Rates rise after Fed increase. Coincidence?

Mortgage rates rose strongly this week, following the Federal Reserve's decision to raise short-term interest rates.

As scientists are fond of saying, correlation is not causation. In other words, you can't prove that 30-year mortgage rates rose just because the Fed increased one-day interest rates on Thursday, June 30. Short-term and long-term rates often move in different directions. In fact, long-term mortgage rates immediately fell the previous three times the Fed raised short-term rates.

But this time was different. The Fed raised the overnight rate by a quarter of a percentage point on the last day of June, and mortgage rates followed.

The benchmark 30-year fixed-rate mortgage rose 9 basis points to 5.7 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.42 discount and origination points. One year ago, the mortgage index was 6.08 percent.

The 15-year fixed-rate mortgage rose 6 basis points to 5.29 percent. The 5/1 adjustable-rate mortgage rose 11 basis points to 5.27 percent.

A 5/1 ARM has a guaranteed rate for five years, then adjusts annually. A 15-year fixed-rate mortgage has a guaranteed rate for 15 years. The average rates for 5/1 ARMs and 15-year fixed-rated loans are almost identical. The average rate on a 30-year fixed is less than a half-point more. Yet 30.7 percent of mortgage applicants last week were applying for adjustable-rate loans, according to the Mortgage Bankers Association.

Can you trace the increase in mortgage rates to the Fed rate increase? "I'm not sure. It's an inexact science," says Dan Green, regional vice president for 21st Century Mortgage Bankers in Westmont, Ill. "A lot of this stuff is momentum."

That's pretty much the standard reply to the question of why Treasury yields and mortgage rates went up following the Fed's action. People don't know. There was speculation that senior bond traders left early for the Fourth of July holiday, and they sold a lot of mortgage and Treasury debt to take their profits before the three-day weekend.

Another common explanation was that it took a day for the market to "digest" the news about the Fed rate hike. Besides making you wonder what comes out after the news is fully "digested," this is another way of admitting that no one knows why the market behaved as it did.

One piece of the puzzle could be the bigger-than-expected increase in a prominent indicator of manufacturing activity. The Institute for Supply Management announced Friday that its manufacturing index for June had increased to 53.8, up from 51.4 in May. An index number over 50 indicates growth. The unexpectedly strong news about factory activity might have nudged rates higher.

But sometimes you just can't figure the market out. Green notes that immediately after Wednesday's announcement that London will host the 2012 Olympic Games, the British pound rose in relation to other currencies. What really had changed? Nothing. But enthusiastic traders bid up the value of the pound out of sheer elation.

In other housing-related news, the National Association of Realtors says home sales will remain at high levels. The group's Pending Home Sales Index was at its third-highest level ever in May, which translates into near-record final home sales in June and July. The index measures the number of homes for which a sales contract is signed, but the transaction has not closed.

"We're looking for a banner year for the housing market," says David Lereah, the Realtors' chief economist. It would be considered a strong year for home sales even if volume was 25 percent lower, he says.