Economic indicators point to higher rates

July 15th, 2013

There were three news items of particular relevance to mortgage shoppers over the past week:

  1. Job growth is up. The Bureau of Labor Statistics reported on July 5 that 195,000 new jobs were created in June. This is an improvement over the average rate of job creation for the past 12 months, and the April and May figures were revised upward to above-average figures as well. Momentum in the job market remains the key to creating a more robust economic recovery.
  2. Mortgage rates rise to the highest level since July, 2011. For the week ending July 11, 2013, mortgage finance company Freddie Mac reported that 30-year fixed mortgage rates rose by 22 basis points, to 4.51 percent. Those rates have now risen in eight of the last ten weeks, and have climbed by a total of 1.16 percent over that period.
  3. Mortgage applications are down. Mortgage application activity is responding to the rise in mortgage rates, which means that higher rates are discouraging new applicants. The Mortgage Bankers Association reported yet another week of declining mortgage application activity on July 10, and most notably, refinancing applications have steadily been becoming a smaller part of overall activity during this period of rising mortgage rates.

As is often the case with economic news, these three items are interrelated and have an effect on one another. Ultimately, the fact that it is economic strength that is driving mortgage rates higher has a silver lining for potential home buyers and even would-be refinancers, despite the obvious dampening effect it has had on mortgage applications.

For potential home buyers, a stronger economy should bring better job security and higher wages. So while the target payment produced by a mortgage payment calculator will rise as rates rise, at least the ability of potential home buyers to make those mortgage payments should be improving.

For would-be refinancers, while higher rates mean that a refinancing calculator will yield less favorable results, the strengthening economy has also been accompanied by a rally in home prices. That could put some underwater borrowers in a position to refinance for the first time.

The key question going forward will be whether the improvement in the economy and the rally in home prices can continue even as higher interest rates create some resistance.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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