Rising mortgage rates pose new threat to economy
NEW YORK — If you were planning on buying a house or refinancing to take advantage of record low mortgage rates: Think again.
Mortgage rates at some lenders spiked by as much as 1 percent Wednesday and saw little relief on Thursday, according to mortgage brokers. April’s record lows in mortgage rates may have come and gone.
That’s a big downer for people like Roger Wald, who recently discovered he would save $25,000 a year if he refinanced his five-year mortgage at 4.75 percent. Wald, an auto body repairman in Sarasota, Fla., could have gotten that rate last month.
But like many homeowners, he waited for rates to fall further. Now, he’s worried he missed his chance.
"The 4.75 percent my broker quoted two weeks ago? There’s no way I’m going to get that now," said Wald, 49.
Of bigger concern is the effect rising mortgage rates could have on the nascent economic recovery. The stock market has rallied since early March on the assumption the recession will end this year. Federal Reserve Chairman Ben Bernanke has been calling early signs of economic stabilization "green shoots" — and one of those shoots was a pickup in refinancing activity caused by tumbling mortgage rates.
But mortgage rates have rebounded sharply over the past few days as the nation’s growing debt raises concerns that government-backed assets could lose some of their value.
Loan officer Dan Green has been around the mortgage business for six years, but he can’t remember watching a move in interest rates like the spike that took place on Wednesday.
In the space of 90 minutes, he said, rates on a 30-year fixed mortgage jumped about five-eighths of a point, hiking the annual cost of a $300,000 loan by more than $1,000.
"So far, the reaction has been immediate," said Green, a Cincinnati-based agent for Chicago’s Mobium Mortgage Group Inc. "I had people who had refi options Tuesday morning that didn’t have them on Wednesday."
It’s a trend that could slow both refinancing and home buying if it continues, threatening the larger economy. Home sales generally generate jobs tied to construction and manufacturing of household items, such as furniture and appliances. And if existing homeowners refinance, it could free up more cash to be used for consumer purchases payday loans.
Analysts say higher mortgage rates won’t necessarily derail the economy’s recovery, but it certainly won’t help.
"If the Fed does not step in, you are going to see the ‘green shoots’ get frost bite," said T.J. Marta, founder of financial research firm Marta on the Markets.
The average rate for a 30-year fixed mortgage is back at 4.91 percent this week, up from 4.82 percent last week, Freddie Mac said Thursday.
The 30-year fixed mortgage rate hit a record low of 4.78 percent in April thanks in large part to the Fed’s decision this year to buy as much as $1.25 trillion in mortgage securities and $300 billion in Treasury notes.
Lower rates led to a surge in mortgage applications. Applications rose for five straight weeks between early March and early April, according to the Mortgage Bankers Association. And sales of both existing and new homes ticked higher from March to April.
The Fed’s moves, however, have recently lost their effectiveness in the market. The yields on the 10-year and 30-year Treasury notes have surged to a six-month high and are nearly where they were a year ago. That’s significant because Treasury yields, or their annual rates of return, help set mortgage rates.
Mortgage activity is already starting to decline. Mortgage applications tumbled 14 percent in the week ended May 22 from the previous week, the Mortgage Bankers Association said Wednesday. Applications to refinance a loan were down almost 19 percent.
The Fed has many tools to bring rates down again. It could increase how much it intends to spend on Treasury purchases or mortgage-backed securities. It could also decide to simply buy longer-dated Treasurys, said David Ader, government bond strategist at RBS Greenwich Capital. Recently, the Fed has been focusing on buying shorter-term government debt.
But if the Fed buys more Treasurys, some investors worry the central bank’s moves could have unintended consequences. That’s because when the Fed buys the debt that the government issues, it is essentially creating money. And that can cause inflation and weaken the value of the dollar against other major currencies.