A closely watched bond-market measure of investor optimism hit a record Monday, amid signs the U.S. economy's recovery is strengthening.
That measure is the yield curve -- the difference between short-term and long-term interest rates on government bonds. That number is at its highest level ever, surpassing the record set in June, and signals that investors are expecting a stronger economic turnaround ahead.
The milestone comes amid a broad sell-off in government bonds, as investors shift money into riskier assets like stocks in anticipation of stronger growth. Last year, investors dumped stocks and sought the safety of government bonds amid the financial panic. That drove up the prices of government debt, and thus drove down the yields on some to record lows.
That trend has reversed. On Monday, stocks jumped on positive words from Wall Street analysts and news of acquisitions in the mining and health-care sectors. The Dow Jones Industrial Average rose 85.25 points to 10414.14, putting it in positive territory for the month. The Dow's strongest component was Alcoa, the aluminum maker whose business is closely tied to the economic cycle, which rose 7.9%. Low trading volumes at the end of the year may also be exaggerating market movements.
The interest-rate development is good news for banks, which normally borrow at short-term rates and lend at long-term rates. The bigger the difference, all else being equal, the bigger their profit. Higher profits mean banks can refill their coffers, which have been drained by bad debts, and return to health.
The yield curve steepens when the Federal Reserve, which controls short-term interest rates, keeps them low to spur the economy. But at the same time investors, expecting growth to resume and with it the possibility of inflation, sell longer-term government bonds, which sends their prices down and their yields up.
The difference between the yields, in this case on 2-year and 10-year notes, is the main gauge of the yield curve. On Monday, the difference reached 2.81 percentage points. The gap between short- and long-term yields tends to stretch on the way out of economic trouble.
Before this year, the yield curve was last near these levels in 1992 and 2003. In both instances, the economy was pulling out of a recession, and staged a sustained recovery. However, on both occasions it took a year or more before the Federal Reserve decided the economy was strong enough to warrant interest rate increases.
The gap could widen further, said Tony Crescenzi, a portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif. The previous peaks "didn't occur until the expansion was gaining some steam, and we don't know yet that's the case," Mr. Crescenzi said. The steeper yield curve is being driven by investors selling off government bonds. The 10-year Treasury tumbled Monday, sending its yield up to 3.686%, the highest since mid August. The yield on the 2-year Treasury rose to 0.872%.
The widening gap stems from a bout of optimism about the U.S. economy, combined with a sense that the Federal Reserve is still months away from raising borrowing costs. The gap is great news for banks, because they can borrow for the short term at low rates and then lend at higher long-term rates.
In the 1990s, a steep yield curve helped pull the U.S. banking industry out of a catastrophic crisis, making it much easier for financial institutions to borrow money at a lower rate, lend it at a higher rate, and put the difference in their pockets. By the end of the decade, earnings growth, fueled by the favorable gap in interest rates and strong consumer spending, had risen to as much as 20% a year.
A rash of better-than-expected economic data in recent weeks has pushed investors to expect better growth. That could lead to inflation, which could eat away at the value of government bonds, making them less attractive. Meanwhile, the Fed has said it intends to maintain its benchmark interest rate near zero for an extended time, which helps keep a lid on yields of shorter-term government securities. "The Fed isn't going anywhere, at least for now," said Dan Greenhaus, chief economist at Miller Tabak & Co. As a result.
At this time last year, the gap was 1.27 percentage points. At the crisis onset, in June 2007, the yield curve was inverted: a phenomenon in which short-term yields are higher than long-term ones, a development which often augurs a recession.
