Mortgage rates jump on politics, not economics

December 11th, 2010

Weekly summaries of economic data and their interpretations can assist you with your mortgage decisions using mortgage calculators. What impacts mortgage rates when there is little economic news? This week offers an example of the myriad of influences that affect your costs and rates as you calculate options for a mortgage refinance or new home loan.

A slow week for economic news

Very little economic data was presented this week. What was presented was not the type of data that makes a large impact. Consumer sentiment was released at a slightly higher number than expectations, coming in at 74.2 on the Reuters/Michigan Consumer Sentiment Index. While nice that the index has climbed slightly, experts feel the number needs to be in the low 90's to signal economic recovery.

The sector of the economy that has been getting the most attention has been employment. This week the Department of Labor reported 421,000 initial jobless claims for unemployment insurance. The number of filings is down from earlier in the year but still remains significantly above the 400,000 mark. Consistently there are over 1.2 million former workers filing unemployment claims every month. Over four million people are on continuing unemployment payments, a number that shrinks not because of new hiring but because the 99 weeks of benefits have expired.

This type of data in the past would have been reason to expect lower interest rates, or at least the same low rates seen through the summer and into October and early November. During that period if you were using refinance calculators or amortization calculators to determine mortgage payments on a refinance mortgage or new home loan you were safe in using a constant mortgage rate for input. For the past several weeks however, and this week in particular, the economic news had no impact on mortgage rates and using last week's rates, or even this week's rates if you are not locking in the rate with your lender, is not a safe proposition. Here's why.

Politics heats up

Capturing the news this week have been the negotiations between President Obama and Congressional Republicans to pass two pieces of legislation. The President very strongly wants to see a continuation of the unemployment benefits passed before the end of 2010. If a bill is not passed to extend the current benefits, up to 2 million Americans will be dropped from the rolls of unemployment payments in the coming months.

Republicans in Congress want to see the current federal tax rates due to expire on Dec. 31, 2010, extended or made permanent. Without a bill to do so, taxes on every American will increase on Jan. 1, 2011. President Obama does not want to extend all the tax rates and would like to raise the rates on income earners over $200,000 and on all estate and capital gains taxes; Republicans do not want to extend the unemployment benefits without a cut in spending somewhere else in the federal budget to offset the $50 billion cost.

Early this week a compromise was reached where unemployment benefits would be extended, most of the existing tax rates would be extended to 2012, some additional taxes would be temporarily lowered and one time payments would be sent to senior citizens on Social Security. As is the case with most compromises, particularly those in the political arena, no one was 100 percent happy and everyone got some of what they wanted while agreeing to something they did not.

Bond investors not happy

Definitely not 100 percent happy are bond investors. Keep in mind when you obtain a mortgage you are providing an asset that will become an investment for a bond investor. When bond investors are not happy they sell bonds, or do not purchase new bonds. This leads to oversupply or reduced demand, either of which in turn leads to lower prices for those investments, which means higher rates of return. As you can guess, this means you need to input higher mortgage rates into mortgage calculators.

Why are bond investors not happy with the compromise? Because they believe it will erode their yields, or returns on investment. They believe it will increase the federal deficit requiring more federal borrowing which will lead to more oversupply of bonds. They believe it will increase the chances for uncontrollable or very difficult to control inflation when the economy is able to break out of its current malaise and grow. These concerns were expressed through the week by bond portfolio managers and analysts as interest rates jumped over the course of the week.

As a result of what they believe will happen, investors stayed away from Treasury bonds and Mortgage Backed Securities, causing prices to plummet and rates to spike. Freddie Mac's Weekly Mortgage Market Survey released on Dec. 9, 2010 reported the rate for a 30-year fixed-rate mortgage at 4.61 percent at a cost of 0.7 origination points. The prior week the rate was 4.46 percent at a cost of 0.8 origination points, the week before that 4.40 percent. One month ago, on November 11, 2010, the rate was 4.17 percent, almost one-half of one percent lower than today's rates.

Use refinance calculator to run the numbers

Are the bond investors correct in their beliefs? Or will the continuing sobering news showing lack of jobs, consumer confidence and housing growth temper their beliefs and bring rates lower? We won't know for several weeks. If the investors are correct we can say the bottom of the market has passed; if they are incorrect we may see a return to the bottom, or near the bottom. What risk are you willing to take if you are considering a new home loan or mortgage refinance?

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

Prequalification calculator tips and tricks

March 02nd, 2011

Are you paid weekly or every other week? Is semi-monthly the same as bi-weekly? One of the most important duties performed by a...  Read More

Home price and sales data show weaker housing markets

February 28th, 2011

If you've been thinking 2011 is the year for you to purchase a new home you may be weighing whether to purchase before rates climb...  Read More

Trust yourself, trust your home

February 22nd, 2011

Every newspaper has a section where, if you are in it, you will not be able to read your name and the story. It is the obituary section. Reading...  Read More

Mortgage rates remain above 5 percent as consumer prices rise

February 18th, 2011

There is a relationship between prices you pay in the store and the rate on your new home loan or refinance mortgage. This week two key indexes on prices were...  Read More

0 Responses to "Mortgage rates jump on politics, not economics"

No Comments

Leave a Comment