Stomp. Stomp. Stomp. That was the sound that mortgage brokers and borrowers heard this week as interest rates on home loans marched inexorably upward.
Rates began to climb last week and continued higher in the current period, according to Peter Thompson, a senior loan officer at Prospect Mortgage in Naperville, Ill.
"Rates were in a flat range, where they were pretty much sideways for over a month, and now it has broken out and is going in a higher direction," he says.
The benchmark 30-year fixed-rate mortgage rose 21 basis points this week, to 5.23 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of one percentage point. The mortgages in this week's survey had an average total of 0.45 discount and origination points. One year ago, the mortgage index was 5.15 percent; four weeks ago, it was 4.94 percent.
Weekly national mortgage survey
Results of Bankrate.com's Feb. 9, 2011, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
The 30-year fixed hasn't been close to this rate since the April 7 survey 10 months ago, when it peaked at 5.35 percent.
The benchmark 15-year fixed-rate mortgage rose 19 basis points, to 4.48 percent. The benchmark 5/1 adjustable-rate mortgage rose 17 basis points, to 4.01 percent, and the benchmark 30-year, fixed-rate jumbo mortgage rose 20 basis points, to 5.74 percent.
This was the fourth week in a row that saw an increase in the 30-year fixed.
Stronger economy, higher ratesRates are on the rise because optimism has won out, at least temporarily, in the tug of war between positive and negative economic news.
The biggest announcement was a Bureau of Labor Statistics, or BLS, report Friday that the national unemployment rate dropped 0.4 percent to 9 percent in January, though only 36,000 net jobs were created during the month. A growing economy needs 120,000 to 150,000 new jobs monthly to absorb workers who've jumped into the labor pool, but investors seemed mesmerized by the 9 percent figure, a significant and unexpected improvement on the jobs front.
"The numbers weren't great, but the unemployment rate was a big, big change and that has fueled the stock market. Money has rushed out of bonds and into stocks, so that's what has fueled the rates rising," Thompson says.
Recovery takes holdA speech last Thursday by Federal Reserve Chairman Ben S. Bernanke added to the optimism.
Bernanke said that household spending rose at an annual rate of more than 4 percent, adjusted for inflation, in the fourth quarter and, while much of the increase was due to vehicle purchases, "recent gains in consumer spending look to have been reasonably broad based." He also noted that business spending "grew robustly over most of the last year."
"A self-sustaining recovery in consumer and business spending may be taking hold," he said.
Other economic data also supported the trend:
- The number of U.S. job openings held steady at 3.1 million as of Dec. 31, 2010, according to the BLS. This flat-lined level of open positions might seem discouraging, but the BLS noted that the number of open positions has increased 700,000 jobs, or 31 percent, since the low point in July 2009.
- Chain-store retailers posted a solid 2.2 percent increase in sales last week, despite the challenges of woeful weather, according to the International Council of Shopping Centers in New York City.
- Nonmanufacturing economic activity expanded 2.3 percent in January, according to the Institute for Supply Management in Tempe, Ariz.
A stronger economy is almost by definition a cause for higher interest rates, since fatter corporate earnings and fears of inflation prompt investors to move capital out of bonds into equities. Lower demand for bonds means higher yields, or rates. While mortgage rates don't perfectly match the bond market, a parallel path is typical.
Inflation still tameMeanwhile, inflation continues to be a wild card. Bernanke told the reporters at the National Press Club that prices of groceries and gasoline have posted "highly visible" increases, yet "overall inflation remains quite low" and core inflation, which excludes the food and fuel components, was less than 1 percent last year.
A spike in prices could put more upward pressure on interest rates; however, the Fed still expects persistently low levels of inflation and a stubbornly high rate of unemployment to temper economic growth this year.
Unable to lower the federal funds rate, stuck at near zero since December 2008, the Fed intends to continue its $2.3 trillion program of buying longer-term Treasury and mortgage-backed securities in an effort to keep downward pressure on interest rates, Bernanke said.
"By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby strengthening the economic recovery," he said in his speech.
The program, known as "quantitative easing," has been controversial and not entirely well-received by investors.
Other potential game-changers include the debt crisis in Europe and political unrest in Egypt, which controls the Suez Canal, an important shipping lane for crude oil and petroleum products. Those events were in the background this week, but haven't been resolved and could re-emerge as influential issues.
"A lot of people think what they've done (in Europe) so far is put a Band-Aid on a problem that still needs a lot more attention," Thompson says. "The Band-Aid is holding for now. At some point, that's probably going to come back to the forefront."