which encompasses rates for true jumbo, conforming and "high-limit" conforming loans. HSH's overall average for Hybrid 5/1 ARMs shed two basis points to finish at 5.31%, while conforming 30-year FRMs eased to 5.55% for the week.

We continue to see some signs that economic growth is bubbling beneath the surface and that the recession's depth is lessening. As a reflection of that, the final report for the national Gross Domestic Product for the first quarter of the year was revised upward by two ticks to -5.5%, a bare improvement in a bleak quarter. Still, any upgrade is a welcome one, and with a better tenor to economic reports over the past month or two, the second quarter does seem to promise a move higher to a less negative reading.

The Federal Reserve met this week to again discuss how best to move the economy forward. There was, as expected, no change to interest-rate policy, and none for any of the "quantitative easing" programs, either. However, they did have soothing words for market players worried that a rise in interest rates might come sooner, rather than later, noting that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." It's worth noting that any funds rate below about 1% could easily be considered "exceptionally low", and so wiggle room is available to the Fed if they wish to shift rates higher. However, with the economy still in recession, the "extended period" will likely last though the end of this year.

The nascent improvement in the economy didn't go unnoticed by the Fed, either, but they made it clear we are far from growth, saying that the "pace of economic contraction is slowing", and that "substantial resource slack is likely to dampen cost pressures." Worries about future inflation may not be wholly unfounded, but the Fed wanted the markets to know that the potential for those troubles remain well down the road from here.

The Fed's programs have lent important support to housing markets throughout the spring, even if the recent rise in rates has curtailed refinancing activity to a great degree. Home sales, however, have found a solid base to bounce along. Existing Home Sales for May increased by 2.4%, rising to a 4.77 million (annualized) rate of sale. Inventory levels retreated to 9.6 months, the same as March, but prices managed a 1% lift for the month (if still almost 17% below last year at this time).

An $8000 tax credit to "first time" homebuyers may also be helping sales to be firmer than they otherwise might be. Sales of New Homes were basically flat in May, running at a 342,000 clip (April was 344,000). The supply of new homes came in at 10.2 months, down slightly. There are actually 292,000 units built and ready for sale, but the absorption rate of those has been pretty slow. We speculated a couple of months ago that those properties probably represent the hard-to-sell inventory, stuff that was salable at the height of the boom but no longer is for various reasons (size, cost, commute, etc). This appears to be the case, and it's our understanding that builders are starting to adjust their mix of homes to suit today's market better. Curiously, after months of heavy discounting and declines, the cost of a new home rose by almost 11% in May, and the year-over-year price reduction is now just 3.4%.

A few fairly solid signs of manufacturing activity did appear in June, at least in the regions covered by the Richmond and Kansas City Federal Reserve districts. The Richmond Fed's activity index moved to a positive reading of 6, up from 4 in May; it stood at -55 as recently as December, so the turnaround is underway, if fragile. Perhaps more encouraging was the positive figure in the KC region, which sported a reading of 9 after a nine-month string of negative numbers.

It goes without saying that those improvements mirror those seen in orders for Durable Goods, items designed to last three years or more. A stout 1.8% increase in April was followed by another like-sized increase in May; three of the last four months have been on the positive side of the ledger. Although the rise here still leaves us well below the order levels of a year ago, we do seem to be climbing out of the depths of the abyss.

Personal Incomes leapt by 1.4% in May, goosed by one-time $250 payments to recipients of Social Security and other government "safety net" programs. For those of us still employed and footing that tab, the news wasn't quite so good, as wages and salaries eased by 0.1% during the month, still all-too-reflective of a very weak labor market. That market pushed another 627,000 new folks into the unemployment line for the first time during the week ending June 20, and without a pickup in hiring before too long, it will be hard for the economy to get very much traction. Most of the increase in incomes went right into the bank, as personal spending rose by a meager 0.3% and the nation's rate of savings jumped to 6.9%, the highest level since 1993.

Whether these spotty improvements are making anyone feel better depends upon who you ask and how the question is posed. The weekly ABC News/Washington Post poll covering Consumer Comfort continues to slide downward, and at -53 is within a single point of its all time low. Rising gas prices over the past few weeks are probably to blame, but the segment which deals with the personal finance situation took a sharp nosedive. We wonder if this could be due to a rising percentage of respondents who are no longer eligible for unemployment benefits, which is quickly worsening their outlooks? It's not clear that this is the case, but the rolls of those receiving "continuing assistance" did dip recently.

That bleaker outlook was offset by a minor improvement in the final June reading of Consumer Sentiment. The University of Michigan poll saw a 1.9 point gain in its index, clambering up to 70.8 for the month. After revisiting the mid-fifties as recently as February, the index has nudged its way higher ever since.

After the successful auctions were completed this week, and with the Fed meeting out of the way, there was a considerable rally in Treasuries, with the ten-year Treasury yield sliding back to levels last seen in early June. As we've noted at other times, mortgage rates are much slower to decrease than to increase, but the eighteen-basis point drop in that yield should drag mortgage rates downward at least for the early part of next week. There's a fair bit of data due out in a shortened week, but if recent spread patterns hold, we could see as much as a ten basis point drop in conforming rates, probably enough to start to get refinancers interested again.

What lies ahead? Read (and hold us to) our new, just-posted two-month forecast.

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