Housing Chill at Summer's Start

May 23, 2008 -- May 23, 2008 -- Mortgage rates staged a minor improvement this week, with HSH's Fixed Rate Mortgage Indicator (FRMI) sliding by six basis points, landing at a flat 6.50%. The FRMI includes rates from conforming, jumbo and the new "expanded conforming" loans. Hybrid 5/1 ARMs also dipped, shedding five basis points to land at 6.11%.

Conforming 30-year fixed rates declined by eight basis points (.08%), while jumbo 30-year FRMs shed seven basis points for the week.

The stumbling economy continues to throw off mixed signals about what may come next. Some signs point to additional (perhaps marked) deterioration, while others are holding fairly steady after periods of decline. Few if any indicators are showing actual improvement at the moment.

The exception this week was the Index of Leading Economic Indicators. After a five-month string of solidly declining numbers, the LEI has posted two consecutive positive readings. Of course, the 0.1% increase noted in March and April aren't much to get excited about, but they do represent a hint of stability. The LEI is purported to foresee economic activity as much as six months down the road, but may better reflect what's occurring when the data which comprise the index are gathered. Reflection or forecast, positive news is welcome, regardless.

The minutes of the April 30 Federal Reserve Open Market Committee (FOMC) meeting, after which the Fed trimmed short-term rates by an additional quarter percentage point, were made available this week. The minutes noted that the decision to move rates at all was a "close call." Rising concerns about inflation pressure gave members sufficient reason to hold off from moving rates, but the overall consensus was that the additional quarter-point would cause limited inflation damage, if any. However, the tenor of the discussion left the distinct impression that, barring some dire unforeseen emergency, the Fed is done cutting interest rates. Indeed, rate increases are the next likely course of action, although probably not in the near future.

Right now, those lower interest rates in upstream costs of funds for lenders are quite useful. Presently, those lower costs aren't (or aren't fully) being passed along to downstream borrowers, as lenders take this opportunity to make new loans at better profits. Those enhanced profits are serving to offset the drag of money-losing loans already on books as well as helping to preserve the willingness to lend money at all, keeping the credit/liquidity crunch from getting any worse. Once books are re-squared and loan-loss reserves replenished (an ongoing process) -- and provided low-cost funds are still available -- rates for many kinds of loans may settle back somewhat. In the present market, sooner would be better than later, but the present price of money is certainly less restrictive than is the availability (through underwriting guidelines) of it.

For good credit quality borrowers, money is certainly available, but the process of potential borrowers adjusting to the new more restrictive financing environment is also ongoing. With home prices still sliding, many would-be buyers are likely waiting for further declines before buying a home. Existing Home Sales for April stepped in at a 4.89 million (annualized) rate of sale, down a little from the 4.94m seen in March. That slowing of sales served to boost the measurement of available inventory to 11.2 months, so there are plenty of homes on the market to choose from, and the median sales price declined a full 1% to $202,300.

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Depending upon your preferred yardstick, prices may be declining a lot or a little. OFHEO's quarterly Home Price Index for Purchases was out this week covering the 1st quarter of 2008, and the news wasn't especially warming, what with a year-over-year decline of 3.1%, the largest such drop in the series' 17-year history. On a quarter-to-quarter basis (Q407-Q108), the decline was a pronounced 1.7%. Prices declined in 43 states.

OFHEO also concocts an "all transactions" index which includes refinancing, and that report was less bleak with a slide of just 0.2% for the quarter. Interestingly, this series noted that of the 292 metropolitan areas ranked by OFHEO, 164 were on the positive side of the ledger with just 128 declining. OFHEO's HPI series differs from the widely-touted Case/Shiller indexes which are showing a greater percentage decline in prices (covering only 20 cities, many in the most challenged areas), but it is safe to say that prices are sliding regardless.

It would be better if "sliding prices" was a phrase we could assign to inflation. The Producer Price Index rose by 0.2% in April, a smaller rise than was expected and a nice change from the 1.1% increase in costs noted in March. However, that comfortable number isn't likely to last, as commodity prices are still rising, and the measurements of inflation at differing stages of production aren't encouraging. The 'core' measurement of PPI, exclusive of food and energy, sported a 0.4% rise even without the influences, and evidence is growing that producers are passing at least some cost increases along to downstream consumers. Over the past year, 'headline' PPI is up by 6.4%, and core is up 3.1%.

Those cost increases are certainly easier to manage if you still have a job. Fortunately, layoffs have mostly been muted during this downturn, but weekly unemployment claims seem to have settled into an area which suggests that a slow and weak job market will persist. The 365,000 new applications for benefits filed at state unemployment windows during the week ending May 17 represented a 9,000 decline from the previous week. As long as we remain above about 350,000 filings, it's reasonable to expect that the nation's unemployment rate will worsen and hiring will remain tepid at best. Hiring has been declining for the past four months, and at last report, the economy shed 20,000 jobs in April.

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Things remain quite soft, according to the Chicago Federal Reserve's National Activity Index. The indicator's move to -1.17 continues a steady string of negatives since mid-2007, pointing to an economy which is performing well below its potential, thought to be about 2.8% GDP. The NAI uses a 'breakeven' point of 0.00 to gauge expansion or contraction, and readings such as these reflect pronounced sluggishness.

Gasoline prices nipping at $4 per gallon continue to batter consumer attitudes. The weekly ABC News/Washington Post poll of Consumer Comfort edged downward to -49, just a shade above all-time lows set back in 1991. With stock markets selling off all during this week, and oil pressing even higher, attitudes will surely darken further.

It was a fairly light week as far as data go, and next week brings us a Monday holiday followed by what will probably be a set of downbeat reports covering New Home Sales, Consumer Confidence and Sentiment, revisions to first-quarter GDP, and a few local survey of manufacturing strength. We're at a juncture in the economy where rates are being pushed and pulled in two different directions: Upward, boosted by rising inflation and its return-eroding effects, and downward, where slumping economic growth produces additional 'resource slack'. Skyrocketing energy costs seem certain to pressure economic growth downward in the weeks and months ahead as consumer spending becomes concentrated into less-productive narrow streams for food, gasoline, electricity and such.

It is strange to say, but we should be cheering the lousy growth pattern. If the economy was moving upward, the additional demand would push inflation and interest rates higher. At present, all we can hope for is that the economy breaks inflation before inflation completely breaks the economy.

Overall mortgage interest rates managed a little improvement this week, surprisingly. More or less, rates have been generally flat for weeks, and that stability is a welcome stance in a weary market. Not much likelihood of a huge movement next week, but we may see rates rise a couple of basis points or so.

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