Mortgage Rates Ease from Seven-Month Highs

According to Freddie Mac’s weekly primary mortgage market survey, mortgage rates fell this week for the first time in a month. The 30-year rate fell 21 basis points to 5.38%, while the 15-year rate eased to 4.89%. ARMs and Hybrid mortgages eased proportionately.

In spite of this decline, demand for mortgages also fell this week. “The Mortgage Bankers Association (MBA)….Market Composite Index, a measure of mortgage loan application volume, was 514.4, a decrease of 15.8 percent on a seasonally adjusted basis from 611.0 one week earlier.” The index was led by continued weakness in the demand for refinancings, which is not surprising since that category of mortgagers is more sensitive to rate changes. There is now evidence that homebuyers are also feeling the pain, as the MBA purchase index is off 3.5% from last week.

A growing chorus of industry leaders and government officials is now sounding alarm bells over rising mortgage rates because of its perceived negative impact on the housing market, and the economy at large. “If the housing market is not corrected or stabilized, the tide of the recession is not likely to reverse in the near term, and the slide in the economy overall will continue,” said one CEO. Especially given that much of the problems in the US banking system have now been addressed, much of the attention is turning to housing.

Ironically, it is the belief in economic recovery that might ultimately prevent such a recovery. Overly optimistic investors are selling government and hosing bonds in the expectation that the Fed will soon start to lift interest rates from current record low levels. This is causing long-term rates to rise, and making it less likely that the housing market will indeed recover!

Analysts are divided over whether the Fed should/will continue to buy mortgage bonds in order to depress yields back to previous lows. Says one, “It’s a losing proposition for the Fed to try to fight an upsurge in yields via Treasury purchases” since its purchases can’t keep pace with the $30 billion to $40 billion in new paper the Treasury is issuing each month to pay for the economic stimulus.” Still, another analyst insists that “Although over the long run the Fed certainly wants to reduce the mortgage market’s reliance on the Fed’s purchasing of mortgages, in the near term it can afford to increase its mortgage purchases in order to keep rates from going higher.”

Despite the cumulative .5% rise, investors and homebuyers are still well-advised to consider that mortgage rates remain near all-time lows, both in absolute terms, and relative to Treasury securities. “That premium has historically been between 150 and 200 basis points…If not for Fannie and Freddie, banks would be charging home buyers much higher rates and would be required to keep the loans on their own books, says one analyst. In short, it may still not be too late…