30-Year Rates Are Lowest In More Than Two Years

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®)  in which the 30-year fixed-rate mortgage (FRM) averaged 6.10 percent with an average 0.5 point for the week ending November 29, 2007, down from last week when it averaged 6.20 percent as well. Last year at this time, the 30-year FRM averaged 6.14 percent. The 30-year FRM has not been lower since the week ending October 13, 2005, when it averaged 6.03 percent.

The 15-year FRM this week averaged 5.73 percent with an average 0.5 point, down from last week when it averaged 5.83 percent. A year ago at this time, the 15-year FRM averaged 5.87 percent. The 15-year FRM has not been lower since the week ending January 26, 2006, when it averaged 5.70 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.86 percent this week, with an average 0.5 point, down from last week when it averaged 5.88 percent. A year ago, the 5-year ARM averaged 5.95 percent. The 5-year ARM has not been lower since the week ending January 26, 2006 when it averaged 5.75 percent.

One-year Treasury-indexed ARMs averaged 5.43 percent this week with an average 0.7 point, up from last week when it was 5.42 percent. At this time last year, the 1-year ARM averaged 5.46 percent.

“Interest rates for U.S. Treasury securities have been drifting lower this month over market concerns that the housing slump and stress in the credit markets could slow future economic growth,” said Frank Nothaft, Freddie Mac vice president and chief economist. “As a result, interest rates for fixed-rate mortgages had room to slip lower this week. In addition to these concerns, the Federal Reserve also noted in its November 28th Beige Book that the glut of available homes continued, keeping downward pressure on prices and construction activity.

“Add to this the S&P/Case-Shiller® 20-composite index showing house prices falling 4.95 percent in the 12-months ending September, with 15 of the metropolitan areas showing annual declines and the overall picture does, indeed, appear glum with no immediate relief in sight.”  
  
Source: FreddieMac, Primary Mortgage Market Survey® (PMMS®), www.freddiemac.com 

The economic slowdown has begun, according to the Federal Reserve's latest report on conditions across the country released Wednesday.

Housing experts told Fed staffers that no turnaround is on the horizon until into 2008 at the earliest. The US economy has weakened evidently by the continuing depressed housing market, downbeat retailers, and poor showing of real estate lending, according to the report, known informally as the “Beige Book” named after the color of its cover.

The economy continued to grow, but at a slower pace, according to the report. The report is a pre-meeting compilation of anecdotal reports from the 12 Fed Bank districts. Seven of the twelve Federal Reserve Districts showed reduced growth while the other five districts reported modest and/or mixed.

It is designed to give Fed officials a flavor of economic conditions on the ground as they prepare for their next interest-rate setting meeting on Dec. 11.

Conditions in the real estate sector continued to get worse, with only a few signs of steadiness or recovery. The glut of homes for sale inventory continues to press house prices downward and slow construction activity down further, the report said.

Economists believe the Fed will cut rates for the third straight meeting as a result of deteriorating conditions in credit markets. The financial market turmoil is impacting the market for credit. Business loans are down and standards for consumer loans are up.

Two of the few bright spots were manufacturing and tourism, which benefit from the weaker dollar.

The report found soft retail sales and pessimism about the holiday season from retailers, who were also concerned that goods were beginning to pile up on store shelves.

The report said that prices for products and services tied to food and energy were rising significantly, although inflation remained modest overall.

The weaker dollar was resulting in price increases for imported goods.

Some labor markets eased and this was cooling off upward wage pressure, the report found. 
 
 

Home prices have continued to fall since July 2006, but dropped even more sharply in the third quarter of 2007, according to a report released Tuesday (November 27) by Standard and Poor’s in S&P Case/Shiller Home Price Indices.

According to the report, the third-quarter home prices dipped 1.7 percent from the second quarter. The Case/Shiller index covers 20 local markets and a national average.

Of the 20 markets covered, 15 showed negative returns and all 20 had negative returns for September, compared with a month earlier.
Many experts consider the index provides the most accurate home price trends. It also showed that prices peaked in the summer of 2006 and prices have fallen 5 percent since then.

Robert Shiller, the index co-founder and an economist from Yale, says that the housing market could possibly get a lot worse, Shiller added, "You're talking about [home-price] declines of 50 percent, in real terms. That's not out of the question."

Shiller, referring to the latest declines said they were notable for two reasons. "First, the third quarter decline, at 1.7%, was the largest quarterly decline in the index's 21-year history. And, second, the year-over-year decline posted its second consecutive record low at minus 4.5%."

