Will the increase in mortgage rates last?by Keith Gumbinger
Below is an excerpt from HSH.com’s latest Market Trends newsletter. Be sure to sign up today.
A drumbeat of better economic news finally got loud enough for markets to notice. Coupled with a generally climbing stock market, interest rates firmed a little last week. Mortgage rates moved to former record-low levels last week, levels which were trumpeted far and wide just a few weeks ago.
The minor move is simply a subtle reminder that yes, interest rates can also rise. At some point, they will ultimately do so, and on a regular basis. With rates so low for so long, some perspective as to what “normal” interest rates are is getting a little lost.
Mortgage rates rise
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) rose by seven basis points (.07 percent) from last week, jumping back to an average 4.25 percent, about where it was in the last week of January.
The FRMI’s 15-year companion increased by four basis points (.04 percent) to finish the weekly survey at an average 3.51 percent.
Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages broke a long string of declines, rising by five hundredths of a percentage point to 3.86 percent, while the overall average for 5/1 Hybrid ARMs rose just two basis points to move to 3.02 percent.
There is at least some momentum in the economy, and signs are appearing that the recovery is broadening. This is a good thing, given that there are some forming or strengthening headwinds.
The economy’s influence
The first has been seen in many headlines of late: rising gasoline prices. Higher fuel costs act as a tax on the economy, sapping billions of dollars from more broad and beneficial spending and funneling them right into the gas tank. It has been noted that the recently-extended payroll tax reduction will be fully eaten up by the 15 percent (or more) hike in retail gas prices. It is worth pointing out that growth was accelerating as prices declined last year, with GDP rising from 1.33 percent in the second quarter (when prices were nearly $4 per gallon) to 2.75 percent GDP as prices bottomed in December. Should price increases persist, some slowing in growth should be expected.
Some slowing may come as a result of the Eurozone getting its fiscal house more in order. Austerity measures to better align sovereign income and outgo are expected to produce a mild downturn in growth this year, and that of course affects our ability to use exports to grow. Slower growth there means less demand for our goods and services, and that will tend to temper growth somewhat. For the moment, though, manufacturing activity seems solid.
Sales of new homes slipped just a little last month, sliding by 3,000 units to an annualized 321,000 in January. Despite the mild decline, sales remain considerably stronger than even six months ago and are presently higher than last year’s peak. Inventories are very thin, with just 151,000 units built and ready for sale, a 5.1 month supply. This is the leanest figure since 2006.
For housing, the fundamentals of jobs growth, low prices and rock-bottom mortgage rates are having beneficial effect. There is no lack of folks cheering for this trend to continue. Homebuilding has wide-ranging beneficial effects and has perked up amid a mostly mild winter, and although improved, sales of existing homes need to quicken in order to materially change the picture for home prices. If mortgage rates hold at or near these levels, and if job growth and optimism continue to improve, we think that an actual “spring housing market” could form.
There’s not much to be said about the minor rise in rates last week. Mortgage rates go up and down all the time, and even if they were to move over the “psychologically important” level of 4 percent, they would still be fantastic. In the long history of mortgages, 30-year fixed rates below 4 percent are a very, very recent phenomena, and we were setting any number of 40 and 50-year lows even when we were above that threshold.
Will the rise continue?
Probably not. There is some data which might move the market a little this week in the form of the Fed’s own survey of regional economic conditions (called the Beige Book for the color of its cover).
If things are broadly improving it will show up here, as well as in the ISM report on manufacturing, and that might cause rates to hold or perhaps even move a little higher, especially if buttressed with other new data on auto sales, construction spending and durable goods orders. There doesn’t seem to be much upward momentum, but best to figure on a couple basis point rise to be safe.