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September 23rd, 2013

Fed inaction prompts mortgage rates to fall

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Below is an excerpt from of our latest Market Trends newsletter, Keith Gumbinger’s weekly examination of the economic conditions that influenced mortgage rates. Sign up to receive the Market Trends in your inbox Friday evening.

As we considered the Fed’s options in the previous Market Trends newsletter, we wondered:

“What if the Fed chooses not to move at this meeting? Markets may interpret this as a signal that the economy is falling short of the Fed’s expectations, and that it is somewhat weaker and more in need of continuing support than not. If this turns out to be the case, mortgage rates would probably decline modestly, at least for a time, but would tend to firm up again as we approach the next Fed meeting, and so on.”

As it turns out, the Fed did decide to do nothing, and we’re embarking into this pattern described above.

Mortgage rates fell last week

HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator–found that the overall average rate (conforming, non-conforming and jumbo) for a 30-year fixed-rate mortgage eased by 11 basis points (0.11 percent) to 4.65 percent, the FRMI’s lowest value since mid-August.

The overall average rate (conforming, non-conforming and jumbo) for 15-year mortgages managed to shed nine basis points (0.09 percent) from the previous week’s figure, sliding to 3.74 percent.

FHA-backed 30-year fixed-rate mortgages improved by a full 15 basis points, dropping back to an average of 4.27 percent.

The overall 5/1 Hybrid ARM gave up nine hundredths of a percentage point (0.09 percent) to stop at a relative bargain of 3.38 percent for the week.

Economy exhibits both strengths and weaknesses

Mixed economic signals have been the order of the day for months–certain strengths here, certain weaknesses there–all suggesting that the economy continues to fire on some but not all cylinders. Last week provided more of that, even as the general collective tone was warmer than not.

In holding the line on tapering, the Fed noted in the statement at the close of the meeting that they wished to see “more evidence that (economic) progress will be sustained before adjusting the page of its purchases.”

Presumably, some of the evidence the Fed is waiting for is to see how much the increase in mortgage rates has cooled the housing market. In July, we did see a 13.4 percent decline in the sales of new homes, with at least some of the decline the result of higher costs.

However, due to the way sales are recorded, there is a lagged effect when we look at sales of existing homes, as present figures can represent demand and conditions 60 days or even more prior. As such, it may be September or even October before the full effect of the recent rate rise is reflected in sales of previously-occupied homes.

Mortgage rates expected to decline further

With the Fed back out of the tapering game for at least a few more weeks (and perhaps longer, if the economy fails to continue to find traction), mortgage rates should be well supported.

However, a lack of move this time this may lead to some additional volatility in mortgage rates, should the economic data continue to prove solid, particularly as the next Fed meeting approaches. That’s a problem for a few weeks down the road. In the interim, we had lower mortgage rates in place last week and expect to have lower mortgage rates again this week, as we watch for more clues about economic trends.

For our part, and as far as mortgage rates go, we think there might be a 10-12 basis point decline in HSH.com’s FRMI by the time the end of the week comes.

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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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