Loan officers know that the Federal Reserve has announced that they will raise interest rates in 2014 at the earliest, but that doesn’t mean another two years of 4% mortgage rates, however – and we’re seeing that now.
The Fed doesn’t set mortgage rates or the yield on Treasury securities – we’re not under that kind of government control yet.
External factors like inflation and the global economy also have an influence. Rising rates are certainly a possibility, then, for a variety of reasons. And loan officers are always having to remind their borrowers that rates naturally fluctuate; in fact, it’s the one thing that’s remained constant over the past fifty years, with 1-1.5% annual changes as the norm.
With little room to fall, rates, analysts believe, have nowhere to eventually go but up.
Also keep in mind that though the Federal Funds rate sets the lowest lending rate available, mortgage rates can both rise and fall even when the Fed Funds rate remains unchanged. Other factors to consider are an outperforming economy, which would increase demand for lending capital, and increased demand for mortgages (a somewhat ironic consequence of HARP 2.0, perhaps).
All this, of course, makes the exact timing of any mortgage rate increase difficult to forecast.
While the last two Fed statements were similar (see them side by side), the latest Fed announcement reflected some degree of improvement in the economy.
This caused investors to reduce expectations for further Fed easing through purchases of mortgage-backed securities (MBS). The chance that the Fed would produce enormous additional demand had helped propel MBS prices to their recent highs. So this news caused investors to sell mortgage-backed securities, which caused rates to rise. The statement also acknowledged that rising energy prices will lead to higher short-term inflation. Investor concern that this will produce higher long-term inflation caused MBS prices to fall and mortgage rates to rise.
The Economist’s headline is poignant: “U.S. economic recovery is uninspiring but real.” Many parts of the U.S. economy are showing signs of life, while others have stopped worsening. A few sectors, such as exports, are weakening. “But economic recovery doesn’t have to wait for all of America’s imbalances to be corrected,” the magazine notes. “It only needs the process to advance far enough for the normal cyclical forces of employment, income and spending to take hold – it now seems that, at last, they have.”
And Wells Fargo’s economics department notes that:
“The sluggish income growth associated with the current cycle has prompted a debate as to whether weak income gains are related to the composition and pay of the jobs that have been added in recent years or simply due to excess slack in the labor market. Our analysis finds that while certain low-wage subsectors have indeed experienced a relatively strong recovery, when subsectors are aggregated into broader earnings quintiles, there is less support for the hypothesis that job gains have been mostly concentrated at the low end of the earnings distribution. Our findings therefore suggest that, rather than the quality of job growth, labor market slack is likely the overriding factor accounting for the sluggish income growth witnessed in recent years.”
So it’s a mixed bag. And this week’s MBS market action are no exception. We started with MBS selling rapidly, pushing rates up, but have had a decent recovery rally in the past couple days.
Julian will recap rate markets in his WeeklyBasis review/outlook this weekend.