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September 6, 2002
By Louis S. Barnes Friday, September 6, 2002
Mortgage rates fell to a new-record low yesterday before rebounding to the old record today.
At the best of yesterday, a 1.00% "origination fee" would get a 30-year rate in the high fives, easy, and "0+0" money almost made it to 6.00%. Today the world is closer to Freddie Mac's survey finding of 6.15 plus .6% fee (Freddie takes the survey early in the week, releases it on Thursdays, the public finds it in Friday's newspapers, when it is correct in real time completely by accident).
The drivers, on the way down: August economic data every bit as flat as July, overseas data worse than here, Iraq, and pre-9/11 jitters.
The twin reports for August from the Institute for Supply Management describe a stalling economy -- not stalled, and not in a double-dip to recession, but unmistakably stalling. The manufacturing sector held just above contraction, at 50.5 the same as July, but the new orders component fell for the first time since last November, down to 49.7. The ISM's service-sector review (almost 80% of the economy) declined from 53.1 in July to 50.9 in August.
Major retailers (Wal-Mart, Target, May...) all reported August sales weaker than already-subdued forecasts, though things like appliances and furniture were supported by home sales, and auto sales screamed along on zero-interest gas.
Then, this morning, the bond market was caught off balance by two things: job data and refi pressure. The Labor Department announced that payrolls rose by 39,000 jobs in August and that the unemployment rate fell from 5.9% to 5.7%. No bond trader attached importance to the unemployment decline (a statistical quirk in workforce calculations), but positive payrolls exposed gamblers who were looking for a deeper deceleration in the economy in August.
Yesterday's newest record-low mortgage rates let loose an avalanche of faxes attempting to lock-in rates for waiting clients. By now, every mortgage banker in the country keeps a list of clients ranked by "trigger rate," the rate the client has said to take on sight. Yesterday evening, at least one giant wholesaler-securitizer stopped accepting new locks: their and others' attempts to hedge their interest-rate risk in future delivery of closed loans had blown up the futures and cash bond markets.
We have met the enemy, and they are us.
What next? There are still an amazing number of analysts (amazing to me) who believe the economy is cooking along at 2.5% GDP growth, soon to accelerate to 3.5% or better. Their faith is based on a super-easy Fed (though this morning's job data mean the Fed will not ease again this month), and that somehow, productivity growth will goose the economy. The people who believe these things have insisted on them for a year-and-a-half, and don't seem to mind having been wrong.
Fewer investors are with them: a skedaddle to safety drove mortgages down, and took the 10-year T-note to 3.91% (back to 4.03% today). The Dow is 500 points under 9,000, the peak of the August rally, and stock markets all over the world are in the same, lousy shape. One reliable international report found the only economic strength on the planet in "non-Japan East Asia," though China was weakening.
Money is properly priced now for a trudging, stumbling recovery in the US. This delicate situation is not well-balanced: an economy like this is vulnerable to a negative surprise (an "exogenous shock"), and I do not see a counterweight in the form of possible/probable positive surprises. We need a long stretch of good luck for the economy to gather forward momentum.
Of course, if you have your heart set on a lower mortgage rate, all we need is a little bad luck.
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