Mortgage rates move upwardby Tim Manni
Yet, after weeks of new record lows, mortgage rates managed a slight tick upwards last week.
Should borrowers be worried?
While we’ve warned many times before that slight economic improvements can sends rates upward (and rates always rise faster than they fall), consumers can’t expect the Fed’s new program, designed for the long term, to send rates down all at once:
The Fed’s program should ultimately foster lower interest rates, but no one should expect the effects to happen all at once, since the program will be taking place on an ongoing basis though next June.
Mortgage rates moved upward
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 increased by two basis points (0.02 percent) from the previous week, moving just off new record lows to end the week at an average of 4.36 percent.
FHA mortgage rates
FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers held steady at an average interest rate of 3.99 percent.
Although it’s hard to recommend ARMs at a time of such low interest rates, a case can still be made for them for some borrowers. Hybrid 5/1 ARMs, the most popular kind among adjustable rate products, saw their five-year fixed-rate periods post a three-basis-point rise to finish HSH’s survey at a still-incredible 3.09 percent.
Operation Twist and the economy
The Fed’s move is intended to help the economy grow, and some forecasts value Operation Twist’s effects at perhaps a couple of tenths of a percentage point of growth in the nation’s Gross Domestic Product (GDP), a measure of the economy’s total output.
While a couple of tenths of a percentage point would be just a meager boost, the economy can use all the help it can get at this point. The final estimate of GDP for the second quarter of 2011 was released this week, and featured an upward revision of 0.3 percent, which landed us back at the original July estimate of 1.3 percent GDP growth.
That does represent a full 1 percent increase from a terrible first quarter this year, and anything the Fed’s new contribution brings would be a welcome addition. Growth needs to get to and hold at perhaps a 3 percent or better clip for the job and housing markets to get on track to any great degree.
Does this mean mortgage rates will rise?
We’ve noted here many times before that bad news and doom and gloom is good news for mortgage seekers, since it tends to push interest rates lower. It’s worth keeping in mind that this weakness is exactly what the Fed’s program is intended to counter, and if the program succeeds in stanching the economic bleeding, interest rates will ultimately firm.
It’s also worth noting that Treasuries and mortgages both used to benefit from flight-to-safety buys in times of global or domestic economic strife, but that is much less the case today.
Treasuries remain highly liquid investments with a guaranteed return and willing investor audience; the same cannot be said for mortgage-related investments, given all the risks which continue to face the market and the relatively puny returns for taking on that risk.
Not so fast
This is precisely why the Fed’s MBS purchasing program was revived, and the reason that we expect lower mortgage rates as a result of Operation Twist.
There’s a host of economic reports out this week.
Surprises to the downside would see mortgage rates fall. Surprises to the upside might firm mortgage rates ever so slightly. If we flipped a coin and had to call it, we’d hopefully (and with little confidence) call for a better-than-expected overall tenor, and a minor increase in average interest rates next week.
Keith Gumbinger contributed to this post