Write to Emily Barrett at emily.barrett@dowjones.com and Joanna Slater at joanna.slater@wsj.com
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Record Low Fixed Rates
Average 30-year fixed rate 4.78%
Nov. 25, 2009
By SAM GARCIA
Fixed mortgage rates fell to the lowest level on record. But don't expect them to stay there.In Freddie Mac's survey of 125 thrifts, credit unions, commercial banks and mortgage lenders for the week ended today, the average 30-year fixed-rate mortgage was 4.78%, falling from 4.83% six days earlier. The 30-year was 5.97% one year earlier.The 30-year matched the record 4.78% set on April 30, Freddie noted.The average 15-year fixed-rate mortgage declined 3 basis points from the record set last week to 4.29%. The new record is based on Freddie's data going back to 1991.It was the fourth consecutive week of declines for fixed rates, Freddie' Chief Economist Frank Nothaft said in the statement.A benchmark for mortgage rates, the yield on the 10-year Treasury bond, was 3.342% today, according to WSJ.com. Seven days ago, the 10-year yield closed at 3.36%, U.S. Department of the Treasury data indicate -- suggesting rates might turn higher next week.The 100 panelists surveyed by Bankrate.com for the week Nov. 25 to Dec. 3 overwhelmingly agreed rates will rise -- with 80 predicting at least a 3 basis point increase over the next 35 to 45 days. The rest were evenly split over whether rates will fall or stagnate.The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.18% in Freddie's survey, falling from 4.25% last week.But the one-year Treasury-indexed ARM was unchanged at 4.35% -- though still its lowest level since July 7, 2005, when it stood at 4.33%. The one-year ARM averaged 5.18% during this week in 2008.The index used on the one-year ARM, the yield on the one-year Treasury bill, closed at 0.28% yesterday, lower than 0.32% the prior week, the Treasury reported. Another ARM index, the six-month London Interbank Offered Rate, fell to 0.49% yesterday from 0.51% the previous week.ARMs accounted for 5.3% of applications tracked in the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ended Nov. 20, up from 5.1% the prior week.MBA said overall applications fell 5% on a seasonally adjusted basis from the prior week. The drop was the result of a 10% decline in refinance applications, which represented 72% percent of all applications -- down from three-quarters the week before.Purchase applications rose 5% from MBA's previous survey.
Friday's bond market opened flat with no relevant economic news being posted today. The stock markets are showing losses with the Dow down 40 points and the Nasdaq down 14 points. The bond market is currently down 2/32, which should keep this morning's mortgage rates at yesterday's levels.The stock markets appear prepared to close the week in negative ground. This should be good news for bonds heading into next week. Since there is no relevant data scheduled for release today, any changes to mortgage rates this afternoon will likely come from sizable move in stocks. If the major stock indexes continuer to move lower, there is a possibility of seeing downward revisions to mortgage rates this afternoon. There are a couple of important reports scheduled for release next week. There is relevant data being posted Monday when the National Association of Realtors gives us October's home resale figures. It is expected to show an increase in sales f rom September's level, meaning the housing sector improved over the past month. However, this data is not considered to be highly important, so it will likely take a sizable variance from forecasts to cause a noticeable move in mortgage rates.Next week is a holiday-shortened week due to Thanksgiving Day, meaning all of the week's data will likely be released the first three days of the week. Look for more details on next week's events in Sunday's weekly preview.If I were considering financing/refinancing a home, I would.... Lock if my closing was taking place within 7 days... Lock if my closing was taking place between 8 and 20 days... Float if my closing was taking place between 21 and 60 days... Float if my closing was taking place over 60 days from now... This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.
Dear Steve,
You did it. You’ve succeeded in achieving a huge victory for real estate. Congress heard you on the need to both extend and expand the homebuyer tax credit to continue stimulating the housing sector of the economy. The Senate voted 98-0 on Wednesday and yesterday the House voted 403-12 on legislation that includes the extension and expansion of the credit. The President is expected to sign the legislation, perhaps as early as today.
Thank you for making this victory happen. Your letters in response to our Call for Action made a very big difference, as did the thousands of REALTOR® phone calls, visits by Federal Political Coordinators—all members of NAR—in getting this legislation passed. This is a great victory for the economy, for homebuyers, and for all of you in real estate. You made your case to Congress. We deeply appreciate your commitment and involvement on this issue and trust your continued support will follow in the weeks ahead on all our future Calls for Action.
