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February 21st, 2012

Mortgage rates ease again as housing improves

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The post below is taken directly from the latest issue of HSH.com’s Market Trends newsletter, an examination of the mortgage and housing markets from the week prior. Sign up today.

For Sale 250It’s not so much that mortgage rates are low. Frankly, they have been low–setting new records, wandering back and forth in narrow ranges–for many months.

Obviously, low rates matter very much to potential refinancers; without them, there is little reason to engage the mortgage market. However, perhaps more important is that they have been stable at present levels, which allows potential homebuyers the chance to search, shop and execute their transactions as planned. The process of buying a home can take months.

Mortgage rates fall to record lows (again)

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 jumbos) eased by three basis points (.03 percent) from the week ending February 10, slipping back to an average 4.18 percent, matching record lows.

The FRMI’s 15-year companion shed two basis points (.02 percent) to finish the weekly survey at an average 3.47 percent.

Conforming 30-year fixed-rate mortgages moved two basis points lower to a new record low of a flat 4.00 percent (with 0.33 points).

Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages continued their remarkable descent, falling by another two hundredths of a percentage point to a new record low of 3.81 percent, while the overall average for 5/1 Hybrid ARMs lost a lone basis point to move back to a flat 3.00 percent.

Current rates keep real estate deals intact

Having mortgage rates hold at a given level is key for homebuyers. At the outset of a home purchase, calculations (prequalification, often) are done so a potential homebuyer knows how much mortgage (and therefore, how much house) they can afford to buy. Armed with this information, it’s out to research neighborhoods, schools and other amenities, and then to look at homes which fit the bill. If one can be located, a contract of sale can be placed and then it’s on to the mortgage process. With luck, this might all happen within a six-month window, but it can take longer.

Stable mortgage rates allow that the end result of the transaction is what the borrower expected at the beginning. This keeps deals from crashing due to a change in costs.

Will the stability continue, and if so, for how long?

Those are good questions.

A growing economy with increasing credit demands and the potential to spark some inflation would typically see interest rates at least trying to rise. Presently, we have a bit of an improving economy which seems to be growing warmer by the month; however, interest rates remain tethered for the moment by policies intended to keep them low. Low, however, doesn’t mean that rates cannot rise somewhat, and they should be expected to do so as evidence of economic expansion mounts.

The FOMC released the minutes of their last policy-setting meeting and noted that things are more economically sound than just a few months ago. Consider the change in language they’ve used over time to describe economic growth: “Considerably slower than expected” (August); “Remains slow” (September); “Strengthening somewhat” (November) while December and January noted “expanding moderately”.

As the climate improves, expectations for perpetually low interest rates should diminish, and investors may turn away from safe harbors in favor of higher returns, driving them higher.

Higher rates are inevitable

Is the upward trend in the economy durable? According to the index of Leading Economic Indictors, we should continue to see growth as we move deeper in to 2012. We have been perhaps more optimistic than most about the state of the economy over the past few months. By our reckoning, it continues to gain momentum, and should it persist, higher interest rates must ultimately follow at some point. That’s not to say that there aren’t challenges or even potential catastrophes which would tend to keep rates low; any increases would likely be mild given the state of various economies both here and abroad.

That’s not likely to be the case to any great degree this week, when we expect rates to rise maybe a couple of basis points.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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