Thursday, February 28, 2008

U.S. mortgage rates rise

Fixed-rate mortgages now at levels last seen in the fall
CHICAGO (MarketWatch) -- Mortgage rates rose again this week, bringing the 30-year and 15-year fixed-rate mortgages to levels last seen in November, Freddie Mac's chief economist said on Thursday.

The upward rate movements are a reversal of what was seen in January, when rates had dropped significantly enough to inspire a surge in refinancing.

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.24% for the week ending Feb. 28, up from 6.04% last week. The mortgage is now higher than it was a year ago; the 30-year averaged 6.18% at this time last year.

Just three weeks ago the benchmark loan averaged 5.67%, meaning it has jumped more than half a percentage point since then, a significant move given that mortgage rates have not been volatile in the last few years and that the Federal Reserve has been cutting interest rates aggressively.

The 15-year fixed-rate mortgage averaged 5.72% this week, up from last week's 5.64%. The mortgage averaged 5.92% a year ago.

Meanwhile, 5-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.43% this week, up from last week's 5.37% average. The ARM averaged 5.93% a year ago.
And 1-year Treasury-indexed ARMs averaged 5.11% this week, up from 4.98% last week. The ARM averaged 5.49% a year ago.

To obtain the rates, the 30-year and 15-year fixed-rate mortgages required payment of an average 0.5 point. The 5-year ARM required payment of an average 0.4 point, and the 1-year ARM required an average 0.7 point. A point is 1% of the mortgage amount, charged as prepaid interest.

The rise in rates will probably curtail the refinance activity seen in past weeks, said Frank Nothaft, Freddie Mac chief economist.

"Refinancing activities, which had surged to a 12-month high in January, according to Freddie Mac's monthly refi share report, are likely to ebb following this recent rise in rates," he said.
Indeed, evidence of a slowdown in refinance activity has been spotted already. The volume of refinance applications dropped 30.4% last week, the Mortgage Bankers Association reported on Wednesday. See full story.

Why the sharp rise?

The volatility in mortgage rates isn't completely unexpected, and issues in the credit markets are likely to cause more mortgage rate volatility this year, said Greg McBride, senior financial analyst with Bankrate.com.

"When mortgage rates move down very sharply, they tend to rebound equally sharply, McBride said. "However, there's usually one catalyst that sparks that rebound, and this time around there wasn't one single precursor."

For one, concern about inflation is putting upward pressure on long-term rates, he said. That's because inflation erodes the buying power of future payments that a bond holder receives, he added. Rates rise to compensate.

Inflation worries will continue to influence rates over the next several months, and continued Fed rate cuts could stoke those worries even more, McBride said.

Overall, a general concern about the U.S. economy -- from inflation concerns to the weakness of the dollar -- has prompted the rate rise, said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. If more investors want to buy U.S. Treasury bonds, the rates go down, taking mortgage rates with them; when they're less willing to buy the rates tend to go up, he
said.

"The world is concerned about investing in the U.S. overall," he said. "The currency stinks, the economy stinks, and they're requiring a higher return to make an investment."
The rate jump also likely includes a reaction to concerns about what the rise in conforming loan limits, as outlined in the recent economic stimulus package, would do to the mortgage landscape, said Ken Fears, an economist with the National Association of Realtors.

The rise in limits could inspire holders of jumbo loans to refinance into conforming loans with lower rates, which would reduce the return that mortgage investors receive, he said. Banks have to offer higher returns to keep getting them to invest, he added.

Housing market effect

As the lower rates seen in past weeks might have caught the attention of those thinking of making a home purchase, the sudden turnaround might now give them pause.

Mortgage interest rates are one closely watched factor when people are deciding whether to buy a home, Cecala said. Coupled with tougher lending standards, home buyers might hold off on plans to make a purchase.

That said, the long-term commitment to buy a home often doesn't hang on half a percentage point, McBride said.

"Lower mortgage rates do give home buyers additional buying power. But it doesn't make the decision on whether or not to buy a house any more than you decide to get married because there is a sale at the bridal shop," McBride said. "If mortgage rates move enough to take you out of the ball game, you probably weren't completely ready to take the plunge."

While the "sticker shock" of rate hikes might spook would-be buyers, they need to take into account their bottom line, considering both interest rates as well as price, Fears said. And with prices coming down in many markets, affordability is increasing.

"What is critical is the monthly payment," he said. "It's the monthly payment that decides whether you can buy or not."

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