Interest Rates remain firm and stay at two month highs

Interest rates for buying a home on the Palos Verdes Peninsula remained firm and stayed at two month highs this week.The following are excerpts from the newsletter on interest rates published by HSH Associates :

“The Federal Reserve meets next week to discuss the state of the economy, offer updates on its own economic assumptions, and to consider whether or not it’s time to start to reduce purchases of mortgage-backed securities (MBS) and Treasury bonds. A recent accumulation of firmer economic data suggests that a change in the program may be in the offing.

The thin calendar of new economic data out this week didn’t shed much new light on whether or not the economy is strengthening, but neither did it detract from that stance. For the most part, interest rates remained firm and mortgage rates continue to hold near two-month highs.

Interestingly, the gap between fixed-rate private market jumbos and government-backed conforming loans has become very narrow in 2013. The spread is a present three basis points; the average since way back in 2000 is 46 basis points, but normal is about 20-25. With government fee increases pushing rates up for conforming borrowers, and with lenders more aggressively courting jumbo loan seekers, there is a good chance that we will see “inversions” ( Where jumbo loan rates are actually lower than conforming loans ) in the average rates of these products more often in 2014 and beyond.

The Federal Reserve gets to have a two-day discussion about all things economic on Tuesday and Wednesday, and will offer their projections for the economy at the close of the meeting. Will they make a change to the QE program? There is a real possibility that they will. Back in September, when the economy was somewhat more “iffy” but the Fed was expected to begin to taper QE purchases, we noted in the September 13 MarketTrends that we expected that “the first taper will be a “toe-in-the-water” of $5 billion dollars or so, and a message that additional tapering will fully depend upon incoming data which supports further reductions in support.”

Given that the program is comprised of $40 billion in MBS purchases and $45 billion in Treasuries, we think that a $5 billion trim in Treasury purchases is a likely outcome by this time Wednesday. By itself, such a small move shouldn’t disturb financial markets much, but would serve to send signal to the markets that the program will be adjusted if the economy warrants. Given that Treasury yields are well off their 2013 bottoms (as are mortgage rates) a case could be made that the program has lost some of its efficacy, since it has not really done much to keep rates from rising as the economy has strengthened. At the same time, it also appears as though the market is better prepared now for the change than it was when Fed Chairman Ben Bernanke first revealed the plan way back in May. Also, as this may be the last meeting Mr. Bernanke presides over, he may wish to be the one to signal the beginning of the end of the program put in place under his tenure.

Mortgage rates have risen over the last few weeks, firming on both better economic news and perhaps on a cautionary basis as we have approached this Fed meeting. If the Fed makes no move (and it remains a good possibility that they won’t) we might see a small dip in rates; that said, the economic calendar is much busier next week, with some fresh clues about the housing market, industrial output, price pressures, worker productivity and the last update to third-quarter GDP. We expect that the trend of warmer data will continue, and as such, rates remain more likely to tick up a little than not, Fed or no.”

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