Home price growth started to slow in November 2005 and turned negative in August 2006.

The housing cycle is very important to the business cycle, according to Shiller. Most economic recessions are preceded by housing declines and residential construction is an important leading indicator for the economy. The weakness in the housing market is causing him to wonder whether the nation could slip into recession.

Shiller conceded that most economists are still optimistic; employment is strong, consumer spending robust and the weaker dollar has increased exports. But, there's a big question in his mind whether subprime problems will lead to a retrenchment in consumer demand.

According to Shiller, the current situation is unprecedented - there's never had been a housing boom quite like the one that ended last year - and how we come out of the bust is anyone's guess.

"We are in the aftermath of the biggest housing boom in history," he said, "and, even though a lot of peoples' models don't reflect [the problems], I think there's a significant chance of recession, over 50 percent." 
 
 

A Drag On The Economy Even As Mortgage Rates Decline

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®)  in which the 30-year fixed-rate mortgage (FRM) averaged 6.20 percent with an average 0.5 point for the week ending November 21, 2007, down from last week when it averaged 6.24 percent as well. Last year at this time, the 30-year FRM averaged 6.18 percent. The 30-year FRM has not been lower since the week ending May 10, 2007, when it averaged 6.15 percent.

The 15-year FRM this week averaged 5.83 percent with an average 0.5 point, down from last week when it averaged 5.88 percent. A year ago, the 15-year FRM averaged 5.91 percent. The 15-year FRM has not been lower since the week ending February 2, 2006, when it averaged 5.81 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.88 percent this week, with an average 0.5 point, down from last week when it averaged 5.96 percent. A year ago, the 5-year ARM averaged 5.99 percent. The 5-year ARM has not been lower since the week ending May 3, 2007 when it averaged 5.87 percent.

One-year Treasury-indexed ARMs averaged 5.42 percent this week with an average 0.6 point, down from last week when it was 5.50 percent. At this time last year, the 1-year ARM averaged 5.49 percent. The 1-year ARM has not been this low since the week ending March 22, 2007, when it averaged 5.40 percent.

“Both the producer price index and the consumer price index remained contained in October while industrial production fell,” said Frank Nothaft, Freddie Mac vice president and chief economist. “This allowed interest rates for the 30-year FRM to decline to the lowest levels since early May 2007 and the 15-year FRM to fall to a level not experienced since early last year.

“The housing market remains weak, continuing to be a drag on the economy. For instance, single-family housing starts fell 6.4 percent in October to 917,000 units (annualized), the slowest pace since September 1991, nearly 25 percent below that of October 2006. Additionally, homebuilder confidence in November remained at the lowest level on record.” 
 
 Source: FreddieMac, Primary Mortgage Market Survey® (PMMS®), www.freddiemac.com

Builders have done different techniques to boost sales and move inventory. Freebies are one of them like giving out appliances as well as no cost closing. These have not solved their problems. The tactic of giving extras did not attract enough buyers and some home builders resorted to price cuts and discounts.

They are slowly experiencing the negative effects the price cuts. Builders have not gotten the sales volume they need to compensate for the reduced margins or just get the inventory moving. Many potential buyers are not buying as they are awaiting more price cuts or just waiting for the prices to stabilize as the homes they will buy may depreciate further and they will be at a loss.

“If people stop cutting prices that would be good (for the builders)” says David Goldberg, an analyst with UBS Investment Bank. It can work if everybody does it. If still some people do price cuts, then the buyers will just go to them and the other will just be forced to do price cuts too.

Apparently, it does not work if 60% of them do it. That's the share of builders that cut prices last month. About half of them labeled the cuts at least effective in bolstering sales or limiting cancellations, down from nearly three-quarters in May, according to National Association of Home Builders.

Yet with the market not expected to improve soon and builders desperate for cash and saddled with inventory, any have been unwilling to resist price-cutting. If they did not cut their prices, they reason, buyers would either turn to competitors who offer better deals or buy used of foreclosed homes.

Still, there are limits. "The reason some companies say 'Enough is enough' on the price cuts is because price cuts often generate expectations of further reductions," says Dave Seiders, the NAHB chief economist. "The question is: 'How far can you go?"

"I've been advising builders, in general, [to] do whatever it takes to get rid of inventory now because the prospects for house prices in the coming year don't look good," he says. "I'm afraid that '08 may be a year of pretty systematic price erosion, at least in many markets."