Financing

 

June 25, 2010 -- There was a time when ultra-low mortgage rates would create a cascade of activity, 40-point headlines, and a bombardment of lender phones -- a crush of volume that would overwhelm lender staffs.

While rates did ease to new record lows this week, and there has been some indication of an uptick in refinancing activity, the response is muted, at best.

Aside from these being new "technical" lows -- really, just a few basis points down from already-record-low territory -- the fact is that there just isn't enough pent-up demand to produce much new activity. At best, the 'window of refinancing opportunity' has merely widened a little bit any may now include folks presently holding mortgages with rates in the 5.75% range or so.

Purchasers are of course interested in low rates, but affordable rates are only one consideration when deciding to buy a home.

Fixed-Rate Mortgage Indicator (FRMI) includes rates for conforming, jumbo, and the GSE's "high-limit" conforming products and so includes a broad swath of the mortgage-borrowing public. This week, the FRMI fell by another four basis points, closing the first week of Summer at 5.07%. The 'best' alternative to the 30-year FRM for many folks, especially jumbo borrowers, is the hybrid 5/1 ARM, which finished the week at an attractive 4.12%.

Conforming 30-year fixed, the benchmark mortgage product, stands at 4.77% with 0.21 points on average. This suggests that borrowers should easily be able to find zero-point rates not higher than 4.875%, and possibly no-fee deals at 5% or thereabouts. Based upon available research, which provides useful but not direct comparisons, we reckon the conforming 30-year FRM to be at levels unseen since May 1956.

For big-balance borrowers, private-market jumbo 30-year FRMs are very close to record low levels, too, at an average 5.60%.

The path to homeownership is a twisty one these days, and even a potential homebuyer with a strong desire may run afoul of any number of obstacles. Aside from low interest rates, which are the initial attraction, those who wish to purchase homes of course need to have jobs, be able to fully document their income and assets, and come up with at least a 3.5% downpayment plus money for closing costs, required reserves and any needed MI. They need to find properties they can afford in desirable locations and be able to execute transactions in their desired time frames. They also need at least a modicum of confidence about their ability to manage what can be an immense commitment. That confidence is built around solid prospects for today and tomorrow plus a belief in the value of value of homeownership -- as well as confidence in the value of a house as an investment and a place to live. All of these items must align to a greater or lesser degree in order to be successful, and aligning them today can be quite difficult.

Those difficulties are reflected in the low levels of home sales. In the aftermath of the expiry of the last homebuyer tax credit in April, it would be reasonable to expect some decline in sales. And so it was that sales of existing homes eased back by 2.2% in May, landing at a 5.66 million annualized pace. Forecasts called for an increase to a level above six million, so at least some hopes were dashed. Despite the slide in sales, inventory levels eased to a still-elevated 8.3 months, and home prices did increase a bit from month to month.

The report for New Home Sales can only be described as a true collapse. A 32.7% month-to-month plunge in activity left new home sales at just 300,000 annualized, the lowest figure since Census began keeping records in 1963. Only about 1,000 completed units were removed from existing inventory, and with the decline in sales there are enough available homes to satisfy 8.5 months of demand.

With the economy running at a subdued pace, it will be hard in the months ahead to gin up many new home sales. The revised 'final' report on Gross Domestic Product showed another downshift to a 2.7% gain. That's less than half the growth rate notched in the fourth quarter of last year, and a pace insufficient to produce much in the way of employment gains which might engender faster consumer spending and home sales. Of course, the diminishment of growth took place even before the euro-zone debt mess really took hold, and the austerity measures now being considered over there seem likely to trim growth prospects here to some degree.

The Federal Reserve noted as much when they finished their meeting this week. While not exactly a downbeat assessment of economic prospects, it was more dour than the last couple of reports, noting that "Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad" and that "the pace of economic recovery is likely to be moderate for a time." If we entered the second quarter on a 2.7% GDP note, already "moderate" by any standards, any additional moderation might see a more extended period of high unemployment, perpetuating an already sluggish recovery.

