Mortgage rates show biggest one week hike of the year

November 19th, 2010

If you have been using mortgage calculators to determine your monthly savings from a mortgage refinance or the balance of your new home loan, time to plug in a higher interest rate. Despite mixed economic news and the Fed beginning its asset purchase plan, mortgage rates have spiked. A weekly recap of events and news that impact the mortgage rates and housing markets that may assist you with your mortgage plans.

Rates jump

Watchers of Mortgage Backed Securities (MBS), which influence the mortgage rates you input into your refinance calculator or prequalification calculator, saw the market for mortgage bonds deteriorate almost daily since the Federal Reserve announced it would push an additional $600 billion into the economy. As a result of lower bond prices, mortgage rates had the highest one week increase of the year.

Freddie Mac’s weekly Primary Mortgage Market Survey for the week ending Nov. 18 reported the average 30- year fixed rate mortgage at a cost of 0.9 origination points was 4.39 percent, up 0.22 percent from last week’s rate of 4.17 percent at 0.8 origination points — which had been the lowest rate in the history of Freddie Mac’s survey. The 4.39 percent rate is the highest in the survey in three months when the rate was 4.42 percent the week of Aug. 19.

Applications drop

Not surprising with an increase in mortgage rates is a decrease in mortgage applications. In its Weekly Application Survey the Mortgage Bankers Association reported its seasonally adjusted index dropped 14.4 percent for the week ending Nov. 12, 2010.

Refinance applications continue to be over 80 percent of total applications, however with the sharp increase in rates the refinance index was down 16.5 percent for the week. Purchase applications for the week were down 5 percent and are over 11 percent below the same week in 2009.

Economic data

Mortgage applications are an indication not just of mortgage rates and housing prices, but also of consumer confidence. Confidence comes from economic data and activity and how you feel about your future financial condition. In October consumers must have been feeling somewhat confidence as retail sales at $373 billion were the highest since July 2008 and up 1.2 percent from September’s sales.

Retailers are banking on sales to remain at the elevated levels through the Christmas shopping season. If retailers are right and retail sales do pick up it could be a sign that other economic activity, including home purchases, will also increase.

The Fed buying program is planned to go through June 2011, its purpose is to boost economic activity and increase the inflation rate to its target rate of 1.7 to 2.0 percent. Despite the retail sales increasing prices remained flat rising only 0.2 percent from September and 1.2 percent from September 2009. Inflation, at least moderate inflation, is a primary goal of the Fed and October’s Consumer Price Index shows a lot of room for prices to increase, and retail sales to jump, before reaching Fed targets.

Crystal ball

Will mortgage rates fall in the future? Consider that they are higher than many felt they would be at this time given the sudden spike in rates following the Fed announcement. And they would be lower had not most of the world known before the announcement that the Federal Reserve was going to begin another asset purchasing program — what was unknown was the amount of money involved.

Because investors knew the Fed would be entering the U.S. Treasury bond market as a buyer they reacted accordingly, buying bonds and forcing prices up and yields (interest rates) down. Prices peaked, the Fed announced it would buy and investors sold. And sold. And sold. Prices dropped and rates climbed.

In coming weeks there will be some positive economic news that may move rates higher, but there will also be news showing the economy is sluggish and growing at a very slow rate. Combined with the fiscal crisis in Ireland that may spread to Portugal and Spain, our economy continuing to struggle should result in rates settling back down under the weight of the Federal Reserve’s massive injection of money into the economy. As always when discussing economic predictions, the key word is “should.”

If you are using a mortgage calculator to determine whether to refinance your mortgage or begin a new home loan, plan on a higher rate; patience however may pay off should the current spike in rates be temporary.

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.

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