Interest Rates Move down slightly this week again

Interest rates for buying a home on the Palos Verdes Peninsula dipped slightly again this week.The following are excerpts from the newsletter on interest rates published by HSH Associates :

“Modest to moderate economic growth in the U.S. has been the order of the day for a fairly long stretch. There have even been periods of acceleration, such as the GDP flare over four percent in the third quarter of 2013. The pretty steady pace for growth has even encouraged the Fed to begin to trim the extraordinary support provided by purchases of MBS and Treasuries, as it would seem they are less necessary.

A subtle reminder that economies are globally connected came this week in the form of a lackluster report on manufacturing in China. A purchasing managers index produced by Markit/HSBC, roughly akin to the widely-followed ISM index here, unexpectedly showed a contraction in activity in China in the initial report for January. The decline spooked investors both here and around the world; markets sold off, and money plowed into Treasury bonds in a flight to safety buy, driving yields down.

Those yields, of course, have some influence on mortgage rates.

The change in China’s growth pattern is unlikely to sway the Fed much one way or the other. However, the interruption in hiring displayed in the December employment report might give them sufficient reason to hold off of making a change at next week’s meeting, or possibly cause a smaller reduction than the $10 billion trim which is expected.

As we’ve noted recently, with interest rates well above last year’s lows, a case could be made that QE has lost its efficacy, and is presently doing little more than adding debt to the Fed balance sheet with little beneficial effect. Even though higher, the price of money remains at fantastic levels and is likely to do so for some time yet; at the moment, the issue in spurring growth arguably stems more from access to credit than the price of it.

The Fed has expressed little concern over any “asset bubbles” forming, but home prices rising at a sustained double-digit pace should have rightfully attracted their attention. The Fed’s plan has moved many homeowners out of underwater positions, and higher rates in the market should continue to temper price gains, especially if inventory returns to more normal levels as is expected this year.

There have been somewhat more mortgage seekers in the markets to start the year than when we ended it. The seasonal slowdown for mortgage applications that usually starts in mid-November was exacerbated to some degree this year as interest rates were rising, so there was little reason for homebuyers or refinancers to make any move during the period. However, the aforementioned soft December employment report has fostered a drop in rates to start 2014, so the post-holiday resumption of activity has also been met by more favorable rate conditions, and that looks to be the case next week, too, presenting perhaps the best opportunity in a couple months to engage the market.

Global economic concerns may or may not enter much into the Fed’s thinking next week, but are no doubt on the minds of stock investors, who have been enjoying both moderate growth and extraordinarily cheap money for an extended period. At least some fear that this fortuitous happenstance may be coming to an end was revealed this week, and the flight-to-safety pushed the yield on the influential 10-year Treasury down a daily level last seen in late November, when a time when mortgage rates were holding in the mid 4.4 percent range or thereabouts.

For mortgage shoppers, this continues to be a “buy on the dips” type of market; that is, to grab an interest rate (and especially lock it in) when these dips in mortgage rates present themselves. It’s not as though rates are bouncing up or down by a lot on a week-to-week or day-to-day basis, but even a move of a eighth of a percentage point on a $200,000 loan can bring savings of $15 per month and over five grand over the life of the loan, so there is some value to be had.

The dip next week should be at least a few more basis points, probably amounting to another five or six basis points or so by week’s end, but possibly more if the Fed decides not to move, or makes a smaller move than the $10 billion presently expected.”