Freddie Mac reports that U.S. mortgage rates increased to the highest level in a year in the face of a housing market that continues to show strength and the general economy improves. The benchmark 30-year fixed rate mortgage climbed to 3.81 percent from 3.59 percent just a week ago. The 15-year product increased to 2.98 percent compared to 2.77 percent last week. The 5 ½ ARM remained stable at 2.6 percent.
The average mortgage interest rate for a Federal Housing Administration or FHA-insured 30-year fixed rate mortgage rose to the highest level since August last year—at 3.62 percent from 3.53 percent the week before.
This marks four consecutive weeks of increases for mortgage interest rates, which began the month near historic lows for home loan rates.
Bond Interest Rates
In response to speculation that the news might influence a reduction in the Fed’s bond buying program, the coupon rate for the 10-year U.S. Treasury yield reached its highest level since April 5, 2012 as bond investors hurried to readjust their holdings
Bond yields or interest rates have a direct link with home mortgage rates. Bond rates have risen faster—0.45 points higher than its point in late April. This means that rates for home loans have yet to catch up with bond yields.
Feds may cut stimulus program
In a speech given before Congress last week, Ben Bernanke, Chairman of the Federal Reserve, told politicians that the central bank might slow down its $85 billion a month asset buying program if unemployment shows “sustainable improvement.” This has defined by the Fed as an unemployment rate of 6.5 percent
Some presidents of the regional Federal Reserve banks who serve on the policy committee have been vocal about the Fed’s monetary policy. They support a reduction in the quantitative easing efforts, especially with the recent series of positive economic news.
However, Bernanke has warned against acting “prematurely.”
In a telephone interview with Bloomberg, Barney Hartman-Glaser, assistant finance professor at Duke University in Durham, North Carolina said “Backing off on quantitative easing sparks fears among investors because cheap, long-term credit is good for growth.”
Furthermore, “…if Bernanke feels that we don’t need cheap, long-term credit to fuel growth, then that means we’re returning to an economy that can support itself,” said Hartman-Glaser.”
The stimulus program has been instrumental in keeping mortgage rates and other rates low. The program has created a vibrant market for buyers for loans. If the Fed purchase fewer bonds it could prompt buyers to demand higher returns, which places upward pressure on interest rates.
Rising rates affect mortgages and refinance mortgage
As mortgage rates have increased over the last several weeks, the volume of mortgage applications dropped 8.8 percent for the week ended May 24 compared to the prior week, according to the Mortgage Bankers Association (MBA).
Refinance applications have declined for each the past three weeks. Refis are down 12 percent on a week-over-week basis—it’s the biggest one-week drop so far in 2013 and lowest point since December 2012. It’s at the lowest share of all applications—71% from 74% the prior week and the lowest since April 2012.
Mike Fratantoni, MBA’s Vice President of Research and Economics, attributes the increase interest rates to a “response to stronger economic data and an increasing chance that the Fed may soon begin to taper their asset purchases."