Mortgage Rates: Up or Down?

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Only a couple of months ago, exceptionally low mortgage rates were one of the very few positive numbers in otherwise bleak economic outlook.   In early April, President Barack Obama encouraged homeowners to take advantage of the 30-year fixed mortgage rates dropping to less than 5 percent and refinance their mortgages.  

However, in recent weeks mortgage rates went up from 5.03 percent on May 26 to 5.79 percent on June 10.  And today, they represent perhaps the most threatening obstacle to the federal government’s efforts to revive the housing market and pull the economy out of recession.   Why does it matter to us?   Higher mortgage rates undercut the recovery in a number of ways:

First, they drive housing costs up, which limits buyer demand and threatens to drag already falling home prices even lower.    Second, it negatively impacts the refinancing market since higher rates destroy many homeowners’ incentives to restructure their mortgages.   According to Bloomberg News, last week raising rates decreased number refinancing applications to their lowest level since November 2008.    That means fewer Americans will be able to reduce their mortgage bills.  In turn, this will decrease their monthly savings that could put more cash back into the economy.   However, there are reasons to believe that mortgage rates could reverse course in the near future.    Here are five factors that could drive mortgage rates lower in the near future:

1. Government intervention: In an effort to reduce rates, the Federal Reserve could always intervene again.  There is still a possibility that the Fed will raise or significantly increase its commitment to buy treasury bonds and Fannie and Freddie bonds.   Such an intervention could certainly push rates down in the short term, but it could also backfire by raising additional concerns about inflation.  Still, it’s a risk that the Fed may have to take.

2. Data dive: The minor improvement of recent economic data created optimism for a recovery and it’s also partly responsible for the rise in mortgage rates.  Over the fall and winter, 10-year treasury yields were depressed by the economic panic that boosted demand for very safe government debt.   But a growing sense of confidence has directed many investors to more risky assets like stocks instead of treasury bonds.  As a result, treasury yields have increased, pushing mortgage rates higher. However, if future economic reports come in weaker than expected, investors could return to the safety of treasury bonds.  For example, next month’s job numbers might be measurably worse than the last one and that will be a reminder that the economy’s troubles are not over yet.

3. Stock market tumble: Since early March, the stock market has been in the swings of a surprisingly rally.    But if stocks should start dropping again, mortgage rates could retreat.   Generally, when the stock market tends to do better, mortgage rates tend to go up.  If the rally stops or we’ll have a 100-point drop or more, we are going to see treasury rates and mortgage rates decline quickly. Investors will rush into bond market.

4. Exit strategy: Much of the upward pressure on 10-year treasury yields, and therefore mortgage rates, has been increased by concerns about the amount of government debt required to finance massive bailout and stimulus programs.   However, if the Obama administration would outline a potential exit strategy for these commitments the upward pressure on treasury yields could stabilize.  A clear exit strategy in place would bring more confidence to taxpayers and investors.   In turn, markets would react positively. 

5. Competition: An absence of competition in the mortgage market has allowed lenders to expand the difference or spread between the yield on 10-year treasury notes and mortgage rates. The spreads between the 10-year treasury yields and 30-year mortgage rates are unusually large now.  That partly reflects the fact that we don’t have a competitive mortgage market.  But with refinancing applications dropping, competition in the mortgage market could heat up, with lenders reducing these spreads to attract more customers.  The mortgage industry has spent a good part of this year trying to increase their operations to take advantage of the refinancing boom.  Most likely, they don’t want that to go away and they can be more competitive on rates than they have been.

Anna Timone (195 Posts)


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