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| Mortgage Rates on Downward Slope September 7, 2007 -- Credit troubles remain a top concern in the markets, but a poor showing in the nation's job growth put the economy back on center stage this week. A sizable rally in Treasury yields helped to drive down the cost of credit a little bit more, with the overall average 30-year fixed-rate mortgage (FRM) falling by two basis points to 6.92%, according to the nation's leading survey of mortgage prices. Hybrid 5/1 ARMs continued seem to be normalizing with an average interest rates of 6.75%, down a sharp nine basis points from last week.
The hangover from the housing boom continues, with delinqencies and foreclosures both on the rise in the second quarter, according to the Mortgage Bankers Association of America. Far less attention was paid to the fact that, absent the influence of California, Florida, Nevada and Arizona, loans entering foreclosure actually declined in the second quarter of 2007. Those areas are suffering from high levels of non-owner-occupied (investor) defaults as well as trouble with adjustable rate subprime mortgages. See our updated discussion on the credit crunch for a more in-depth look at these issues. Also, if you've not yet seen our thumbnail sketch of the mortgage liquidity crunch, here's a good opportunity to do so.
Despite the ongoing trouble in credit and housing markets, job growth has been fair this year, as the economy holds near what might be considered "full" employment. Sizable increases in hiring occurred in a number of months during 2007, but that apparently came to a grinding halt in August, when a net 4,000 jobs were lost during the month. The losses might be able to be explained away by some unusual factors -- government employment fell for a second straight month, for example -- but downward revisions to June and July left a distinct impression that the economy downshifted at the end of the second quarter and certainly through the third quarter to date. Although the nation's unemployment rate held steady at 4.6%, cries from the market for a near-immediate cut in short-term interest rates arose. Although the softer data does lend some credence to their argument for a lower Fed Funds rate, the Fed may instead hold pat; in recent months, the Fed has noted that in order for inflation to truly begin to wane, that some "slack" in "resource utilization" (largely labor markets) would be required. A couple of anemic months of hiring hasn't yet translated into a higher unemployment rate, but it does seem likely to move at least somewhat higher. One theory of economics essentially states that about a 5% level of unemployment should allow the economy to grow without sparking inflation, and we've been below that level for quite some time. On the topic of employment, the outplacement firm Challenger, Gray and Christmas noted that there were 79,459 announced layoffs in August, up from just 42,897 in July. It's safe to say that many of those announced cuts were at financial and mortgage-related firms, and to that end, Countrywide announced on Friday that they would lay off perhaps 12,000 employees by year end. Of course, not all announced job cuts happen, and some happen outside the United States. The weekly unemployment claims number presented an interesting contrast: at 318,000 it represented a decline of 19,000 from the previous week -- the best number since early August. One of the offsets to labor-based price pressures is an increase in output per hour by a worker, known as productivity. More productive workers can be paid more without any effect on final costs. During the second quarter, Productivity rose at a revised 2.6% increase, and that served to trim the amount of labor cost incorporated into each unit produced to a rise of just 1.4%, down sharply from the first quarter.
If certain portions of the consumer-led portion of the economy are stumbling, business must pick up the baton. Manufacturing seems to be holding its own, at least according to the members of the Institute for Supply Management. The ISM index for August eased just a little, slipping from a reading of 53.8 to one of 52.9, but remains on the "mildly expanding" side. The ISM index uses a breakeven level of 50. Input costs also eased back during the month, but remain a little elevated, with the ISM's "prices paid" subindex notching 63.0, down from July's 65.0 level. Also, the ISM non-manufacturing "service" index managed to remain unchanged at a reading of 55.8 for the month, and like its manufacturing sibling, price pressures eased a bit. In light of the continuing mess in housing, a decline in Construction Spending during July wasn't unexpected. The -1.4% drag from residential investment overwhelmed a 0.4% increase in commercial building and a 0.7% lift in government spending. The overall figure declined by 0.4% during the month, and improvement in residential spending is likely way off into the distance, given present levels of unsold new homes on the market. Troubling headlines have kept most measures of consumer attitudes at low levels, but the highest-frequency reading improved a little. The weekly ABC News/Washington Post poll of Consumer Comfort moved two ticks higher to -17 during the week of September 2. It was the second consecutive improvement after a plummet to -20 in mid-August. Those sour moods haven't stopped people from buying, though, as auto sales rebounded in August to an annualized 16.3 million, and retail sales were said to be pretty good during the month, as well.
The Fed leans heavily on its own sources of information to help guide monetary policy. The week, the Fed's own survey of regional economic conditions, called the "Beige Book" for the color of its cover, specifically noted "modest," "moderate," or "mixed" growth levels around the country, and went on to say that "Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited." With regards to hiring activity, "Nearly every District reported at least modest increases in employment during the recent survey period." Admittedly, these reports don't include more recent developments such as this week's employment report, but with an FOMC meeting due up in about 10 days, the survey's measured tenor doesn't suggest a teetering economy, but rather one which seems to be managing reasonably well. The surveys were taken up to about August 27. Demands for the Fed to "do something" may be quite strident at the moment, but at least some of the evidence points to an economy weathering its current troubles fairly well. In addition, those credit troubles are fostering lower interest rates for at least some mortgages, and that trend seems likely to continue in light of Friday's employment-led rally. The Fed Funds rate, perhaps the shortest of short-term interest rates, has very little to do directly with mortgage prices, and those underlying costs of credit are already much lower than they were just a few weeks ago. Spreads, though, have widened considerably, as investors seek to be better compensated for whatever risks they perceive. Mortgage rates improved a little this week, and that seems likely to be the case next week, too. While the average for a 30-year FRM conforming failed to move this week, average Jumbo 30-FRMs shed about four basis points. Some money may have begun moving back to good quality, well documented jumbos, and we think that process will continue as the proverbial wheat gets separated from the chaff. Rates should shed a few more basis points overall next week, perhaps as many as four for the 30-year FRM. For a longer view, see HSH's new two-month forecast. And for today's top stories, see our daily news column.Are You a Subprime Success Story? If you're one of the majority of subprime borrowers who's not in financial trouble, we'd love to hear from you! | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| For further Information, inquiries, or comment: Keith T. Gumbinger, Vice President Copyright 2007, HSH® Associates, Financial Publishers. All rights reserved. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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