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March 26th, 2012

Mortgage rates continue to rise, sign of good news

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Mortgage rates bumped higher last week, climbing from near or actual record low levels to, well, former record levels. Rates moved back to early December 2011 levels; at the time, these rates were cheered with enthusiasm. Last week, though, they were met with fear and concern.

The fact is that mortgage and other interest rates go both down and up, and the increase in rates is reflective of good news. To cheer for lower and lower mortgage rates is to wish continued economic gloom; at this stage of the still-forming recovery, we can’t imagine why anyone would wish for that.

Mortgage rates up

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 thirteen basis points (0.13 percent) for the week ending March, 23, and now stands at an average 4.37 percent.

The FRMI’s 15-year companion rose by only eight basis points (.08 percent) to finish at an average 3.50 percent.

Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages rose only three basis points, climbing to 3.91 percent, while the overall average for 5/1 Hybrid ARMs increased by nine hundredths of a percentage point, climbing back to 3.12 percent for the survey period.

Rising rates impact refinances

Although it is coincidental with the full rollout of HARP 2.0 over the past week or so, refinance activity will certainly be affected by the slight increase in rates. That said, refinancing has slowed over the past month or so. It should be noted that at any given interest rate level, there are only so many borrowers who are interested in changing an old loan for new, and we had been hanging around the 4 percent level for months, so that pool may have largely been sated.

That said, any new demand coming in as a result of HARP 2.0 are arguably folks with rates in the mid- or perhaps upper-5-percent range, and refinancing will prove valuable to them regardless of the less-than-rock-bottom rate they might obtain.

Rising rates and home sales

A legitimate question is whether or not an increase in rates might affect home sales trends, which had been gaining at least some strength as interest rates declined over the past few months (see below).

3.26.12 HSvs30FRM_032312

The answer to that question is “probably not”.

 Demand has been forming because the job market has improved somewhat, and consumer moods about the future have risen to some degree. It’s also true that affordability has improved greatly; affordability is an intersection produced by the combination of home price and interest rate (this produces a needed loan amount and a monthly mortgage payment, which is then applied against a potential homebuyer’s budget).

Affordability is a balance between the two; should one factor rise, if affordability is to remain constant, the other must fall, and should a sustained rise in rates occur, home prices would be negatively affected again. There was a time when borrowers, faced with higher fixed-rate mortgages would switch their choice to some form of ARM, but that’s less the case these days.

If there is no offsetting factor (i.e. prices cannot fall, there are no viable choices of mortgage product) then demand would become affected over time. At the moment, a sustained rise in rates is unlikely, but it will also be hard for rates to fall if the economy continues to move ahead.

The rise in rates was inevitable

The rise in mortgage rates over the past seven business days was inevitable. The economic news has been suggesting it since perhaps mid-January if not earlier, and in the face of such evidence the market will eventually show confidence that the reports are real and that the pattern has become more trustworthy.

That said, the bump in rates is small, little better than an eighth percentage point for conforming 30-year FRMs. As well, there are no indications that rates will inexorably rise in the days and weeks just ahead, but if the good news keeps coming it makes it less likely we will return to record lows.

Given the bounce last week, it would be reasonable to expect a slight decline in rates this week of perhaps a few basis points. Mortgage and interest rates are notorious for overshooting their marks, and this is likely the case this time, too.

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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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