We may have been a bit premature in celebrating the return of a healthy U.S. housing market. Where there were encouraging early signals, it is now the case that interest rates for home mortgages are on an unchecked upward spiral, which is actually pushing borrowing costs too high, too fast.
Right now, they’re nearing their highest levels in over two years, which is tempering demand from would-be home buyers and those seeking refinancing terms—and hence retarding the housing market’s recovery.
CNBC reports that interest rates on 30-year fixed-rate mortgages rose for the ninth straight week to reach an average rate of 4.68 percent—the highest since July 2011. According to the Mortgage Bankers Association, this led to the seasonally adjusted measure for loan requests for new home purchases to drop by 3.1 percent, marking the second consecutive week of declining demand.
Refinancing took things harder, dropping 4.4 percent as of last week, since it is more sensitive to upward changes in rates. The overall index of mortgage application activity, tracking both refinancing and home purchase demand, is down by 4 percent.
Back in June, Ben Bernanke of the U.S. Federal Reserve indicated that the Fed’s asset-buying stimulus program, under which it buys $85 million in bonds and mortgage-backed assets per month, could see a tapering-off sometime toward the end of this year. Although home rates had been rising slowly since as far back as May, Bernanke’s comments about the Fed’s position sent a shockwave of sorts throughout the markets in general and began a rapid acceleration of these rising rates.
This is a problem, since much of the recovery so far—still very much in a nascent stage—has been driven by the artificially-low interest rates maintained by the Fed’s efforts. Given how quickly the mortgage rates and other costs have been rising in the recent past, it’s reasonable to be concerned that we’re going too fast at a time when we should instead keep the rates low to build momentum for a recovery.
USA Today quotes Contingent Macro Advisors on the state of affairs:
“Mortgage applications had been on a rising trend over the past 18 months although there has been substantial week-to-week volatility, but the trend now appears to have topped out and begun a steady retreat.”
Granted, despite the recent trends in interest rates, these rates are still at very low levels in a larger historical sense. Thus, even though we saw adjustable-rate mortgage applications decrease to just 7 percent of all applications, as well as rising rates across the board, the four-year average for home purchases is actually still moving upward and has been doing so ever since November 2011, when it first started rising.
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Of course, it’s worth pausing a moment to recall just what goes into determining the consumer’s mortgage terms. Credit score has an obvious influence, but so does the consumer’s income, down-payment size, and outstanding debt.
Especially after the 2008 financial crisis, lending in general has become much more stringent. Credit scores that may have received decent terms back then simply won’t do today, as banks and other lending agencies have dramatically raised the bar for approval of the best rates and the most flexible terms.
Today, it’s practically necessary to have a score at least over 760 in order to receive the best possible terms. This is an interesting factor to consider when thinking about the present housing scenario. One reason why home prices and housing rates could be rising so quickly may well be because the total population sample that’s actually driving this activity is just more affluent than before. Some months before, I actually noted that the average square footage of new homes being sold is larger than it was in the past. We’ve also seen that home prices are rising quickly. It’s something to think about.
As things stand, the Wall Street Journal notes that applications to refinance current mortgages are up 64 percent, while ARMs account for the aforementioned 7 percent. Rates on mortgages with jumbo-loan balances are up to 4.86 percent, and the average rate on 30-year fixed-rate mortgages backed by the Federal Housing Administration is up to 4.37 percent. Average rate for 15-year fixed-rate mortgages is at 3.76 percent, and the 5/1 ARM average rate is up to 3.4 percent.
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