Mortgage Rate Trends: Weekly Market Trends & Forecast

Mostly Directionless, Mortgage Rates Wander to New Lows

December 7, 2012 -- A combination of mixed economic news and an ever-impending fiscal cliff pushed mortgage rates down just a little this week. Hurricane Sandy's distortion of some of the latest economic date make it hard to clearly discern the underlying trend, but there's nothing we can see which suggests that any imminent spurt of growth is forming anywhere.

The Federal Reserve meets next week to discuss the state of the economy, and to sunset, extend or replace Operation Twist, their program of selling the Fed's holdings of short-term Treasurys in favor of longer dated ones. The program -- which included the recycling of money from old mortgage bonds into new -- is slated to terminate at years' end. At the moment, and with low interest rates key to the recovery, it is widely expected that the Fed will announce a new program of outright purchases of Treasuries. This in turn should serve to keep long-term interest rates low, a happenstance of keen interest to potential mortgage borrowers.

HSH.com's broad-market mortgage tracker -- our weekly Fixed-Rate Mortgage Indicator (FRMI) -- revealed that the overall average rate for 30-year fixed-rate mortgages declined by two basis points (0.02%) to 3.60%, setting a new record low. The FRMI's 15-year companion also moved downward just barely, easing by a single basis point (.01%) to touch a new record low of 2.95%. FHA-backed 30-year FRMs also lost a hundredth of a percentage point, as the most viable option for credit- or equity-impaired borrowers saw its average slip to 3.28%. Finally, the overall average rate for 5/1 Hybrid ARMs also managed to shed a single basis points to close the survey week at 2.69%.

See this week's Statistical Release and Trend Graphs.

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Whether influenced by Sandy or a broader business slowdown, activity at the nation's manufacturing concerns downshifted in November. The Institute for Supply Management survey which covers factory activity moved down to a below-par 49.5 in November, the softest reading of the year. The report noted that while production increased during the month, orders and employment declined. The modest expansion here and recessions in the economies of some of our trading partners will continue to put pressure on this sector of the economy as we move into 2013. That said, the report covering overall Factory Orders from October did show a 0.8% gain, so perhaps Sandy's influence caused some distortion in November in getting new business in the door; December's report may clarify this.

A bright spot for manufacturing in 2012 has been a solidifying auto market. In November, an annualized 15.5 million vehicles moved off dealer lots, according to AutoData. Some storm distortion was at play here, as some sales which would have happened in October were pushed into November, and a considerable number of cars damaged or destroyed by Sandy needed to be replaced as well. Looking over the last couple of months and averaging them together finds an annual 14.9 million autos sold, the same figure as seen in September, so smoothing out Sandy's distortion leaves a fairly solid (although flat) pattern for sales.

With the housing market reviving, spending for construction projects has been largely improving. October was no exception, with overall outlays on new building rising by 1.4%, driven there by a full 3% rise in residential construction. Commercial building added 0.3%, and even public projects rose by 0.8%. In the aftermath of Sandy, a lot of funds are expected to be spent on rebuilding both private and public infrastructure, so that may provide some upward momentum here in the months to come.

Service-related business activity revived a little in November. The ISM's survey covering non-manufacturing concerns pointed to a slight increase, with their measuring gauge moving to 54.7 from 54.2 during the month. In the report, new orders posted a gain, but employment declined, so the hiring picture still remains muddy at best, and the overall index still remains well below 2012's best levels.

Hiring is of course affected by any number of things, including present and expected business conditions, tax policies and other costs of doing business. One consideration is the amount of output a workforce can produce, and gains in productivity can preclude the need for much hiring to meet production goals. To some extent, this is the case in the third quarter of 2012, where worker output rose a stout 2.9%, up from 1.9% in the second quarter. With a rise in output, the labor component of cost per unit produced declines, and a 1.9% decline was seen. This often means that an employer can afford to pay existing employees more, but does little to spur job creation or employment growth.

Labor market growth remains muted. In November, some 146,000 new hires occurred, besting analyst expectations of about 100,000 new jobs (we called for perhaps 150,000 in last week's MarketTrends). There were downward revisions of 49,000 to October and September gains, and after a pretty solid July and August, gains in the last three months have been little more than sufficient to cover growth in the working population. However, the unemployment rate did ease to 7.7% during the month, as the increase in hiring and a 0.2% retrenchment in the size of the workforce combined to pull the figure downward.

Other mixed signals about the labor market are evident, too. The monthly report covering announced layoffs from Challenger, Gray and Christmas recorded 57,081 jobs slated to be lost, up almost 10,000 from November. A chunk of those were from the Hostess Bakery shutdown; however, the pattern has been trending upward for the past three months, and December's already got an announcement from Citicorp of 11,000 jobs to be cut, so things don't appear to be improving much at the moment.

That's essentially the scene in weekly unemployment claims. After a Sandy spike, initial claims for new benefits have settled down, slipping back to 370,000 during the week ending December 1. However, we'll need to move down close to 360,000 just to get us back to pre-storm levels, let alone falling to a level which suggests much faster employment growth. Given the impending fiscal mess, now just weeks away, it seems unlikely that we'll get more than stasis in hiring over the next month or more (if then) until the dust begins to settle in Washington.

Consumer moods are showing the effects of the post-election fiscal mess coming into clearer focus. The weekly Bloomberg Consumer Comfort Index declined by 0.8 points in the week ending December 2, slipping back to minus 33.8 for the week. A decline in the outlook for the economy did much of the damage, and the figure may have also been propped up somewhat by sliding gasoline prices. That was certainly not the case in the initial reading of Consumer Sentiment from the University of Michigan, which shed a whopping 8.2 points from last month, landing at a 74.5 mark. Almost all the decline came from expected economic conditions, and pushed this yardstick back to August levels. Consumer moods are believed to have an effect on spending patterns, and to the extent this holds true, we may see some wallets begin to shut before too much more time passes.

While some aspects of the economy are no doubt stronger, others still have tenuous gains at best, and the change to tax policy and cuts in government spending (forced by cliff or from agreement) will slow the economy. How much drag will come is a matter of debate; regardless, a slower economy is usually good for mortgage rates, as broad demand for credit is tempered throughout the economy. With mortgage markets already fully supported by the Fed, there may not be a huge amount of room for rates to fall, but there may be some declines as a result of a slower economy after the cliff comes or an agreement is reached.

Until then, we wander through murky waters, and rates can be expected to continue to be mostly directionless. Aside from the Fed meeting next week, where a new bond-buying policy will likely be detailed, there is not much economic data due out to drive the markets one way ot the other. We'll be looking at Retail Sales, inflation patterns in the PPI and CPI reports, looking at the imbalance of trade to see if exports can continue to find some traction despite slow economic times, and how much the weather interrupted Industrial Production. For the most part, mortgage rates are in no hurry to go anywhere fast, so little change can be expected next week.

For an longer-range outlook for rates and the economy, one which will take you up to early mid-January, have a look at our new Two-Month Forecast.

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Daily FRMI rates are available on HSH.com. Check out our weekly Statistical Release here (and archives here).