Mortgages stand still amid world turmoil
Rates on the most popular mortgage edged down this week as housing activity continues to lag last year's rapid pace and the tragic downing of a passenger jet over conflict-ridden Ukraine sparked investors to seek haven in the 10-year Treasury note.
30 year fixed rate mortgage – 3 month trend
- The benchmark 30-year fixed-rate mortgage fell to 4.28 percent from 4.3 percent last week, according to the Bankrate.com national survey of large lenders. One year ago, that rate was 4.54 percent. Four weeks ago, it was 4.28 percent. The mortgages in this week's survey had an average total of 0.3 discount and origination points.
- The benchmark 15-year fixed-rate mortgage rose to 3.41 percent from 3.4 percent last week.
- The benchmark 5/1 adjustable-rate mortgage rose to 3.37 percent from 3.33 percent.
- The benchmark 30-year fixed-rate jumbo fell to 4.34 percent from 4.37 percent.
Housing without rose-colored glasses
The low mortgage rates partly reflect the dearth of potential borrowers.
"There's still slack in the economy. Not everyone who wants a job can get one. People don't want to borrow," says David Cary, mortgage broker with C2 Financial Corp. in California. "Think of interest rates as supply and demand. They would be higher if there was a huge appetite for debt."
The volume of mortgage applications from homebuyers increased marginally this week by 0.3 percent, according to the latest weekly survey from the Mortgage Bankers Association released Wednesday. But that wasn't enough to erase the 8 percent drop last week when purchase volume hit its lowest level since February.
The tepid demand can be seen in home sales, too. On the face of it, it appears all good that sales of previously owned homes rose by 2.6 percent in June to a seasonally adjusted annual rate of 5.04 million. However, that pace is off by 2.3 percent from June 2013, according to the National Association of Realtors.
"In any given week, you're going to have a lot of variables," says Pat McCluskey, senior fixed-income strategist at Wells Fargo Advisors. "But in general, there is just slower demand for mortgages."
Escalating unrest in Ukraine may also have kept down mortgage rates, which tend to track the yield on the 10-year Treasury. On July 17, a Malaysia Airlines passenger flight flying from Amsterdam to Kuala Lumpur was reportedly brought down by a missile strike from rebel separatists fighting in Ukraine, raising tensions between Russia and the West. The yield on the 10-year Treasury the day before the plane crash ended at 2.54 percent. It fell to 2.48 percent on the day of the crash as investors put more money into the safety asset. The yield has yet to bounce back.
"There could be sanctions imposed on Russia, and that will have an economic impact on Europe," says Guy Cecala, publisher of industry trade publication Inside Mortgage Finance. "When there is concern about the euro, that generally puts downward pressure on rates."
Another unrelated global influence on mortgage rates is the Chinese government, which increased its purchases of U.S. Treasuries this year at the quickest rate on record, according to government data released last week. The country upped its holdings of Treasury debt by $107.21 billion in the first five months of this year and now holds about 10.6 percent of the $12 trillion U.S. Treasury market, according to federal data.
Don't leave out the Fed
The Chinese Treasury shopping spree comes as the Federal Reserve continues to scale back its purchases of Treasuries and mortgage-backed securities, a program it employed during and after the recession to lower interest rates and boost economic activity. In its past five meetings, the Federal Open Market Committee, the Fed's monetary policymaking branch, has reduced purchases by $10 billion and is on pace to conclude the program by its October meeting
Last week, Fed Chair Janet Yellen reiterated that the FOMC won't raise the federal funds rate, a key benchmark rate for business and consumer loans, including mortgages, for a "considerable time" after the bond-buying program ends.
"The message is sometime, but not tomorrow," says Cecala. "And that's keeping rates low, too."