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September 17th, 2012

Mortgage rates should continue falling this week

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Below is an excerpt from the latest Market Trends newsletter, available Friday night in your inbox.

falling ratesWith words and actions, the Federal Reserve moved again to try and spur the economy last week. While not out of weapons to combat economic malaise, the Fed chose a track which has arguably had the most wide-ranging beneficial effect: driving down mortgage rates.

While there was some immediate effect, the cumulative benefit of the Fed’s change in policy over time might be a quarter percentage point or so. Mortgage rates did decline on Friday, the day following the announcement, and a move into new record territory for rates is expected this week.

Mortgage rates set record lows

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) declined by another three basis points (0.03 percent) to 3.83 percent, a new record low for the series.

The FRMI’s 15-year companion decreased by four basis points, sliding to 3.10 percent and posting a new record low with that 0.04 percent move.

Important to homebuyers and low-equity-stake refinancers, FHA-backed 30-year mortgages eased back down to 3.42 percent, tying a previous low, while the overall average rate for 5/1 Hybrid ARMs finished the weekly survey at 2.74 percent, down a single hundredth of a percentage point from last week, also establishing a new record low.

The Fed’s multi-pronged attack

The Federal Reserve announced multiple approaches:

  1. They will purchase $40 billion per month of additional agency-issued mortgage-backed securities. Importantly, this is an open-ended commitment, and if “the outlook for the labor market does not improve substantially,” it will be joined by additional asset purchases and other means of stimulus, provided inflation remains tame.
  2. At the same time, at least until the end of the year, it will also continue Operation Twist, which churns the Fed’s portfolio in favor of longer-dated Treasury bonds and recycles money coming in from its existing mortgage holdings into new mortgage purchases.
  3. The Fed also pushed out the expected date of any change in short-term interest rates until mid-2015, about six months longer than their previous estimate.
  4. The policy-setting group also noted that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” signaling for now a go-slow approach to raising short-term rates when the time to do so finally arrives.

Low(er) mortgage rates have worked

Of all the Fed policies, driving down mortgage rates has arguably been the most successful.

Low rates have fostered refinancing, putting money in homeowner pockets and helping to spur consumer spending. Those low rates have enhanced housing affordability, while the steadying aspect of the Fed’s presence in the market has allowed for more of those transactions to complete; in turn, this has helped to firm up home prices. The Fed is trying to cause at least some inflation, namely in asset prices–homes, stocks–but there can be unwanted ancillary effects on prices when money flows into oil or other commodities.

But will it continue to work?

The Fed has noted that enhancing job creation is the reason for the expansion of its programs, but it is hard to see where exactly many new jobs will be created by lowering mortgage rates. There might be some gains in finance and real estate trades, and possibly even some in building trades and related suppliers, but probably marginal increases at best.

Mortgage rates already are extraordinarily favorable for refinancing, so there is no barrier to refinancing being removed and little additional improvement can be expected. Can some folks refinance more profitably, or refinance again? Yes, but only some.

While there will still be downward pressure for mortgage rates following the initial dip, the decreases will not come all at once. It should be noted that investors in Treasuries were disappointed that the Fed’s plans didn’t include them, and yields on the influential 10-year Treasury rose appreciably on Thursday and Friday, muting the Fed’s announcement somewhat, at least for now.

If one of the Fed’s goals is to help push money out of safe-haven holdings and into riskier assets such as stocks, it may be working to some degree, but some of that freed-up money also seems to be headed into oil, and that might spur additional unwelcome increases in energy costs, which would tend to slow the economy further.

Mortgage rates should decline this week by a handful of basis points or more, putting us deeper into new record territory, for what it’s worth.

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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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