Thirst for bonds shows growing fear that recovery is in jeopardy

By Inman News, Thursday, May 17, 2012

Mortgage rates headed deeper into record territory this week as rumblings from Europe continue to make the guaranteed bonds that fund most mortgage loans look like a safe bet to investors.

Fears that the European debt crisis will derail the global economic recovery may also be weighing on would-be homebuyers, as demand for purchase loans slipped last week, with applications back down to levels seen a year ago.

Economists at Fannie Mae said in a monthly outlook report released today that they continue to see “a number of threats that could dampen growth” this year, including “substantial risk that investors will lose confidence in the ability of Europe to solve its problems over the intermediate term.”

Recent elections in Greece and France indicated “waning public support for austerity, igniting fears that the sovereign debt crisis could develop into a more significant credit crisis that could spill over to countries around the globe,” Fannie Mae economists Doug Duncan and Orawin T. Velz said.

With the U.S. again approaching its debt ceiling, there’s also uncertainty over whether the lawmakers here will reach a long-term budget agreement and forestall more than $1 trillion in automatic spending cuts set to begin taking effect at the end of this year.

With Republicans demanding spending cuts and Democrats angling for tax increases, the debate over raising the debt ceiling is “likely to weigh heavily on financial markets and consumer confidence, potentially dampening growth late in the year,” Duncan and Velz said.

Several members of the Federal Reserve committee that determines the central bank’s monetary policy are worried that uncertainty over the budget could lead businesses to defer hiring and investment, according to minutes of the committee’s last meeting in April.

Although housing sales appeared to be losing steam at the end of the first quarter, Fannie Mae economists are sticking to their projections that total home sales will increase by a little more than 7 percent this year, and that housing starts will jump nearly 20 percent.

Modest economic growth, and uncertainty about the European debt crisis and the U.S. budget talks, should at least serve to keep interest rates low, Fannie Mae economists said. They expect rates on 30-year fixed-rate mortgages to rise slowly back toward 4 percent by the end of the year.

Freddie Mac’s weekly Primary Mortgage Market Survey showed rates on 30-year fixed-rate mortgages averaged 3.79 percent with an average 0.7 point for the week ending May 17, down from 3.83 percent last week and 4.61 percent a year ago. That’s a new low in Freddie Mac records dating to 1971.

For 15-year fixed-rate loans, rates averaged 3.04 percent with an average 0.7 point, down from 3.05 percent last week and 3.8 percent a year ago. That’s a new low in records dating to 1991.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.83 percent with an average 0.6 point, up from 2.81 percent last week but down from 3.48 percent a year ago. Rates on five-year ARMs hit an all-time low in records dating to 2005 of 2.78 percent during the week ending April 19.

For one-year Treasury-indexed ARM loans, rates averaged 2.78 percent with an average 0.5 point, up from 2.73 percent last week but down from 3.15 percent a year ago. Rates on one-year ARMs hit an all-time low in records dating to 1984 of 2.72 percent during the week ending March 1.

Looking back a week, a separate survey by the Mortgage Bankers Association showed demand for purchase mortgages fell a seasonally adjusted 2.4 percent during the week ending May 11 compared to the week before. Demand for purchase mortgages was down 1 percent from a year ago.

There was a 13 percent increase in applications to refinance from the week before, with 28 percent of applicants seeking loans through the Home Affordable Refinancing Program (HARP), which is targeted at underwater borrowers.

In their monthly economic outlook, Fannie Mae economists said the latest numbers show “some loss of momentum” in housing activity late in the first quarter.

After a “robust gain” in January, existing-home sales fell in March for the second consecutive month. Although first-quarter existing-home sales were much stronger than a year ago, they remained below the pace seen during the first three months of 2010, when federal homebuyer tax credits were still in place.

“Housing will continue to face many challenges,” Duncan and Velz said. While the Census Bureau’s latest housing vacancy survey suggests that the inventory of homes available for sale or rent is shrinking, it also shows a continued rise in the number of vacant homes held off the market.

“Combined with the still elevated number of seriously delinquent loans, the current environment indicates that the shadow inventory will remain an issue for the housing recovery in coming years,” Fannie Mae economists said. “The overhang of the shadow inventory will continue to weigh on home prices.”

Although low mortgage rates are “one positive for the housing market,” lending standards for mortgages remain tight, they noted.

Fannie Mae’s latest survey of consumer’s views of housing market conditions, conducted in April, showed some improvement in sentiment among buyers and sellers.

The survey found that on average, Americans expected home prices to increase by 1.3 percent over the next year, up 0.4 percentage points from March and the highest value recorded in the survey’s two-year history.

Although 71 percent of those surveyed said it’s a good time to buy, only 15 percent thought it was a good time to sell. And 32 percent of those surveyed said they would rent if they were going to move, up 2 percent from March and the highest level since November 2011.