Even as the average rate on 30-year fixed-rate mortgages touched 3.9 percent – the highest since May of last year – the actual number of mortgage applications filed here in the U.S. has dropped by 9 percent from the week just past. That is the third straight week that refinancing applications have fallen, and the coincidence has given rise to questions concerning the so-called recovery of the housing market.
MarketWatch reports that the market composite index is down by 8.8 percent (seasonally adjusted) as of the end of last week. At the same time, the refinance index was down 12 percent. Most of the gains in interest rates appears to come on the heels of overall stronger economic data as well as growing speculation regarding the Federal Reserve’s curbing of the quantitative easing program.
Although credit requirements remain a lot tighter than before the crash, the impressively low interest rates keep pulling in new buyers as well as those seeking to refinance their mortgages to more flexible terms. But if rates keep rising, we’ll quickly see the gains made across the housing market trail off.
And these rates are rising across the board. The average for 30-year fixed-rate mortgages rose from 3.78 percent to 3.9 percent, and rates for higher loan balances went from 3.93 percent to 4.07 percent. That’s the highest since last August.
Moreover, rates for 30-year fixed-rate mortgages that are supported by the Federal Housing Administration also rose, going from 3.53 percent to 3.62 percent. And finally, 15-year fixed-rate mortgages went from 2.96 percent to 3.1 percent.
This is a precipitous situation. A sustained rise in the mortgage rates is bound to dissuade would-be homebuyers or those looking to refinance. The effect would be magnified since these rates were so low until just recently.
However, it should be noted that against the larger historical context, mortgage rates remain very low indeed. As Reuters reports, prices are now hovering around levels seen back in 2003. With this latest development, we could actually see a sudden spurt in home purchases and mortgage activity over the next few weeks if those looking to buy or refinance realize that the low rates won’t last forever and decide to make a decision sooner, perhaps, than they anticipated.
Housing Market Future
Just recently, I noted that the market shock over in Japan was more than likely a simple case of pressure building up due to Prime Minister Shinzo Abe’s “Abenomics,” or the injection of stimulus into the Japanese economy. In short, quantitative easing of any sort always carries the risk that the market will overheat and let off some steam – usually via a minor crash.
The Fed continues to buy up $85 billion in assets every month, and Ben Bernanke has stated that, on the one hand, it is far too early to end the stimulus program, but on the other, the Fed would eventually draw it down in a gradual fashion so as to ease the market’s shock.
The recent fluctuation in mortgage rates may very well be read as an early sign that the markets could be reaching some sort of critical threshold. Interest rates have been rising; USA Today notes that rates for 10-year Treasury securities are now up to 2.14 percent, a level not seen in 14 months.
But today, the National Association of Realtors came out with the pending home sales index, which provided comfort. Pending home sales were at the highest level since 2010, rising 0.3%.
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Two major questions remain. Should we read this as a minor blip and hope that rates continue to stay low? I would argue that we can, with the proviso that rates will keep creeping upward as long as the Fed continues its stimulus action. As the Japan incident showed, there’s just no real way you can continue pumping money into the market without some outlet valve.
The other question is: should you take action on a mortgage or possible refinancing? I would argue that this is probably the tail-end of the period wherein rates will remain low and everything else reasonably stable. Wait too long, and rates will resume their inexorable climb.
Of course, the present fluctuation will likely ease out in short order, and that would probably be the best time to act.
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