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Behind the “Brutal” Jump in Mortgage Rates After Last Wednesday’s FOMC Meeting

What a difference a week can make.

Last Monday, we mentioned that the Federal Open Market Committee (FOMC) meeting would set the tone for the week. As it turns out, one week would alter the entire outlook for the housing market – at least in the short term.

30 yrWe went from publishing our “one point” cost 30-year fixed rate 3.625% (3.722% APR) on June 17 to 4.375% (4.463% APR) on June 24 (see graph to the right). This is a rate jump of 0.750%! (And our prices are some of the lowest and most competitive around).

The rise in pricing has a real dollar value. People who have not locked in a mortgage rate, suddenly face a higher monthly payment of up to $100 (or more). This effects their affordability and purchasing power.

“This is a brutal day for people actively engaged in mortgage transactions who have not locked their interest rates,” noted Daniel Podesto, co-owner of Central Coast Lending.

We have written extensively about what happened – and why – but we will recap below. For further, in-depth reading, including commentary on the news and possible effects to the Central Coast real estate market, check out:

1. Making Sense of the Jump in Mortgage Rates and Federal Reserve Policy

2. Mortgage Rate Hike Could Hurt Blossoming Central Coast Real Estate Market

First, we will say this. We don’t anticipate rates to keep rising like this. As we will explain, we believe that the market has over-reacted (and may be misunderstanding) the FOMC announcement and Bernanke’s press conference.

The sequence of events went something like this:

  1. The FOMC sets Federal Reserve policy, and as the policy meeting of last Wednesday (June 19) wrapped up, markets were itching for clarity about the future of the quantitative easing (QE) program.
  2. The FOMC announced that the Fed would continue its easing program.
  3. The FOMC also released slightly upwardly revised economic projections.
  4. Federal Reserve Chairman Ben Bernanke said in a press conference that the recovery remained weak, but acknowledged that tapering would begin as the economy continues to improve.
  5. Investors and traders jumped out of stocks and bonds, preparing for easing as early as late-2013. Both markets tank. Mortgage rates rise, and rise some more.

If the logic between points 4 and 5 seems shaky, that is because it is. Bernanke didn’t say explicitly that the Fed would begin tapering by late-2013. He repeatedly said “look to the data.”

The Fed has long acknowledged that its program existed to help with the economic recovery, mentioning certain employment (6.5% unemployment rate) and inflationary (2.0%) thresholds that the Fed would consider progress.

So in other words, the market is reacting to 1) something it already knew would eventually happen, and 2) something that was “hinted at” – derived from their interpretation of Bernanke’s words, not from reality itself.

“In my opinion, there is a huge disconnect between what the Fed and Bernanke are saying and reaction in the stock and bond markets,” said Podesto.

“I did not hear at all that the Fed was likely to taper as soon as September,” Podesto continues. “Bernanke clearly stated that late-2013 would be the earliest they would consider tapering it the economy continued to improve to the point we reached 7% unemployment.”

With so many sectors working through “soft” growth (as Bernanke put it), there is also a real likelihood that QE will continue through 2013.

This is a tough blow for the housing market, especially as it has been taking off over the past year. Still, we believe that mortgage rate price gains will settle down. Keep checking in with us for our rate updates every Monday, Wednesday, and Friday for tracking on this story.

We follow stories like this closely to stay on top of this fast moving industry. We are happy to take any questions and prepared to work through any problems that have come about due to the rate hike. Give us a call at 805.543.LOAN.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile