Surprise Mortgage Rate Rise... Relax
May 29, 2009 -- Bond and mortgage markets spasmed this week, and the corresponding sharp rise in rates over a two-day period served as a reminder that even a battered private market can be a dangerous animal. It wasn't completely clear what sparked the rout, but there was speculation that a combination of unclear goals in Federal Reserve quantitative easing programs, floods of new sovereign debt and shoddy treatment of GM bondholders all led to the selloff.
Yields on the influential 10-year Treasury bond had lifted by just over a half a percentage point in a few days' time, rising from the low- to the upper-3% range and taking conforming fixed mortgage rates along for the ride. After standing at a familiar 5.03% on Tuesday, Conforming 30-year FRMs leapt to 5.29% on Wednesday and then 5.44% on Thursday before finally settling back some on Friday to 5.30%.
After hitting a daily closing peak of 3.71%, the 10-year TCM eased back to about 3.46% by Friday's close, taking back about one-half the increase. As is typical, average mortgage rates will probably be slightly slower to retreat, though. Those who keep insisting that "The end is still coming!" need to relax.
Overall, our Fixed-Rate Mortgage Indicator, which includes rates for conforming, jumbo and "high-limit" conforming data, rose by only 18 basis points to 5.64%, as the increase in the conforming portion was tempered somewhat by a softer response in Jumbos. An all-inclusive average for 5/1 hybrids increased by 10 basis points, closing the survey week at 5.15%.
As markets move further away from emergency stances, and as "green shoots" of economic improvement (however premature) appear, we could see episodes like the above from time to time. One such shoot may have served to influence the bond market rout, in that the Conference Board's measure of Consumer Confidence rose strongly in May, with a reading of 54.9 blowing well past forecasts of a slight upward move from April's 39.2 mark. Almost all of the gain was due to improvements in the expectations component of the index, as present conditions were judged to be only on a mildly improving bent. Whether or not that optimism about the future is unfounded will be seen in the weeks and months ahead, and there is a reasonable chance that the big gain in the indicator will be throttled back somewhat next month.
Perhaps the perception that the economy appears to have, just maybe, stopped getting worse is the cause for the sunnier outlook. The second revision to the first-quarter GDP left us with a milder -5.7% decline in the nation's output, a slight improvement over the 6.1% drop seen in the fourth quarter of 2008. The back-to-back contractions still rank among the steepest since the Great Depression, if less dark than originally estimated. Admittedly, the period being measured came to a close some two months ago, and while that ensuing period has been somewhat warmer, it's a certainty that GDP remains in the red in this quarter, if on a lessening basis. One bright spot seen in the revision was that corporate profits did rebound, posting their first increase since Q207, and profitability is a key to getting us moving forward again.
The latest National Activity Indicator from the Chicago Federal Reserve found a lesser decline in April than in March, with their indicator climbing from -2.96 to -2.06 during the period. The indicator reflects whether the economy is growing above or below its potential, and while we are off January bottoms, we remain a long way from zero, let alone a growing pattern. The last above zero figure was about two years ago, and came amid a string of mildly negative numbers itself.
The sharp increase in the Conference Board's index wasn't mirrored in other measures of consumer moods. The University of Michigan's survey of Consumer Sentiment did nudge higher in its final May observation, landing at a 68.7 mark (up from April's 65.1 level), a continuation of an erratic-but-improving pattern after last November's nadir. However, the higher-frequency ABC News/Washington Post poll of Consumer Comfort turned down again in the week ending May 24, as rising gasoline prices pushed the indicator back to April 19 levels and the middle of its recent range.
Orders for goods designed to last longer than three years bumped 1.9% higher during April, almost wiping out the -2.1% decline noted in March. The last three months have now featured two positive readings and one negative, a back-and-forth pattern more typical than the slew of consecutive declines seen from last August to this January. Even with the improvement in orders this month, durable goods spending by businesses did fall by 2% as there's little need to upgrade equipment as long as final demand remains tepid.
Four looks at regional manufacturing conditions pointed to a mixed bag. The Richmond Fed reported that its gauge of activity rose to a reading of 4 in May, its first positive showing since March 2008. The Kansas City Fed's indicator showed a -3 for April, the smallest such decline since last September. In the Chicago area, a local supply management trade group reported a downturn in May, as auto industry woes spread though their region, while a similar New York-area group told of the first increase in activity in its area since January 2008.
Home Sales continue to trend along a bottom. Existing Home Sales rang in at a 4.68 million (annualized) rate of sale in April, a slight increase from March's figure but in line with recent figures, which have been showing a kind of "backing and filling" pattern for the past five months. Prices continue to ease -- they are 15.4% below year-ago levels, and the supply of inventory increased back to 10.2 months at the present rate of sale. Expiring foreclosure moratoria among property-holding banks and seasonal selling patterns likely accounted for the increase in homes for sale.
New Homes sold at a 352,000 annualized clip in April, almost exactly the same pace seen in March. Like their 'used' counterparts, prices here are about 15% below last year, but inventory levels continue to improve and now stand at 10.1 months available. According to the Commerce Department, the actual number of units on the market is now 297,000 and is starting to approach half of the peak levels seen a couple of years ago. The sooner inventory disappears, the sooner new construction can begin, and we are approaching that day steadily, if slowly.
While a drop in refinance activity is sure to follow the small rise in rates this week, it's instructive to keep in mind that while rates should remain favorable, it is unlikely that we will always be holding near 50-year lows week in and week out. While refinance borrowers will probably move to the sidelines, hoping for better market conditions, potential home purchasers probably will be less deterred, since a rock-bottom interest rate is only one of a number of factors involved in buying a home. However, any rise in rates does affect affordability, and the result of any sustained rise would likely be additional downward pressure on home prices.
A greater deterrent to housing demand than rates is the specter of continuing job losses. Another 623,000 new applications for unemployment assistance were filed at state windows during the week ending May 23. While the pace of layoffs has slowed somewhat, and although it's a little better than recent highs, the job market remains troubled, with fresh records being set each week for continuing assistance.
It was a rough-and-tumble week in the credit markets, but the waning characteristic of the upset suggests that rates will settle back next week, barring any new unforeseen events. On tap are the usual slew of first-week-of-the-month economic reports, including the May employment report. More or less, we're about where we were last month and should have about the same 540,000 loss of jobs, but the unemployment rate will likely top the 9% mark. We'll be looking for any green shoots in the ISM surveys, Construction Spending and vehicle sales, but don't expect too many to appear. After an unexpected flare higher this week, mortgage rates should settle back, with a probably decline of perhaps 10 basis points in the FRMI. The improvement in conforming 30-year FRMs at week's end should hold, leaving us perhaps a quarter-percentage point above Spring lows.
