4.56% 30-Year Fixed Mortgage Sets 40-Year Record Low With 2nd Quarter GDP Coming
Bonds trade in tight range; 30-year fixed mortgage sets new 40 year record low; European banks checked; 2nd quarter GDP on the way; Corporate profits eyed;Housing numbers beat expectations – Recap of July 19-23 economic news and preview of July 26-30 events
Bonds refused to break out of a tight range last week, ensuring homeowners wishing to refinance an excellent opportunity in the week to come. The 10-year Treasury note held between 2.89% and 2.99%, while mortgage pricing stayed in within plus or minus 25 basis points all week. Mortgage pricing generally refers to the sale price of the completed loan, and more directly affects additional fees, or points, that borrowers will pay to get a particular interest rate. The 30-year fixed rate mortgage set a 40-year record low at 4.56%, according to Freddie Mac.
Mortgage and bond traders spent much of the week worrying about the results of stress tests on European banks, and rightly so. Europe has been a significant source of world economic worry over the past 3 months because of concerns about the ability of European banks to continue functioning in the face of a debt crisis for one or more of Europe’s weaker countries. Specifically, Portugal, Ireland, (Italy), Greece and Spain, or the “PIGS”, have been subject to constant focus, frequent downgrades, and substantial concern over recent months, as the probability of default was highlighted recently by the Greek government’s difficulties in raising capital to continue operations.
European banks own a substantial quantity of Europe’s sovereign debt, so a crisis for one country could turn into a disaster for the entire area. Remember the recent $750 billion bailout of US banks, then multiply that by the 16 countries that currently use the Euro currency, and you get the idea.
The results of the ECB stress tests were published on Friday, and traders were relieved to see that 84 of the 91 banks tested passed. Those that failed included 5 small savings banks in Spain, one bank in Greece, and, oddly, one bank in Germany. The results provided relief to traders who had been concerned that more would fail.
Spending cuts like Europe’s present a challenge to economists wishing to see an improvement in economic activity. Advanced results of the 2nd quarter US GDP are due on Friday, and are expected to show the the GDP increased on an annualized pace somewhere between 2.5 and 3.0%.
GDP is composed of 4 main factors: consumer spending, government spending, investment, and net exports. We already know that net exports is a negative, and may have worsened in the 2nd quarter as the dollar gained value against the Euro, making exports more expensive to Europeans. Consumer spending, usually, 65-70% of GDP is often eyed as the key driver of GDP growth.
The problem is that, these days, Joe Consumer stands a pretty good chance of being unemployed and out of money.
Investment, then, is where governments need to focus. Investment is money spent by companies to increase production of goods and services they can then resell to consumers, and investment is currently stagnant.
Think about this:
For every X dollars companies spend on new machinery, for example, they then need to spend Y dollars on salaries for employees they will need to operate that machinery. New machinery by itself adds a little to GDP; imagine the case of Caterpillar, which depends almost entirely on business investment to exist. When Caterpillar sells a new front-end loader, the company buying it has to add salaries for the machine’s operator, as well as workers to maintain that equipment.
Multiply this economy-wide, and you’ll see that companies investing in new machines can have a huge multiplicative effect on the economy. If the machine employs 4 workers, between them, those workers need a net total of 2-3 jobs to support them between supermarket clerks, doctor, dentists, barbers, bartenders, etc.
Ultimately, this Friday, when 2nd Quarter GDP is released, while Investment should be the most focused-upon section, consumer spending will garner more attention.
For the most part, corporations reported some of their highest profits on record last week, including major banks burdened with real estate writeoffs. McDonalds, Ford, American Express, and Microsoft all reported higher-than-expected earnings. Corporations in the US are sitting on bigger piles of cash than at almost any time in their history. If they can be convinced to part with that money, jobs will follow.
Meanwhile, in the US, problems continue for builders of new homes. Their confidence level dipped to a new low, as new home starts hit rock bottom, possibly starting to rebound slightly. Builder concerns have recently been exacerbated by low-priced distressed homes on the market in many areas. Some localities have seen a complete drop off in new construction, especially in areas that overbuilt new homes that still have yet to be occupied.
Builder confidence weighs heavily on investment, as builders are some of the biggest spenders in this area. Meanwhile, sales of existing homes in June beat expectations. Sales had been expected to dip 8.1% due to the expiration of the home buyer tax credit; in actuality they fell only 5.1%.
Some Americans saw jobless benefits on the way to extension last week, as congress entertained an additional benefit for the long-term unemployed. Money spent this way has a a bigger economic effect than any of the $300 stimulus checks you or I received over the last few years, as unemployment compensation is almost universally spent on immediate needs. Still, new claims for unemployment benefits remained quite high.
Apart from the GDP results due Friday, this week also brings several other relevant economic reports, and the US Treasury will be borrowing more than $100 billion through auctions of new securities. On Monday, we’ll find out how many new homes were sold in June, an number widely expected to be dismal. Consumer Confidence will be closely watched on Tuesday, while Wednesday’s Durable Goods Orders will provide insight into major spending. Thursday brings weekly unemployment claims. All in all, there is certainly enough activity to significantly move rates if all news is similar, however, it is much more likely we’ll see a few bright spots here and there along with some more negative news, meaning that at the end of the week, mortgage and treasury rates should be about where they are today.
If you have questions regarding Rhode Island Refinance Rates, about a mortgage for home purchase in Massachusetts or Connecticut, please don’t hesitate to contact me by cell at (401) 263-8655, or by commenting on this post. Have a great day!
Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.
July 25, 2010 by Dan Hartman · 2 Comments
Dan Hartman is a founding Senior Mortgage Advisor with Province Mortgage Associates, a Rhode Island Mortgage Lender, and a Massachusetts, Connecticut and New Hampshire Mortgage Broker. Dan has worked in the mortgage industry for more than 10 years, and holds an MBA in Finance from Clark University. Every day, Dan helps homeowners and home buyers in southern New England with their mortgage and refinance questions. He also serves as an Adjunct Professor at Roger Williams University and the University of New Haven. NMLS #13507.
While rates are at a 40 year low, the % of loan approvals vs. applications is at a low. We need to fill the major gap between where banks vs. private lenders are willing to lend.