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| Mortgages: Rates and the Bear Response March 21, 2008 -- The government unlashed more help for troubled mortgage and financial markets this week, although too late to save Bear Stearns from an untimely demise. The introduction of the Term Securities Lending Facility last week -- a way for firms to swap illiquid mortgage assets for tradeable Treasury Securities -- was soon joined by the offer of direct Fed lending to troubled financial firms. However, the liquidity crisis which engulfed Bear last week so weakened the firm that there seemed to be little choice but to engineer a fast sale of the firm at a fire-sale price to JPMorgan Chase. By Tuesday, mortgage markets were abuzz with the prospect of Fannie Mae's and Freddie Mac's new ability to purchase as much as an additional $200 billion worth of mortgages, due to OFHEO's 30% reduction in the amount of reserves the GSEs were required to hold against loans. Those higher loan-loss reserves were put into place several years ago, when ballooning portfolios and opaque hedging strategies at those firms was believed to be fostering potentially systemic risks. Earlier this month, restrictions on the amount of mortgages the GSEs can hold in their own portfolios was lifted. As the possibility of more and faster loan purchases came into light, conforming mortgage rates fell sharply, running below 6% for the first time in about five weeks and closing HSH's weekly survey at 5.91%. Jumbo markets, still impaired, saw little change in pricing, with the average Jumbo 30 FRM landing at 7.22%. HSH's combined FRM indicator, which includes both kinds of loans, eased back by 22 basis points to close the period at 6.50%.
Late Tuesday, the Federal Reserve Open Market Committee slashed short-term interest rates by an additional 75 basis points (0.75%), leaving the Federal Funds target rate at 2.25%, with that key cost of money now down by a full 225 basis points since the beginning of the year. The Prime Rate also slid by a like amount but effects on other interest rates and markets are varied. Read our analysis of the Fed move here. Lower interest rates and easier access to cash are all important components if we're to get the economy back on track. Debate over whether we're in a recession aside, there's no doubt that economic growth has faltered. Whether or not the stimulus of fiscal policy and lower costs of certain kinds of credit will be sufficient to kick-start growth anytime soon is anyone's guess, but we do think key elements are now more fully in place to start to resurrect stumbling housing markets. Two good indicators suggest that we're running along the bottom in terms of housing. The sentiment index of members of the National Association of Home Builders remained at a weak reading of 20 in March, holding in a narrow range for the last seven months after a near-straight-line decline from June of 2005 to last September. Traffic and sales levels remained at February's levels, too. Housing Starts came in at a quiet 1.065 million (annualized) units initiated in February, down just 0.6% from January's revised level. Single-family activity was down the most, which is to be expected at a time when builders are seeking to sell existing inventory to make room for new homes. Multifamily homes kicked higher, as condo and townhome development increased 14% for the month. Building permits, an indicator of future activity, continued to fall, with the 7.8% decline leaving potential starts down the road under one million (annualized) units. At present, there are more than enough units available to fulfill demand for months, so there's little reason to go through the often-expensive permitting process right now.
More slowness was evident in the February report covering Industrial Production and factory utilization. IP eased by 0.5%; almost all the drag came in the form of lower utility output, but manufacturing dipped by 0.4% as well. With that decline, the percentage of factory floors in active use nudged down to 80.9% from 81.5% in January. Local measures of factory activity revealed that March was more or less as weak as February. The index of local manufacturing conditions in the Philadelphia Federal Reserve district improved somewhat, rising from a -24 reading to -17.4 during the month. However, the report from the New York Fed district declined a substantial 10.5 points to land at -22.2 for the month. Both series were in positive territory until November and January, respectively, so the downturn has been both swift and pronounced. Things don't appear too much brighter down the road, at least according to the crystal ball known as the Index of Leading Economic Indicators. The February reading of -0.3% was actually better than expected, but not as good as January's milder 0.1% downtick. The LEI has produced negative numbers for seven consecutive months, but those figures may better represent the period in which the components were gathered rather than foretelling the future. Find fresh mortgage rates you can believe every day at HSH. Come what may, the future does seem likely to contain at least some inflation pressure. Inflation isn't out of control by any means, but is still a force to be reckoned with. The Producer Price Index for February notched a 0.3% increase in the 'headline' report, a decline from January's outsized 1% increase, but price pressures are running at a 6.8% annualized level for production upstream of consumers. Like the Consumer Price Index, the PPI also has a 'core' measurement which strips away food and energy inputs to try to reveal inflation more clearly. The 'core' PPI rose even more than did the headline, with the 0.5% lift in costs in February leaving a 2.5% rise in core PPI over the past twelve months. This number is a little above the Fed's preferred level of perhaps 2%, but the Fed seems glad to trade a little more inflation for a little more economic growth at the moment. That's precisely why they slashed another 75 basis points from both the Federal Funds and Discount Rates on Tuesday. While there were two dissenting votes, the Fed noted that "the outlook for economic activity has weakened further" and observed that "growth in consumer spending has slowed and labor markets have softened." Moreover, they exect that the mess in financial and housing markets are "likely to weigh on economic growth over the next few quarters."
But concerns about prices remain firmly in their minds: "Inflation has been elevated, and some indicators of inflation expectations have risen," said the Committee. They noted that they expect a "leveling-out of energy and other commodity prices... [but] uncertainty about the inflation outlook has increased." Hopefully, the expected boost for economic growth won't be accompanied by more intransigent inflation, but we won't know that until we get there. Eventually, growth will pick up again, and when it does it's a reasonable bet that the Fed will raise interest rates as quickly as possible to deter price pressures. In the Fed statement which accompanied the close of the meeting, they also did note that they expected "an easing of pressures on resource utilization." This is generally believed to refer to the resource which is human capital, aka labor markets. Unemployment numbers have drifted higher, and weekly unemployment claims kicked 22,000 higher to 378,000 new applications during the week ending March 15. This was the third reading in the 370s in the past eight weeks, and the last two employment reports have been slightly negative, so it's reasonable to expect that the next one will be much the same. It'll be two more weeks before we know, though, but there's no reason for much optimism at the moment. As you might expect, bad news continues to give people the blues. The weekly ABC News/Washington Post poll of Consumer Comfort crawled off the -37 bottom a couple of weeks ago, climbing as high as -30, but backslid by a tick to land at -31 during the week of March 16. The advent of Spring this week has brought flooding to wide swaths of the country, and that will probably temper moods next week. Trying to keep up with the changes in financial and mortgage markets has been more than challenging, and forecasting interest rate movements in this environment considerably more difficult than it typically is. We keep trying, though, and have a new two-month forecast posted at our website. Markets were closed on Friday, and three-day market weekends haven't been kind come the opening bell on Monday, so our fingers remain crossed. For next week, though, we'll get a fair bit of new data. We'll find out about new and existing home sales, durable goods orders and several additional regional manufacturing pictures, personal income and spending, and several more reports revealing how consumers feel about their situations. If present patterns hold (never a sure thing) we'd expect a collective downbeat tone, or perhaps a little improvement to less-poor readings here or there. Floods of liquidity and lower rates should begin to have an impact any time now, and we think overall rates should ease some, with conforming more likely to fall than jumbo. HOT OFF THE PRESS: our new Two-Month Forecast. OUR LATEST site survey wants your opinion: How long before the housing & mortgage markets recover? For today's top stories, see our daily news column. | | ||||||||||||||||||||||||||||||||||||||||||||
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| For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President Copyright 2008, HSH® Associates, Financial Publishers. All rights reserved. | |||||||||||||||||||||||||||||||||||||||||||||
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