Interest Rates Ease Down a Bit

Interest rates moved down about a tenth of a point this week, after having increased about 1 percentage point over the last month from their historic lows.The following are excerpts from the newsletter on interest rates published by HSH Associates :

“As we expected, mortgage rates eased a little this week. After a period of shock and disbelief, it would appear that the market has become resigned to the fact that the Fed will eventually begin tapering purchases of Mortgage-Backed Securities and Treasury Bonds.

However, the more concrete deadlines offered by Fed Chairman Bernanke just a few short weeks ago — all predicated on the Fed’s forecasts for growth, employment and inflation being realized — seem to have become a little fuzzier of late. Milestones for unemployment and inflation aside, Mr. Bernanke said as much in testimony before Congress this week.

“We will be waiting to see if the movement in mortgage rates has any material effect on housing,” Bernanke said. “If we think the mortgage rate increases are thwarting the progress we will have to take additional action.”

It will be interesting to see what the Fed considers “material effect on housing”, but we will surely know in the weeks ahead.

One other indicator is pretty clear on the effect of the rate spike. Fixed mortgage rates at two-year highs have pushed applications for new mortgages to two-year lows, accoring to the Mortgage Bankers Assocaation. Purchases are holding up better than refinances, which have largely vanished, but activity for purchase apps has been muted of late, too. All of the decline in applications has come since rates began to rise in mid-May.

Unlike refinancing activity, which is more purely driven by interest rates, the purchase of a home has a good number of moving parts, all which need to align well before a transaction can happen. Interest rate — and the effect on a monthly payment — is certainly a consideration, but not usually the primary one. Also, there are other items which can promote demand for housing, employment, household formation and income growth number among them. If the economy can move beyond a sputter, home sales will continue to rise, especially if rates (and corresponding monthly payments) remain reasonable.

However, there are few signs at the moment that any powerful surge in growth is coming. More likely, we’ll continue to lurch forward in fits and starts and hope that no external shock crushes growth.

Mortgage rates eased a little this week due to the market’s growing comfort with the Fed’s plans, but perhaps more so due to an economic and inflation climate which suggests that the tapering may both start later and last longer than the initial indication from the Fed might have suggested. Mr. Bernanke made it very clear again this week that a highly accommodative monetary policy would remain in place for a long while, QE or no QE.

It’s also worth considering that of course the Fed would like to soon begin the process of tapering, and to end it soon, as well; that said, it stands to reason that they would have preferred not to have to have implemented these unprecedented programs in the first place. For our part, we should all be cheering for the day when this extraordinary support is no longer needed, since by then millions of more Americans will have jobs, be paying taxes and buying homes — even if the monthly nut is a little bit more than it would have been otherwise.

Given the present course of the economy, and even if diminished, we seem likely to have these programs in place for a while yet to come. In a strange way, that’s actually unfortunate.

Lots of fresh data out next week to chew on, including new and existing home sales for June, the Chicago Fed’s National Activity Index and Consumer Sentiment. A hunch says that rates soften up a little bit more, with a decline of perhaps another handful of basis points by the end of the week.“

The following are interest rate quotes from Al Hermann of American California Financial: