Weekly Review: Mortgage Rates Stay Low While Purchase Mortgages Increase

May 28th, 2010

Plenty of news impacting mortgage rates occurred this week, extending the window during which consumers can take advantage of low interest rates. When will the words “extended period” become “near future,” and raise mortgage rates? With the Federal Reserve meeting, positive key economic data, and increases in mortgage applications, pressure continues to build toward a mortgage rate increase.

Fed Holds Rates and Language

In its regularly scheduled Federal Open Market Committee (FOMC) meeting on April 28, 2010, the board of governors of the Federal Reserve System (“The Fed”) announced that the federal funds rate–an underlying basis for consumer lending rates–would remain “exceptionally low” for an “extended period of time.” “Exceptionally low” is generally interpreted to mean 0% to 0.25%, an unusually low rate that has kept mortgage rates down near 5% for almost a year.

Mortgage rates should therefore remain very low until well past the next FOMC meeting in late June. Eventually, however, the Fed must begin to raise rates to combat potential inflation as the economic recovery finds itself on a more solid footing. Once this occurs, mortgage rates can certainly be expected to rise–presumably by at least 0.25% immediately upon any FOMC announcement of anticipated monetary tightening.”

A free mortgage payment calculator can help you determine how any such rate change might affect your ability to finance a home after a rise in interest rates.

Unemployment Claims Drop

Initial unemployment claims for the week ending April 30, 2010 dropped by about 30,000 claims, although seasonally adjusted figures dropped only marginally. Presumably, the Fed will wait until unemployment has dropped somewhat significantly before raising the fed funds rate again.

While there is some debate as to whether the “Great Recession” is officially over yet (such announcements typically happen up to a year or more in arrears, since relevant economic data is continually revised for such a recent period), the US economy has been growing again since the third quarter last year.

However, employment typically remains higher than normal during the beginning stages of economic recovery, until consumers become confident enough to buy things again, and businesses become confident enough in how consumers are buying things to expand their operations again and renew hiring.

Consumer Confidence At 18 Month High

In April, 2010, the Consumer Confidence Index reached its highest level since October 2008, when the credit crisis most dramatically contracted the broader economy. With consumer spending historically representing about two-thirds of the domestic economy, any rise in consumer confidence during an economic downturn is to be welcomed.

As consumers feel more confident financially, they spend more money, prompting businesses to ramp up operations, hire more employees, and commit resources to learn new ways of doing things better. Consumers (including other businesses) can then buy these new and better things, thus growing the economy and circulating its benefits among all economic participants.

Purchase Applications Rise

On April 28, 2010, the Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey. The survey showed that, in the week ending April 23, the greatest number of purchase applications since October and the least number of refinance applications since last August were received.

Driving the increase in purchase applications was a large jump in government (i.e., FHA) applications, up nearly 12% from the previous week. This is presumably due to the upcoming April 30th deadline for purchase contracts for qualified home buyers eligible for the home buyers tax credit of up to $8000.

The MBA survey also noted national average mortgage rates for 30 year fixed rate mortgages at 80% of underlying property value increased incrementally from 5.04% to 5.08%. Mortgage origination fees stayed relatively flat, dropping to 0.93 points from 0.98 points the week prior.

Impact on Mortgage Rates

Ultimately, mortgage rates must rise from their very low current levels, as the Fed and the markets take into account improving economic conditions in their rate determinations.

A free mortgage calculator can help you determine how anticipated mortgage rate increases may affect your ability to purchase a home, and at what price. A mortgage refinance calculator can help you determine how such a change might affect your refinance terms, and may help you decide whether now is the time to act.

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