If there is one sentence to sum up what mortgage rates have been going through over the past several months, here it is (courtesy of CNBC):
“Ongoing anxiety about a possible imminent scaling back of the Federal Reserve’s massive stimulus program roiled markets worldwide.”
Readers of our column here and our website www.CentralCoastLending.com will recognize the theme. Rates are guided by investor’s daily feelings… about the Federal Open Market Committee daily feelings… about the economy.
Rates are higher in part due to “possible imminent” movement (thanks for the careful verbiage CNBC), and borrowers currently buying or refinancing a home are paying a bit more monthly as the “Fed watch” anticipates the tapering of “quantitative easing” (QE).
On the other hand, mortgage rates were bound to rise eventually. The bond market received a massive influx of demand (read: cash) with monthly QE bond purchases of $85 billion (to see how rates move with the bond market, click here).
Furthermore, major events effecting global financial security have been relatively quiet this summer. Remember the European debt situation? The U.S. fiscal cliff? These types of “uncertain” events push investors to “safer havens” such as the U.S. Treasury market. In this case, it pushed them en masse.
With less demand for safety, the U.S. bond market was bound to drop, thus increasing yields and mortgage rates.
The market hasn’t received any major negative jolts recently. Stocks have just finished their first four-day losing streak of 2013, but this was more due to Fed-watching than anything else. The Dow and S&P 500 trundle along after breaching record-high levels earlier in the year. The U.S. economy is growing – albeit slowly – but this is in part due to “austerity” measures that have cut government spending.
As things have calmed, the primary market mover left to watch is the Federal Reserve. Investors made a large preliminary exodus from bonds to avoid getting stuck with low-yield, expensive bonds when the Fed leaves the market.
Though Fed chairman Ben Bernanke has given indications that the Fed will reduce QE when the economy is strong enough, he hasn’t concretely said what that threshold looks like. What we do know, though, is that tapering won’t suddenly erase all $85 billion in monthly bond purchases from the market. The decline will be gradual, which will give time for markets to adjust.
Here we are. Rates are higher, but how much is this really hurting the housing market?
Rob Chrisman, author of the widely-followed Daily Mortgage News & Commentary blog notes that, “Yes, it is certain that higher rates will put a damper on lending – but the question is when. For now, housing inventory, sales, and prices, are still showing strength.”
Refinance activity is down, but most people who wanted to refinance and catch the lowest rates on record were able to do so. Ultimately, higher rates may reduce demand for home purchases, but we haven’t seen the evidence of such a decline quiet yet.
In other housing news, construction activity continues to gain momentum. Housing starts rose by 5.9% in July over the previous month and 20.9% over the previous year. Permits rose 2.4% monthly and 12.4% yearly.
This week, watch for data on existing home sales (Wednesday) and new home sales (Friday) to further gauge how the market is reaction to higher rates.
This week, mortgage rates begin on the upswing. See HERE for our complete rate update.
