February 25th, 2013
Below is an excerpt from of our latest Market Trends newsletter, a weekly examination of the economic conditions that influenced mortgage rates. Sign up to receive the Market Trends in your inbox Friday evening.
Nothing lasts forever, not even stimulative monetary policy. It may last for a while, perhaps even an extended period, but will eventually go away. The open questions, unanswerable at the moment, are “when” and “how” will it affect mortgage rates?
Minutes from the latest Federal Reserve Open Market Committee meeting released last week from the Fed’s January meeting revealed at least this much: Even the Fed isn’t sure.
Recently, date-based targets for policy changes have been replaced with benchmarks for joblessness and inflation. While there is general agreement that this is a good thing, some on the Fed’s policy-setting committee see QE3 tapering or ending as soon as the second half of this year, some at the end of 2013, and some perhaps not until mid-2014 at the earliest.
However, there is some discussion that the size of the program, presently some $85 billion per month, may be modified from time to time as market conditions warrant. The Fed is going to discuss whether such a changeable program is suitable at its next meeting in March. To the extent that the Fed lessens its purchases of Treasuries and MBS, mortgage rates may be affected and pushed upward as a result, but to us that doesn’t seem to be coming in the immediate future.
Minimal rise in mortgage rates
- 30-year fixed: HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator (FRMI)–found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbo) rose by three basis points (0.03 percent) to 3.85 percent.
- 15-year fixed: The overall average rate for 15-year fixed-rate mortgages (conforming, non-conforming and jumbo) increased by a little less, adding two basis points (0.02 percent) to land at 3.08 percent for the week.
- 30-year FHA: FHA-backed 30-year fixed-rate mortgages also managed a two basis point lift, ticking higher to stop at a still-fantastic rate of 3.43 percent, as inexpensive mortgage money remains readily available to credit- or equity-impaired borrowers.
- 5/1 ARMs: The overall average rate for 5/1 Hybrid ARMs held almost steady in familiar territory, adding just a single hundredth of one percentage point to move to 2.72 percent.
Rising costs ahead
We are given to wonder what will come of the housing market–sales and prices–when interest rates eventually return to normal. When we first created this chart in February 2011, the 10-year and five-year average rates were on either side of 6 percent. After two years of unbelievably low rates, those have been pulled down by a considerable amount.
The monthly cost of borrowing $1,000 at the 10-year average is $5.65; the same $1,000 over the last five years cost $5.26 on average. Presently, the monthly cost per $1,000 borrowed is a scant $4.60–and moving back to even that 10-year norm would see a 23 percent increase in cost.
Rising costs of financing must be borne either by rising incomes or offset by lower home prices if affordability is to be maintained. As such, the Fed may have a bit of a delicate dance as it exits its program of extraordinary support, since some damage to the housing market is possible, if not likely.
Mortgage rates: More of the same
Amid all of this, mortgage rates are about flat. We did move up to present levels a few weeks ago, climbing from December’s record lows, but there doesn’t seem to be enough economic oomph to move us any higher. Some doubts about the strength of the stock market rally have surfaced over the last week or two, and concerns that the Fed might end the liquidity party sooner than expected did certainly cause a halt in stock gains earlier last week. The influential 10-year Treasury managed to slip below the 2 percent level toward the end of the week, putting a lid on the small rise in mortgage rates.
We would expect next week to be more of the same, with just enough good news to keep rates from falling, but not so good as to engender any serious rise, either.