Weekly Mortgage Rate Review--End of the Rate Records?, September 3, 2010

Have we Seen the Last Record Low in Mortgage Rates?

Evidence is mounting that the trend of ever-lower mortgage rates may be coming to an end.  I will consider the evidence and give you my thoughts after we review mortgage rate activity for the week.

Monday began with dramatically improved mortgage pricing.  With little economic data, the move seemed simply to be a reaction to the negative mood from the previous Friday. Tuesday, August 31, 2010 continued the positive pricing movement and sent prices to a new all-time low--perhaps for the final time for many years to come.  But, more on that later.

On Wednesday manufacturing data that was better than expected sent prices higher.  Thursday continued the move higher. The data that was released on productivity, initial jobless claims and factory orders came in close to expectations, yet productivity did turn negative for the first time in a couple of years.  

Friday often provides the most important data and this Friday was no different as the report that is considered the most important guage of the economy--the Non-Farm Payroll report was released.  What the report showed was a surprising better than expected increase in private (non-governmental) job creation.  This caused immediate worsening in mortgage pricing, that may have continued except for the release of the ISM Services Index.  This report measures the strength of the service sector of the economy and the report for July was very weak.  This curtailed the increase in mortgage pricing but was insufficient to actually improve pricing.

Next Week

For the week, mortgage pricing was virtually unchanged from the previous week, yet higher than the all-time lows reached on Tuesday.

Next week is a short, holiday week with very little data available to change the market direction established on Wednesday through Friday of this week.  Consequently, higher rates may lie ahead.

Have We Reached the End of the Line for Mortgage Rate Records?

I say that the evidence seems fairly convincing that we have.  Why?  Well here are my reasons in no particular order:

1.  Lack of a market for a 3.5% coupon mortgage-backed security

2.  Improving US corporate earnings

3.  Record cash on US corporate balance sheets

4.  Improved personal financial positions--lower debt, increased savings

5.  Increasing mergers and acquisitions activity

6. Stabilizing residential real estate values

and the big two,

7.  Impending political actions in Washington

8. Improving jobs picture

I have spoken about all of these issues over the last several months, but not until this week have they all seemingly come together.  As it relates to the political actions, comments made this week by President Obama it appears likely that some sort of new economic stimulus is going to be announced next week. Also, with the Congressional elections only two months away it appears likely that we will have a divided government...one or both houses of Congress controlled by Republicans and the White House (and perhaps the Senate) controlled by Democrats.  This will make compromise a necessity and will likely result in a more business-friendly approach to taxes and regulation.

The current jobs picture is, I believe, actually better than the Non-Farm Payroll report shows.  Remember this report looks back over the previous month.  Now the June, July and August reports have shown improvement. The history of this report is for long-lasting trends, sometimes years in length.  I believe that the jobs picture is improving and will continue through 2010 and 2011.  This is the key to a widespread improvement in the overall US economy.

Of course I could be wrong! Our sputtering economic growth could choke out due to many possible events.  Another bank crisis is possible as accelerating foreclosures on residential properties and emerging issues with commercial properties become more prevalent.  Manufacturing and service sector employers could cut back in response to the global economic slowdown we have expereince over the past several months.  There could be a failed auction of US Treasury debt as foreign investors lose confidence in the long-term strength of the US economy.  US consumers can continue to reduce debt and save excess cash rather than increase borrowing and spending.  An asteroid could hit the earth and ruin everything. 

All this is possible, but I don't see it.  I may be wrong on whether we have hit the final "lowest" rate, but I am confident that the trend is upward from here.  It's time to smoke'm (refinace) if you've got'm (a mortgage).