More information on the tax credit and what it means to you:
Changes to the Homebuyer Tax Credit Law Frequently Asked Questions About the New Bill Listen to NAR President Charles McMillan's Podcast About the Bill Passing See How the House Voted In Depth: 2009 First-Time Homebuyer Tax Credit Watch the Entries in the Tax Credit REALTOR® Party Video Contest
Visit the web address below to tell your friends about the REALTOR(R) Action Center. Tell-a-friend!
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Lehigh Valley home sales rose sharply in March, providing some hope that the worst of the housing slump is over.
March figures rose 45.7 percent to 335 sales, a big jump from 230 in the prior month, according to a report released today from the Lehigh Valley Association of Realtors.
Those figures are still down 25 percent from last year's pace and further down from prior years. But it also represents the second straight month of rising sales.
Prices showed upward momentum last month as well.
The median sales price rose 11.4 percent to $185,000, compared to $166,000 in February. The median price is now the same as March 2008.
Many analysts consider the median price -- the point at which an even number sell for above and below -- a better barometer than averages, which can be distorted by high or low extremes.
The average sales price rose 3.1 percent to $202,000 from $196,000 in February. That average price at this time last year was $208,000.
The difference between a recession and a depression.
During his 1980 Labor Day speech at New Jersey's Liberty State Park, Republican presidential nominee Ronald Reagan listed the economic failures of his opponent, President Jimmy Carter. With the Statue of Liberty as a backdrop, Reagan used the moment to respond to Carter, who had accused Reagan of misusing the term "depression" to describe a recession that began in January of that year. "Let it show on the record that when the American people cried out for economic help, Jimmy Carter took refuge behind a dictionary. Well, if it's a definition he wants, I'll give him one. A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his."
However imprecise Reagan's macroeconomic definitions may have been, he'd made his point. Semantics don't mean much to Americans who have lost or are about to lose their jobs, their savings and their homes. But for those charged with charting the fastest course to an economic recovery, knowing the exact severity of the situation is critical. So what does constitute a recession, or a depression? Answering that question is harder—and takes longer—than you might expect.
Some economists define a recession as two consecutive quarters of economic contraction, or a decline in real gross domestic product (GDP). By that measure, the U.S. wasn't off to a bad start this year. According to the Bureau of Economic Analysis, real U.S. GDP rose 0.9 percent in the first quarter of 2008 and 2.8 percent in the second quarter. The problem with such a simple definition, according to James Poterba, president of the National Bureau of Economic Research (NBER), the official arbiter of when recessions begin and end, is that it "omits the possibility that you see two very tiny declines in two quarters, and [it also] doesn't look at other information for the rest of the economy, which may suggest that what is happening is not a broad decline."
According to NBER's definition, a recession occurs when a "significant decline in economic activity is spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The beginning of a recession is commonly referred to as a business-cycle "peak," and the end of it is called a business-cycle "trough."
Robert Gordon, a member of the NBER committee responsible for determining the beginning and end dates of recessions, says making a determination is often complicated by the fact that figures like GDP can be revised substantially even years later. Roy Smith, a professor at NYU's Stern School of Business, adds, "It's very frustrating for commentators and other folks who feel like they know in their gut that we are in a recession, but that is not a very scientific [approach,] so people can get it wrong. The choice is that someone calls it based on their gut, or we wait for the data."
Waiting for the data tends to take some time. As a result, most recessions have not been declared by NBER until at least five months after they've ended. The one marker that seems to be a constant in most recessions is unemployment. "There has never, in the postwar U.S., been a 1 percentage point increase in unemployment without a recession having been declared, and much of that increase in unemployment occurs after the recession started," says Gordon. "Right now, we've had a 1.7 percent increase in unemployment. On historical precedence, absolutely this is a recession. All we have to do is figure out when it began."
Still, to NBER, the means by which to measure a recession make as much sense today as they did 50 years ago. Harvey Pitt, former chairman of the Securities and Exchange Commission and CEO of the global consulting firm Kalorama Partners, says there is another reason why the process by which a recession is defined will likely go unchanged. "It's fairly elastic, because it has enormous economic as well as political consequences," he says. "Whoever is running the government at any particular time wants to avoid people drawing the conclusion that economic stagnation is a recession."
