Mortgage Rates Continue Spring Creep

April 6, 2007 -- Another week passes, and another small lift in mortgage rates is seen. This week, the average 30-year fixed-rate mortgage (FRM) rose by three basis points (.03%), closing the nation's leading survey of mortgage prices at an average 6.32%. Five-one Hybrid ARMs lifted by six basis points to finish the survey week at 6.14%.

The biggest economic report for the week, and perhaps the month, was the employment report for March released on Friday. Since stock markets were closed for Good Friday, however, and bond markets open only for an abbreviated session, it's hard to precisely judge the market reaction to the far-better-than-expected report on hiring for the month.

In March, some 180,000 people were hired anew, and the number of hires for the previous two months were ratcheted higher as well. The nation's unemployment rate moved down to 4.4%, again matching the lows of this expansion. Meanwhile, wages moved up by 0.3%, and have now increased a solid 4% over the past 12 months.

Labor markets don't look to be adding much slack, either. The monthly report of announced layoffs from Challenger, Christmas and Gray found only 48,987 job cuts announced during the month, down about 40% from February and the lowest number since last July.

Since the economy has been slow for several quarters now, and the Fed has moved away from an explicit stance of tighter monetary policy, market players are watching (some would say hoping) for the next sign of softness, which might bring lower short-term interest rates sooner. A big component of that would be a downturn in hiring and an upturn in the unemployment rate, but that just doesn't seen to be in the immediate cards. True, the falloff in housing which began last year should have much greater impact on employment at this point, as should the fallout from the implosion in subprime mortgage markets. So far, it seems that any folks becoming unemployed as a result of those circumstances are finding other employment, but there is probably considerable unwinding yet to occur.

Softness in employment, over time, might stir the Fed's hand to action, but not if inflation hasn't worked its way out of the picture. While there was no new major inflation report out this week, components of two other releases point to an uptick in price pressures of late.

The Institute for Supply Management monthly report on business conditions among its member firms found a deceleration in overall activity. The headline ISM index slipped to 50.9 in March from 52.3 in February, as manufacturing continues to stumble amid choppy growth. The ISM surveys use a reading of 50 as a breakeven point; above 50 indicates growth, and below, contraction. In the ISM report, though, a rising number of respondents -- the highest number since last September -- reported paying higher prices for materials. Those conditions were largely echoed in the ISM non-manufacturing (service businesses) index, where activity slowed somewhat (a reading of 52.4 from February's 54.3) while price pressures increased.

With March just having come to a close, we are still seeing data generated back in February, which we already know to be a fairly weak month. Wholesale inventories rose by 0.5% during the month despite a strong lift in sales. The process of trimming stockpiles of goods, which in turn would lead to higher levels of new ordering, hasn't yet gotten underway, showing minor improvement at best. As evidence, Factory Orders during February rose by just 1%, and that increase failed to meet expectations. As well, it came on the heels of a 5.7% decline in January so it didn't represent much of a rebound, to be sure.

Consumer attitudes have bounced around lately, buffeted by rising gasoline prices, whipsawing stock markets and varying political messes. The weekly ABC News/Washington Post survey of Consumer Sentiment dipped back to a reading of -5 during the week of April 1, down from -2 the prior week. Weekly state unemployment claims nudged higher to 321,000 for the last week of March.

Consumer Credit barely expanded in February, rising by $3 billion for the month, mostly in revolving accounts. The 1.5% annualized increase in the accumulation of new debt is weak, but as incomes are rising on a reasonable basis and mortgage debt remains fairly inexpensive, there's little likelihood of a breakout in borrowing at the moment. Auto sales, a significant driver of consumer credit, eased a little in March but have been pretty steady for months.

Although we'll need to wait for next week to get the full reaction of the market, stronger-than-expected employment reports frequently serve to cause a rally for stocks and a selloff in bonds. At least some of that selloff happened in the shortened trading session on Friday, but there will likely be at least some hangover into next week.

Mortgage rates have been on a mild upturn for a number of weeks now, but the economy simply hasn't yet produced that "other shoe" to drop which would kick rates more strongly in one direction or the other. Even though there have been several events of concern -- oil prices, housing, mortgage finance -- no single event has been significant enough to cause that change, so we continue to wander about in a pretty fairly defined range. At the moment, we seem likely to trend more upwards toward the top of that range, most especially if the latest looks at Import and Export price figures or the PPI show uncomfortable levels of increase. Gasoline prices, too, are poised to spike again.

Mortgage rates next week will likely show an increase of about five basis points, perhaps a bit more if the price numbers are above expectations.

If you haven't been following the trouble in subprime mortgage lending but wonder where it came from and where it may go, you should consider reading "Is a Credit Crunch Coming to the Mortgage Market?", our latest discussion piece.

For more pithy commentary, see our latest two-month forecast.

Did you ever actually read your mortgage docs? Yes? No? Which ones? Tell us about it!

Read a discussion of the results of our last survey question: "When you have a few extra bucks left over, where do you park it?". The results may surprise you!