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June 4th, 2012

Mortgage rates break record as economy grows more uncertain

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Below is an excerpt from the latest Market Trends newsletter, available Friday night in your inbox:

Another week of sell-offs in global stock markets saw investors running for cover in the world’s safest markets. Money has roared into Treasuries, German Bunds and other fairly safe sovereign debt markets, driving yields down to record lows. Such is the panic of investors to try to save their principal investments that some of these instruments now feature negative returns, once inflation is factored in.

Mortgage rates are being pressed lower, dragged there by the influence of slumping long-term rates. That the U.S. economy is throwing off mixed signals at best doesn’t help matters much, and low rates are a symptom of the sickness and also part of a hoped-for cure.

Mortgage rates: Breaking records

HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbo) slipped by three basis points (0.03 percent) for the week ending June 1 to 4.03 percent, producing a new record two basis points below the old.

Conforming 30-year fixed-rate mortgages closed the week at 3.85 percent, but Friday featured a daily average of 3.75 percent, the lowest reading yet.

The FRMI’s 15-year companion also shed three basis points (0.03 percent), nudging to a new record low of 3.29 percent.

Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages drifted into new territory, falling by another two basis points to 3.68 percent, while the overall average rate for 5/1 Hybrid ARMs returned to record lows of 2.92 percent during the survey period.

The relationship: Mortgage rates and Treasuries

Mortgage rates are falling, but just gently compared to the huge downward spike in Treasury yields. This speaks to the relative demand for the two instruments, as there seems to be an insatiable appetite for government-backed debt. However, investing in mortgages isn’t nearly as liquid as treasuries, and a soft economy here simply exacerbates the additional risk of holding mortgages, which can prepay or default at any time.

6.4.12 TCM10andConfSpreads_060112

It’s not as though the economy started 2012 on a fast note, either. The second revision for GDP for the first quarter featured a downgrade to just 1.9 percent for the period, even more anemic than the 2.2 percent initial estimate. While there have been some signals that the second quarter is a little warmer, we might only be running at perhaps 2.4 percent pace at best right now, when closer to a 3 percent rate on a sustained basis is needed to get us out of the economic mire. Given the troubles around us, that seems less likely to happen anytime soon.

Given the already gray economic skies here and the black clouds not that far off in the distance from the Euro zone troubles, we can’t help wonder if the call of borrowing at record low rates is being more than partially tempered by a sense of unease about the economic climate just ahead.

Perhaps this will only become a soft patch, and we’ll escape much damage. Perhaps our economy is strong enough to power past it. Perhaps the fall in energy and gasoline costs will allow for an offset to any downward pull. Ultimately, panic will subside, but the damage may leave us with an ongoing sluggish recovery that even the benefit of lower interest rates may fail to fix.

Mortgage rates might move lower

Given all the troubles so evident, it’s hard to gin up much optimism. There will be some clues this week as to whether weakness is spreading. These will come in the form of the ISM Services, the Fed’s regional survey of economic conditions (”beige book”), consumer borrowing and factory orders. While all eyes have been on Europe for the past few months, it’s a fair bet that at least some focus will turn here after weak back-to-back employment reports.

Mortgage rates seem determined and destined to be lower this week. The decline should be a handful of basis points, perhaps more if the ISM and beige book reports fail to provide some hope. New record lows, again.

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One Response to “Mortgage rates break record as economy grows more uncertain”

  1. The Appraisal Hub Blog » Blog Archive » What’s The Best Month To Lock A Mortgage Rate? – The Mortgage Reports Says: June 5th, 2012 at 2:52 pm

    [...] loan work for you?Allentown Morning Call BRIEF: Mortgage Interest Rates at Record LowsLoanSafe HSH Financial Publishers (blog) -Dayton Daily News -Minneapolis Star Tribune all 31 news [...]

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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