When it comes to depressions, Pitt believes the term is fairly well understood, even if there is no official definition. A common unofficial definition for a depression refers to a deeper and prolonged recession during which the GDP declines by more than 10 percentage points. That was certainly the case in the 1930s, when the GDP dropped by more than 30 percent from 1929-33, with unemployment rates peaking at 25 percent in 1933. "These numbers were monstrously larger than anything we'd experienced otherwise," says Smith. "We have no other modern experience of it and will likely not have any, because we've installed safeguards that didn't exist then to prevent such a catastrophe."
Smith doubts there's a need for an official definition, because he believes it is unlikely that the country will find itself in such a drastic situation again. The NBER's Gordon says that coming up with one would likely be difficult, because "really, all we agree on is that a depression is much more severe than a recession, and everyone agrees we haven't had one since the 1930s."
When it comes to searching for definitive explanations, Reagan may have gotten it right back in 1980. In that same speech, he said, "Human tragedy, human misery, the crushing of the human spirit … They do not need defining—they need action."
The Federal Reserve is going to extraordinary lengths to push down long-term interest rates, including home-mortgage rates. But those hoping mortgage rates will fall sharply from current levels, already historically low, may be disappointed.
Mortgage firms Thursday were quoting rates averaging 4.75% on 30-year fixed-rate mortgages, according to Zillow.com, a real-estate information service. That is down from more than 5% two days ago and about 6% in mid-November. But further big declines will be hard to achieve, partly because the mortgage-lending market has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers.
Rates for borrowers with the strongest credit are likely to be in a range of roughly 4.5% to 4.75% for the rest of this year, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse in New York.
Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.
The Fed began driving mortgage rates down in late November when it announced plans to buy as much as $500 billion of mortgage securities this year. On Wednesday, the Fed expanded that program, saying it will spend as much as $1.25 trillion on such securities in 2009. That is enough to provide funding for more than half of all home-mortgage loans likely to be made in the U.S. this year.
The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing affects mortgage rates.
By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn't been below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and 5.25%. The 30-year rate averaged 4.98% in the week ended March 19, down from 5.03% the prior week, according to Freddie Mac's survey. Fifteen-year fixed-rate mortgages averaged 4.61%, down from 4.64%.
One reason mortgage rates often tick back up after a decline is that a rush of people seeking to refinance quickly causes backlogs at lenders, which frequently don't have enough employees to process all of the applications.
"If lenders are working people overtime to close loans, they don't have an incentive to compete too hard on price," says Arthur Frank, who heads research on mortgage securities at Deutsche Bank in New York.
The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but also wants the banks to make profits on loans so they can return to financial health.
Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned companies, aren't licensed to take deposits and so lack that source of money for their loans. Instead, they typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.
But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big banks and Wall Street firms that used to provide it have exited that business.
Despite these constraints, the Fed's action is "going to be a plus" for the housing market, says Thomas Lawler, an economist in Leesburg, Va. Lower rates make it more likely that home prices will hit bottom in many parts of the country later this year, Mr. Lawler says. The recovery, though, is likely to be gradual, partly because rising unemployment reduces housing demand.
Christopher J. Mayer, a real-estate professor at Columbia Business School in New York, says the Fed's moves to cut rates are "helping to put a floor under the housing market." But he worries that the Fed could face huge losses on the mortgage securities if inflation fears eventually push interest rates much higher.
Still, the consumers who need these low rates the most aren't likely to get much help. Many people can't qualify for these low rates because their credit scores aren't high enough or they can't afford a down payment of 20% or more on a home purchase. Such people will be socked with fees that can drive up their housing costs considerably. Banks also have become far pickier about appraisals and are nixing many purchases as a result.
Others can't qualify for a refinancing because they owe far more on their homes than the estimated current market values. Fannie Mae and Freddie Mac have new refinancing programs that will let some borrowers refinance into lower rates even if they owe as much as 105% of the home value, but only for current loans owned or guaranteed by Fannie or Freddie.
Write to James R. Hagerty at bob.hagerty@wsj.com
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