Refinance mortgage applications plunge on rising mortgage rates

December 03rd, 2010

Economic news appears to have taken a back seat to investor foreshadowing. News that should bring lower rates instead sees rates climb. Refinance calculators should be getting a workout as homeowners who have been waiting for rates to move back to their lows consider perhaps they have missed the low mark. Here is what has happened this week in the economy that impacts mortgage rates and housing markets.

Jobs still missing

So much for expectations and consensus. The consensus of expectations from experts, analysts, business media and other oracles was that the economy would add 130,000 jobs in November, that the unemployment rate would remain constant from October to November at 9.6 percent, and that average earnings would increase 0.1 percent from October to November. Miss, miss and miss. Only 39,000 new jobs were added to the economy. The unemployment rate rose 0.2 percent to 9.8 percent. Average earnings did not increase and remained flat from October to November.

In a normal market this triple-bad news on jobs and earnings would benefit mortgage rates. This is not a normal market and the news did not benefit rates. As investors ignored the news and looked into 2011 and their expectations for rates to keep rising, they continued to bid down mortgage backed securities and other bond investments.


In an interview to be broadcast Sunday on CBS, Federal Reserve Chairman Ben Bernanke says that the possibility exists for "QE3" if needed. (For background on "QE" or Quantitative Easing a recent article on the subject is available here.) Since the Fed announced and then initiated QE2, interest rates have risen steadily. Upon the news of Bernanke's interview comments breaking today bonds and other interest rate investments such as mortgage backed securities saw massive selling. Thus far the Federal Reserve's plan to drive interest rates down further and keep them low into the second quarter of 2011 has not taken hold and the reverse has happened.

If you are looking for a new home and using the mortgage calculators while house hunting it is advisable to input a slightly higher mortgage rate for your calculations to ensure you are qualified and prepared should rates climb even higher during your search.

Home prices drop

Third quarter housing prices were released for the S&P/Case-Shiller Home Price Index and the news was not good for the housing sector. With housing prices increasing steadily for most of 2009 and 2010, the news from Case-Shiller was a real setback with prices dropping nationwide 2 percent in the quarter. Prices in the major markets that make up the Case-Shiller index were 0.6 percent lower in September 2010 than September 2009.

Rates up applications up for new home loans and down for refinances

Freddie Mac's Weekly Mortgage Market Survey reported the rate for a 30-year fixed-rate loan at a cost of 0.8 origination points averaged 4.46 percent for the week ending Dec. 2, 2010. The survey rate is up for the second week in a row. The rate is the highest in the survey since it hit 4.49 percent in the Aug. 5, 2010, survey.

With rates climbing it should be no surprise that refinance applications have slowed as they are much more rate-sensitive to mortgage rates than purchase mortgage applications. The Mortgage Bankers Association Weekly Applications survey for the week ending Nov. 26, 2010 showed refinance mortgage applications down 16.5 percent and only 75 percent of all applications taken for the week. For a few months refinance applications have held steady above 80 percent of total applications; with the increase in rates, total applications are falling due to the sharp decline in refinances.

The news for the economy has not been pointing to growth, or sustained growth. Normally, bad (or even not good) economic news moves rates lower. Recently however bond investors seem to be ignoring the economic news for their buy-sell decisions but rather are looking at the future and all the money the Fed is putting into the economy. The investors are not happy with the Fed's move into the equity markets as they see it eroding future values of bond investments. To show their displeasure they are not coming to the market, reducing demand, creating lower prices and higher yields. The result is mortgage rates that are moving up.

Is now a good time to apply for a refinance mortgage or new home loan? According to recent trends for mortgage rates you may want to apply soon or you will be inputting even higher rates into the mortgage calculators on this site.

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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