Mortgage interest rates held steady this week. Without a doubt, rising rates have pushed some potential home buyers and homeowners looking to refinance their mortgages to the sidelines. According to the Mortgage Bankers Association (MBA), all applications for mortgages—purchases and mortgage refinancing, dropped 13.5 percent for the reporting period ending September 6. Refinancing applications felled 20 percent compare to the previous week.
MBA data shows mortgage refinancing is off the peak level established in May and has plummeted to the lowest activity level in four years.
Fed meeting to clarify direction
With concerns that rising interest rates may derail the housing market recovery, many economists, investors and consumers will be awaiting Chairman Ben Bernanke’s the announcement immediately following the upcoming two-day meeting of the Federal Reserve scheduled to start on September 17.
At that time, the world should have a clearer picture of the Fed’s intent and if it will leave the $85 billion a month purchase of Treasuries and mortgage-backed securities in tack, at least for the near future, or begin winding down its purchases.
The decision will have a huge impact on the direction of interest rates and the economy.
Reducing the unemployment rate has always been one of the main goals of the bond-buying program, which started in late 2008. In theory, by keeping interest rates low and making low-cost money available to consumers and businesses, it would result in stronger demand and eventually the hiring of more workers.
From the outset, one of the Fed’s primary goals has been to reduce the unemployment rate, which is currently 7.3 percent, to 6.5 percent. The recent Employment Situation data was disappointing. Although 169,000 new jobs were created in August, the Department of Labor revised July’s figure down to 104,000 from a previously reported 162,000.
According to John Williams, President of the San Francisco Federal Reserve, the latest job report would not have any impact on its decision.
Other factors to evaluate
When trying to decide where mortgage rates will go, and if you should buy or refinance your mortgage in the near future, you must consider other factors that can complicate or counter-balance the effects of mortgage rate increases; the economic recovery and easing of credit underwriting standards.
- Economic recovery- Historically, as the economy heats up, demand for consumer and business credit increase, which pushes interest rates higher. Inflation also becomes a concern.
- Availability of credit - Banks have loosened credit slightly in recent months. The huge drop in mortgage refinancing applications might be enough for mortgage lenders to complete more loans for home buyers. The Consumer Financial Protection Bureau also has new mortgage guidelines that may lead to a higher rate of mortgage approvals for home buyers since the new loans will carry less risk of default.
The latest retail sales data shows that consumer spending increased just 0.2 percent---below the projection of 0.5 percent and the lowest increase in four months. And after reaching it highest reading (in July), since before the recession, the Thomson-Reuters/University of Michigan Consumer Sentiment Index fell in August to 82.1.
Consumer spending, which makes up about 70 percent of the nation’s economy, has been the major reason the U.S. economy has slipped back into another recession.
The bottom line is that economic data--retail sales, job creation and consumer confidence, are not signals of a robust, sustainable economy. If the Fed leaves the bond-buying program “as is,” the decision should calm the bond market and mortgage interest rates may start to go down again.