What it will take for mortgage rates to fallby Keith Gumbinger
We’ve discussed the influence rising mortgage rates have had on the market a good deal over the past few weeks. Although recent rate increases have brought us off all-time lows, current mortgage rates–near 4 percent–remain historically low and still present a great borrowing opportunity to refinancing homeowners and home buyers alike.
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Instead of reiterating the specific influence rising mortgage rates has on buyers and refinancers, today we’re going to focus on what it will take for mortgage rates to trend back downward and what influence the Federal Reserve has on the future direction of mortgage rates.
What will it take for mortgage rates to fall?
For mortgage rates to settle back, we’ll need some poorer economic news. There have been a few signs of slowing:
- Institute for Supply Management index moved into “contracting” space two weeks ago
- The Fed’s “Beige Book” estimate of growth was marked down in the latest report
However, these were insufficiently weak to break the upward string of increases. Here’s what we’ll need:
- More evidence that growth is slowing from the 2.4 percent rate of GDP in the first quarter
- More data that inflation is soft or declining
- More clarity from the Federal Reserve that it sees no immediate reason to substantially change their program of purchasing mortgage-backed securities and Treasuries
But will that happen?
Fed intentions must be clear
The economic data will likely be clear enough, but the Fed may not be as clear.
Unfortunately, any Fed ambiguity might send the market reeling again, and the Fed has no doubt noticed (and should be a little concerned with) the plummet in mortgage applications for both purchase and refinancing over the past month.
Both the recasting of household debt though refinancing and the purchase of existing (and especially new) homes have important economic consequences, and have been key to the revival of the economy. However, it may well be, with a sizable number of refinances already completed, that the Fed may think that there is little more to be gained there from an economic-benefit standpoint.
At the same time, the ability to purchase a home with a 4 percent interest rate is still a highly viable and very compelling opportunity, so at least one widespread benefit of low mortgage rates would persist.
Mortgage rates: Is still all comes down to the economy
Into this fray comes the Fed this week with a two-day meeting concluding on Wednesday. From where we stand, there doesn’t seem to be any economic or inflation reason to do anything but continue QE for a while longer yet, followed by a gradual tapering process.
That said, a host of interest-rate-sensitive economic reports come out this week–a June report from the National Association of Homebuilders, a look at May’s housing starts and existing home sales, May’s CPI report, and a couple of looks at manufacturing health will provide bookends for the Fed meeting.
Will we get needed clarity from the Fed?
Probably not as much as we could use, and the economic data will probably be mushy enough as to not strongly suggest that the Fed should move one way or another, or how quickly.
Softer data would help mortgage rates to slip a little, but soothing words from the Fed after the meeting (or contained in the updated economic projections to be released at its conclusion) would allow for a more substantial fall in mortgage rates.
Tim Manni contributed to this post.