Positive economic news pushes mortgage rates

September 24th, 2010

Bad news in the economy is good news for those looking for a mortgage. Good economic news is good for the nation but not so good for mortgage seekers as it leads to higher rates. This week saw some positive economic news for the first time in some time and investors have reacted accordingly. If you are using mortgage calculators researching a new home loan or refinance mortgage here is a recap of the week’s economic information that impacts mortgage interest rates.

Fed uncertainty

Rates took a bit of a dip following the Federal Reserve Meeting on Tuesday when the Fed stated that inflation is uncomfortably below the target. In a post-meeting statement the Fed stated it “…is prepared to provide additional accommodation if needed.” Exactly how this additional accommodation will occur with the Fed holding rates near zero is the magic question.

One way is for the Fed to buy more debt in the form of mortgages or Treasury offerings and in fact the Fed has been doing this, moving funds from its current mortgage holdings as they pay off through refinances to purchasing new Treasury offerings. This will have the effect of holding interest rates down and hopefully stimulate borrowing and capital expenditures by companies.

This has not worked so far in the economy because banks are not lending despite having practically interest-free reserves from the Fed and significant cash on the their balance sheets. Worried about past mortgages that are still facing foreclosures that will drain their cash reserves, banks are wary about facing another credit and cash crisis as they experienced in the fall of 2008 that led to the TARP bailouts.

Until, or unless, the Fed can find a way to loosen up lending criteria for businesses, inflation will remain below target levels for some time.

Some good news

After a summer of poor economic news investors reacted by buying stocks and selling bonds, including mortgage backed securities, after the Commerce Department reported today that while total durable goods orders in August dropped, the core orders increased. Reversing all the gains in mortgage rates following the drop in rates following the Fed meeting investors liked that non-defense capital goods, minus aircraft, increased 4.1 percent in August after dropping 5.3 percent in July.

If you are using a refinance calculator news such as this is not good news for lower mortgage rates. If continued positive data is forthcoming regarding manufacturing and durable goods, those that are expected to last longer than three years, pressure will be put on mortgage rates to increase.

Mortgage rates and applications

On a day-to-day basis over the past week mortgage rates have pitched up and down, with the down early in the week before the Freddie Mac Primary Mortgage Market Survey released on Sept. 23. In the survey the average 30-year fixed-rate mortgage at a cost of 0.7 origination points held steady at 4.37 percent from the week before. While steady from the prior week the trend for the past few days has been a slight increase in costs that could see an increase in this mortgage rate indicator next Thursday when released.

In its Weekly Mortgage Applications Survey the Mortgage Bankers Association announced on Wednesday that total mortgage applications for the week declined 1.4 percent from the week ending Sept. 17, 2010, seasonally adjusted for Labor Day the prior week. Refinance applications dropped for the third week in a row, down 0.9 percent, and purchase mortgage applications were down 3.3 percent.

Despite low mortgage rates, applications for refinances have been on the decline the past three weeks but still constitute over 80 percent of total mortgage application volume.

Looking ahead

Looking ahead is dicey as the mortgage rate markets have been somewhat volatile day-to-day. Long-term economic data from the past summer has the Fed concerned, which leads investors to anticipate lower rates. Recent data, however, points to a few positive economic events in August which causes investors to move money from bonds to stocks — and an increase in rates.

If you are using mortgage calculators while deciding whether to refinance your existing mortgage or purchase a new home, be prepared that rates may inch up while you are making your decisions. To be safe you may want to input a slightly higher mortgage interest rate should they increase before you can submit your mortgage application and lock in your mortgage interest rate.

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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