Existing home sales jumped more than expected in July, even in the face of higher mortgage rates. The reason? Borrowers are trying to “get out in front” of higher rates and purchase a home before affordability deteriorates even more. Fence sitters are standing up quickly.
Last week, Freddie Mac’s survey of mortgage rate averages across the nation had the 30-year fixed rising to 4.58%, which is the highest level in 100 weeks.
The difficulty for borrowers isn’t simply the fact that rates are higher, it is that rates are changing at “the fastest pace in more than 4 years,” according to Dan Green.
Green points out that during the summer months of June 2013 through August 2013, mortgage rates were changing at 0.142% per week, on average. This compares to an average of 0.054% per week from January 2010 through August 2013.
Borrowers face a faster-paced market and higher home prices. Will July’s buying surge give way to a slump if rates continue to rise? The market is still sorting itself out, but if the rules of supply and demand are any indication, higher costs will reduce demand, home sales, and price appreciation.
Rates move as investors (and markets) find themselves dealing with a uncertainty. The Federal Open Market Committee (FOMC) has been very deliberate about “openness” regarding the “tapering” of its stimulus program, quantitative easing. QE helped push rates lower in the first place, and less QE (read: demand) will lower bond price, thus increasing interest rates.
[For more on the connection between the bond market and mortgage rates read here.]
The problem, though, is that Federal Reserve Chairman Bernanke has said that the Fed will wind down QE when the economy is ready. The “readiness” of the economy is open to interpretation.
This is why slight changes in economic data are having an outsized influence on mortgage rates. We are interpreting the numbers not just in relation to the U.S. economy, but to what they might suggest about the Fed’s view of the future of quantitative easing (QE).
For example, when unemployment claims drop on a week-to-week basis, investors might interpret the improvement as a sign that the economy is growing – and the Fed is more likely to “taper” QE.
Perhaps in the future we can go an entire week without mentioning words like “Fed” and “QE”, but for now this is the world we live in.