OK...when will it stop? "Why" should continally decreasing interest rates stop? Isn't that "good" for the economy.
Well, look at it this way - if you were an investor and the return on your investments kept going down, down, down - how would you feel?
Someone has to buy the mortgages, right; and there has to be some positive (employment, housing, manufacturing, something...) to get markets trending up again.
As much as we all like low interest rates, I'm not a fan. Sorry, but for our economy to pull itself out of this "malaise" (remember Jimmy Carter?), rates need to go up.
Current market conditions:
Mortgage pricing opens under slight pressure, but stable for the time being. We ended the week on a very strong note on friday as MBS reached record breaking levels once again. The 10yr treasury note was finally able to close below the 2.88% level and currently sits at 2.82%. The bullish trend in bonds seems to be in full effect as economic data in housing and jobs continues to be questionable at best. We don't see anything in the near term to break the trend, however with treasury auctions on the calendar this week, you'll want to be cautious if floating as traders will likely begin hedging ahead of the auctions.
More:
Consumer Credit shrank for the 5th straight month by $1.3 bn according to the Federal Reserve making it the 16th drop out of the past 17 months, but it was less than the expected drop of $5 bn yet the figure still shows the consumer continues to pay down debt and not run to the malls. If you are an optimist you could say, ‘hey, it is leveling off' BUT as long as income and employment don't show improvements consumer continue to avoid taking on new debt. Between Sep 2001 to Sep 2008, not including mortgages, consumer credit increased 59% to nearly $2.6 trillion. Since then, consumer debt has decline about 6% or $166 billion, to a little more than $2.42 trillion. 2010 continues to shape up into a year that is well below expectations...
Econ News According to the Commerce Dept, income and savings basically unchanged in June. Income increased by $3 billion, or less than 0.1%, but they downwardly revised the 0.3% rise in May. Economists expected the figure to edge up 0.1% during the month. Spending by individuals, a key driver of economic growth, fell $2.9 billion June, or by less than 0.1%, in line with economists' estimates. The report showed that Americans saved a slightly larger chunk of their disposable income during the month, as the personal savings rate edged higher for a third straight month. Personal savings totaled $725.9 billion, or 6.4% of disposable income, up from $713.9 billion, or 6.3%, in May. Meanwhile, the core consumption expenditures index, a closely watched gauge for year-over-year inflation that excludes food and energy, increased less than 0.1% in June, following a 0.1% increase in May. Economists are worried that the financial troubles weighing on households could cause spending to ebb even more in the second half of the year.
The sub-par economic growth, just about half the pace normally seen coming out of a deep recession, has made little headway in reducing the 9.5 percent unemployment rate. The zero reading on income growth was weaker than the 0.2 percent increase economists had expected. It followed a 0.3 percent rise in May and was the poorest showing since incomes were also flat in September. Part of the weakness in June reflected a decline in the number of temporary census workers, which subtracted $3.4 billion from federal payrolls at an annual rate. A spurt in census hiring in May had boosted government payrolls. The zero reading on consumer spending was also slightly weaker than economists had forecast. It followed a small 0.1 percent rise in May and a 0.1 percent decline in April. No good news in this report.......
Treasury Market The 2-10 Yield Curve continues to narrow - 3 weeks ago it was 242 bps, 2 weeks ago 239 bps, and last week it was 236 bps - as the 2 yr ended last week at 0.50% (another new low in yield) and the 10-yr ended at 2.86%. As I mentioned earlier, a good proxy for GDP is the 10-yr yield. At 2.86%, you can assume that is what the bond market is saying GDP growth will be for the year. If the 10-yr starts to rise, bad for borrowers, but good news for the economy. Right now, the bond market is not expecting much from the economy or the inflation rate - and I agree. It would not be surprising to me, or others, that the 10-yr Treasury gets down to 2.5% sometime next year.
FHA said this week that it is down to $3.5 bn in cash in its ‘capital reserve account' after they transferred $9.8 bn to another account to cover losses in its portfolio from expected defaults and foreclosures. In less that 3 months, FHA CRA has shown a 71% decline which is certainly dramatic. This past week Congress approved changes to allow the FHA to replenish their depleted reserves, thus increasing costs for borrowers. The FHA will simultaneously lower their upfront mortgage premium from 2.25% to 1%, and increase their annual mortgage premium from .55% to up to 1.55%. According to the FHA letter it will not be fully increasing the annual premium to 1.55% at this time. Beginning September 7, 2010, the FHA will first increase their annual premium to .85% for borrowers with 95% LTV or lower, and .90% for borrowers above 95% LTV. The combined impact of lowering the upfront fee and raising the monthly fee would mean a borrower taking out a mortgage of $170,000 at an interest rate of 5 percent would pay an extra $38 a month. The good news is, the lower upfront mortgage premium will allow new borrowers to get in the door more cheaply.
Bottomline: economic news continues to be negative, overall; and, although rates continue to go down, they are going down much less than expected - due to bank/lender concern about overall risk and its associated costs. Don't expect dramatically lower rates, just a continuing slow spiral in that direction.
- Al Rodenburg, www.mortgageoffice.com
Comments(0)