The production-led recovery does seem to have lost a step but is holding. Localized reports covering manufacturing in the Richmond Federal Reserve district told of a slight slowdown in June, with their indicator easing from a reading of 26 to 23. Over in the Kansas City district, a sharp drop in May was thankfully not repeated in June, but the dip in their indicator from a reading of 5 to just 3 leaves activity barely above flatline in their area.

Orders for durable goods cratered by 1.1% during May, but the downturn was due to a falloff in orders for expensive aircraft. Removing the distortion from those big-ticket items left a "core" spending rate by businesses of +2.1%, a fairly healthy gain, so manufacturing should be able to continue to do the economic heavy lifting for a while yet. Hopefully it will be a period long enough so as to allow consumers to get back into the game.

New claims for unemployment fell during the week of June 19... all the way back to familiar and typically lousy levels. The 457,000 new applications for benefits was actually the lowest such number since early May, but still far too elevated to indicate any measurable labor market improvement. The June jobs report comes next Friday; May produced a disappointing level of hires, and with the influence of Census hiring gone, expectations are for a net loss of jobs to have occurred. Still, with the momentum of five positive months in a row, we might do a little bit better than expected.

Current Adjustable Rate Mortgage (ARM) Indexes Index For the Week Ending Previous Year   Jun 18 May 21 Jun 19 6-Mo. TCM 0.16% 0.23% 0.31% 1-Yr. TCM 0.30% 0.35% 0.51% 3-Yr. TCM 1.22% 1.24% 1.82% 5-Yr. TCM 2.06% 2.10% 2.76% FHFB NMCR 4.99% 5.02% 4.88% SAIF 11th Dist. COF 1.825% 1.859% 1.627% HSH Nat'l Avg. Offer Rate 5.11% 5.21% 5.91%   Sources: FRB, OTS, HSH Associates.

A bit better than expected, too, was the final June review of Consumer Sentiment. The University of Michigan survey rang in at a two-and-a-half year high of 76.0 for the month, with both present and expected conditions putting in gains. Even with the gain, sentiment remains low and a long, long way from pre-recession levels. Also, the different measurements of the weekly ABC News/Washington Post poll of Consumer Comfort has yet to stage a breakout from its recession borders, but moved a little closer to doing so during the week ending June 20, bouncing two notches higher to -43. The most recent high was -41 way back at the turn of the year.

We're approaching the halfway point of 2010. At this point, we expected to have a growing economy (we do, sort of) and a falling unemployment rate (not so much). A confluence of factors has served to bring us lower rates than expected at this point in the year, and present prospects seem likely to have them persist for longer than anticipated. There's nothing wrong with this at all, but we'd trade slightly higher rates for better economic prospects and a firmer hiring pattern at this point. Refinancing is fine in and of itself -- it can free up money for consumer spending, and serves to put household balance sheets in much better shape overall -- but it remains a poor substitute for the beneficial effects of a good homebuilding and -buying trend.

Next week is the last full week before the Summer doldrums hit, and a busy one, too. A full calendar of reports during the week culminates with the employment report on Friday, but before then we'll see personal income and spending data, consumer confidence, auto sales, the latest ISM manufacturing survey and more.

Underlying interest rates trended down again this week, and at least one contact noted that MBS prices were near or at all-time highs. If solid demand for well-underwitten MBS investments with any kind of yield isn't being met with new supply, prices rise and yields (along with mortgage rates) tend to fall. Its worth noting that, in years past, falling interest rates were met with additional purchases of Treasuries as a hedging instrument against refinancing, which in turn served to produce lower rates, which served to produce more refinancing. It can be a beneficial circle, for at least a while, but with yields already puny its hard to see how anyone would want to buy after a while.

Rates may slip again next week, although that should be no surprise at this point. Any group of solid reports, especially employment, would stop and reverse any decline. Refi or buy if you can, at rates probably as low as your parents -- or even grandparents -- got.