Excerpts from HSH Assoc. newsletter for the week ended 7/28/06:
With another Fed meeting closing in, fixed rate mortgages (FRM) continue to edge downward. The average 30-year FRM shed eight basis points (.08%) this week, to the lowest figure in about six weeks. Interest rates have now dropped back to their levels of last April 30, 2006 after undergoing a run up over the last 3 months.
While well below their peaks, sales of new and existing homes haven’t crashed, but seem to be pacing lower in an orderly fashion from an extraordinary period, and despite the downtrend, still show resilient strength. Current price and interest rate levels — which combine to produce affordability — are in a mildly restrictive stance, creating drag in the home sales markets. It will take lower prices or lower rates, or a combination of both, to put affordability into greater balance and level off the rate of decline. As rates are expected to be around these levels for the foreseeable future, prices seem likely to be the first to move in a meaningful way.
The Fed’s own survey of regional economic conditions — informally, the “beige book” for the color of its cover — revealed that the economy is still expanding, but in a slower, more mixed pattern than earlier in the year. In addition, some price and wage pressures were still evident but there was nothing in the report to suggest any new surge of inflation or demand. The report of the slowing economy cheered markets, as it served to make it less likely that a “data dependent” Fed would raise interest rates at its next meeting on August 8.
We’ve been of the mind, and on the record for weeks, that we believe the Fed will pause at their August 8 meeting. A pause doesn’t mean that the Fed is actually finished raising rates by any means, and at the moment we still think they’ll be back in the fall with another quarter-point kicker. While we still hold to that forecast, the inflation numbers in the latest data were such as to add a modicum of doubt. Taken collectively, a picture of a cooler economy does emerge, but some of the June and July numbers denote a pick-up in strength lately, and inflation pressures do seem a little persistent. The soft tenor of the reports cheered bond markets this week, as the futures market puts the odds of a Fed move at only a 30% chance, but we think that next Friday’s employment report is really the key. If job and especially wage growth have moved higher, the Fed will have some interesting discussions ahead.
Along with Treasuries, mortgage rates eased back this week, rather more than we expected as the eight-basis-point dip tied for the largest week-to-week decline this year. However, there doesn’t seem to be much space left for them to fall at the moment, even though the 10-year Treasury slipped below 5% on Friday.