Range Bound Rate Environment
"The US economy continues on a bumpy road to recovery. There is no doubt that the extreme weather conditions across much of the country have adversely impacted the recent dataflow. In our view, it will be difficult to get a firm grip on the economy until the March data begin to roll in. We expect that once the impact from the severe weather fades, the data will reveal an economy enjoying a modest cyclical recovery."
[Ethan S. Harris. North American Economist, Bank of America/Merrill Lynch, 02.26.10]
Recovery Signs Evident
Labor market conditions are showing recovery signs. The unemployment rate held steady at 9.7 percent in January and February, which was down from October’s 10.1 percent cycle peak. But, be aware that as more job seekers enter the market (i.e. higher number of unemployed), the unemployment rate may rise back into double digits. This means that things may look worse on the surface as the underlying market improves throughout 2010.
Job losses slowed in January and February (62,000 combined). To put that in perspective, in January and February of 2009, businesses reported (1,505,000) fewer jobs. Temporary help services have been adding jobs since last September and manufacturing firms have been hiring for the past two months, both of which are viewed as positive momentum in support of predictions for job growth of ~100,000/month in the upcoming months (Census-related hiring in the April to June timeframe also has potential to boost job growth).
The Institute for Supply Management (“ISM”) national surveys of manufacturing, as well as service firms, have both recently registered growth (readings greater than 50), which further indicates support for expectations of sustained economic growth.
The ISM manufacturing index suggests that the manufacturing sector has been expanding since last August, and the employment sub-index confirms industry hiring. Gross Domestic Product (GDP) in the fourth quarter of 2009 is currently estimated at 5.9 percent (that’s the second of three readings), and is boosted by smaller inventory declines and business investment. During 2010, GDP is expected to remain positive with quarterly readings
around 3 percent.
The Conference Board’s consumer confidence index continues to hold below historic norms (46 in February vs. 95 in better times) due to weak labor market conditions, but retail sales registered growth (up 0.3 percent in February), and the personal savings rate dipped (3.3 percent in February from 4.2 percent in January.) This indicates consumer spending is strengthening despite low confidence. Increased consumer spending is considered extremely important to U.S. economic recovery because it will add to GDP growth, bolster manufacturing activity and eventually spur hiring across more industries.
“We think we're going from a period of record-low mortgage rates to a 6 percent rate ... So we think that with the recovery in housing demand that it's not going to be a significant enough roadblock to keep the housing market from recovering. ... I think that this recovery is becoming self-sustaining and that's a real positive."
[Michael Fratantoni, Vice President of Single-Family Research, Mortgage Bankers Association, quoted on SNL, 03.05.10 ]
Mortgage Rates Remain Low; Home Prices Stable
Fixed-rate mortgage rates have been holding in a tight — and low —range for the past five months, between 4.79 percent and 5.18 percent. That’s right, the average 30-year fixed rate mortgage hasn’t been above 5.20 percent since last August! The monthly rate average dropped to 4.97 percent during February from 5.07 percent in January as the spread between 10Y T Bill rate and 30-year fixed rate mortgage tightened to 127bp (due in part to the Fed’s MBS purchases and government support for GSEs). February’s spread was tightest since October 1997, and marks the fourth straight month of sub-150bp spreads, which hasn’t happened since the first half of 2007. The lower the spread between government bonds and average mortgage rates, the less risk investors perceive in mortgage investments.
Low mortgage rates and the upcoming deadline for home buyer tax credit (contracts must be signed by April 30, 2010, and closed by June 30, 2010) are likely to boost purchase activity in the next few months. Home sales and mortgage application activity declined in December and January. Why? The original first-time home buyer tax credit expired at end of November, winter weather deterred home buyers and lenders dealt with challenges of new RESPA rules. Refinance application activity picked up in February in response to lower rates, while purchase volume has picked up in recent weeks.
Home prices have been fairly stable, across most measures, for the past few months as weak demand and lower inventory of homes available for sale offset impact on prices. Foreclosure inventory and 90+ day delinquencies remain at high levels, but declining 30- and 60-day delinquency rates may suggest improved conditions ahead, especially with the ramp-up of successful loan modification programs that may help more borrowers avoid foreclosure.
"... forces will help the economy and housing markets shake the chills of winter and emerge stronger in the spring."
[Frank Nothaft, Chief Economist, Freddie Mac, 03.11.10]
Alex Arce
Shelter Mortgage
Senior Loan Officer
Se Habla Espanol
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