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October 22nd, 2012 (Modified on October 23rd, 2012)

Would you trade higher rates for a growing economy?

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Federal Reserve BuildingA continuing stream of largely better economic data has helped mortgage rates to firm a little in recent weeks, but they wandered a bit backward last week.

There’s really no place for them to go at the moment, not with the Federal Reserve’s QE3 program fully underway. That said, it is interesting that the Fed’s program to keep mortgage rates low must in some ways fight against the ultimate goal of the program, which is to foster stronger economic growth; stronger growth tends to push interest rates higher.

Mortgage rates inch lower

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 eased by two basis points (0.02 percent) to 3.71 percent, settling back after a five-basis-point rise the week ending Oct. 12.

The FRMI’s 15-year companion slipped by just a single basis point last week to land at 3.02 percent.

FHA-backed 30-year FRMs held steady last week, as the most viable option for credit- or equity-impaired borrowers remained at 3.30 percent. Finally, the overall average rate for 5/1 Hybrid ARMs also failed to move last week, holding steady at an average rate of 2.72 percent.

QE3’s effect on housing

The Fed’s program is intended to have a direct effect on the housing market, and if the latest data is any indication, it is for a number of reasons (even though it has only been in place for about a month):

  1. QE3 seems to have met with the approval of the members of the National Association of Homebuilders, whose index of member sentiment moved up to a value of 41 in October, its highest level since June 2006.
  2. Housing starts rose by a fat 15 percent in October, rising to a 872,000 annualized pace, the best level since mid-2008. Single family starts rose to over a 600,000 rate of initiation, rising by 11 percent for the month, and multi-family leapt by a whopping 25 percent.
  3. While new home sales and construction are important — they carry wide ranging economic benefits — existing home sales are a much larger portion of the market. Despite a 1.7 percent decline in sales from August to September, it is hard to be disappointed with the present state of the market. Even with the modest month-to-month decline, sales remain some 11 percent above last year at this time; prices of homes actually sold are also better than 11 percent above last September.
  4. Inventory levels at the present rate of sale slipped below the six-month mark for the first time since 2006, signaling a market much closer to healthy than ill.

Given recent trends, not to mention the still-difficult economic climate, those one-month bounces are probably unsustainable. We wonder, though, if the open-ended nature of the Fed commitment lent some confidence to builders, who have been very cautious in managing inventory levels, perhaps there is some building in anticipation of future demand starting to happen as a result; for that, we’ll need to wait and see if unsold inventory has begun to rise from extraordinarily lean levels. The first peek may come with the new home sales report next week.

Still, there are plenty of homes in various stages of foreclosure which will need to work through the system, but it is starting to appear that the system is in good enough shape to handle them, or will soon be.

A growing economy means higher rates

We’re of course encouraged by the warmer tenor of the economic news. We have noted on a number of occasions that we would gladly see interest rates move upward from these levels in exchange for a much higher reading on GDP or a much lower unemployment rate.

Low mortgage and other interest rates are fine, but can only do so much economic good on their own; a stronger growing economy with more people employed would be a better set of circumstances, not only on an individual basis, but also to help solve budget deficits both local and national.

Mortgage rates should remain stable

With just a couple of weeks to go to the presidential election, it’s a fair bet that the focus may turn away from the economy to some degree. There is a Federal Reserve meeting this week, which will probably end on Wednesday with some encouraging words about the economic situation and a pledge of vigilance.

Meanwhile, the calendar of data out this week will contain some items worth watching, including new home sales and the first look at third quarter GDP. The quarter, which ended a few weeks ago on a stronger note, will probably feature a 1.7 percent rate of growth, up from 1.25 percent in the second. In the meanwhile, we’ll expect near stasis for mortgage rates.

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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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