Mortgage rates bounce off record lowsby Keith Gumbinger
Below is an excerpt from the latest Market Trends newsletter, available Friday night in your inbox:
Meanwhile, the Federal Reserve concluded their two-day meeting last week by deciding to do simply more of the same as they will continue both Operation Twist and buying mortgage-backed securities through the end of the year.
Since broad-market interest rates and mortgage rates are both lower than when the Fed began Operation Twist, it seemed logical that they would continue the process. We thought that would be the case all the way back in April’s Two-month forecast, when we said that we believed the Fed would vote to continue the program until the end of the year. We’re pleased to see that they agreed with our assessment.
Mortgage rates are both lower than they would be and more stable as a result of the program.
Mortgage rates mostly unchanged
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) was unchanged last week, holding at a record low of 3.98 percent.
The FRMI’s 15-year companion added three basis points (0.03 percent), rising off the previous week’s new bottom to 3.27 percent.
Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages shed a single basis point, landing at 3.66 percent, while the overall average rate for 5/1 Hybrid ARMs finished at 2.90 percent, a rise of just 0.01 percent.
Who doesn’t love low mortgage rates?
Low and stable mortgage rates are a key component to the gradual revival of the housing market. For most homebuyers, the monthly “carry cost”–mortgage payment, taxes, etc.–is of chief concern. Affordability is enhanced when one of two things happens: home prices fall and/or mortgage rates fall.
Home prices have already collapsed, causing tremendous damage to household balance sheets and creating losses throughout the economy. At this point, suffice it to say that few people would really want to see lower home prices. That said, everyone (excepting perhaps fixed-income investors) seems to love lower mortgage rates, and mortgage rates low enough can help spur demand and even foster firmer home values.
A lower mortgage rate can offset a higher home price, since it produces the same monthly payment. A borrower who can afford $1000 a month to buy a home arguably doesn’t care what combination is needed to achieve that $1000 carry cost, provided it is available at both the start and end of a transaction. Reliably low interest rates are crucial in this regard.
The housing market is responding
For the most part, home sales and homebuilding markets have responded. To be sure, there is no substitute for an improving job market, which is the largest hindrance to substantial improvement, but considerable opportunity is in play for those who are gainfully employed.
The National Association of Homebuilders index of member sentiment continues to wander in weak territory, but the value of 29 posted for June is a new recovery high.
The modest improvement for the month came despite a downturn in housing starts in May. New residential construction was initiated at a 708,000 annualized clip during the month, down 4.8 percent from May (itself upgraded by about 4 percent in the latest revision). Single-family starts were stronger during the month, and the highest since December 2011, while multi-family cooled to its weakest setting since then.
Existing homes sold at an annualized 4.55 million clip in May. Although this was a 1.5 percent decline from April’s pace, it was about average for this year to date. The downturn in sales means an upturn in available supply, which moved up by a tenth of a point to 6.6 months of unsold inventory.
Expect more of the same this week
At the very least, we’re in a soft patch in the recovery. There are plenty of risks which might further derail economic growth, with a number of them outside of anyone’s direct control. The conditions which foster needed confidence to move the economy forward don’t seem to be in play at the moment and it is an open question whether they will to any degree in the near future.
Meanwhile, the Federal Reserve and other central banks are doing what they can to address individual and collective problems which aren’t insurmountable but will require protracted solutions. There is no quick fix for any these issues, and so we are likely to continue to stumble along. That said, we think there are some pretty powerful supports for the U.S. economy forming, lower energy prices among them, but those also will take time to work. At this point, it seems like it’s going to be a long, slow summer to us.
It’s hard to expect any kind of marked improvement regarding the economic data out this week. That said, mortgage rates should be roughly the same by the end of the week.