Why mortgage rates aren't higher — yet
Despite predictions of high rates this year, the average 30-year fixed mortgage carries a rate of 4.32 percent this week.
The thinking was that a combination of new mortgage regulations and a pullback in bond-buying by the Federal Reserve would be the rocket fuel to lift rates off near-historic lows. The Fed announced Wednesday it would extend the so-called taper and cut its bond-buying by another $10 billion, to $65 billion.
And yet for the past month, rates have not really moved. If anything, they've moved slightly lower from their year-end level and now hover at around 4.5 percent for the 30-year fixed (Editor's note: Freddie Mac reports today that the average rate on a 30-year fixed mortgage was 4.32 percent this past week). That has some scratching their heads about where rates will move as we head into the usually busy spring housing market.
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"The simple answer is that the rate hike due to the Fed's tapering really took effect last May/June—despite the fact that the tapering didn't begin until December," said Guy Cecala, editor-in-chief of Inside Mortgage Finance. "There was no need to hike rates further."
Cecala points out, that from the standpoint of the mortgage market, the Federal Reserve is still buying as big a share — and perhaps bigger — of new agency mortgage-backed securities production as it was six months ago.
That is because overall mortgage production is down. The rate jump at the start of last summer ended the refinance boom, and purchase originations are sluggish, as sales slow and all-cash buyers reign.
Total mortgage applications are down 52 percent from a year ago, according to a weekly report from the Mortgage Bankers Association. Refinance applications and purchase applications are down nearly 63 percent and over 12 percent, respectively. The average contract rate on the 30-year fixed was 4.52 percent last week, compared with 3.67 percent during the same week a year ago.
The Fed may have cut its mortgage-bond buying by $5 billion in January, but it has had no effect on rates for one simple reason.
"Other parties have filled the void, and then some," said Dan Green, publisher of TheMortgageReports.com. "Mortgage bonds are rallying, and mortgage rates are dropping."
The reason: As the stock market falls, investors head to the safety of quality assets such as bonds. Recent economic turmoil overseas has added to that movement and, consequently, to a rebound in Treasury-buying, which depresses yields. Mortgage rates generally follow the 10-year yield.
"A reduction of $10 billion or even $20 billion shouldn't change the current situation where the Fed is buying a disproportionately high percentage of new agency MBS production," Cecala said. "Again, the big factor is declining originations and new MBS production."
As for any major policy changes in the mortgage market, they are unlikely at least this year.
President Barack Obama mentioned housing just two times in his State of the Union address Tuesday. He said housing is "rebounding," and then suggested that legislation was needed to protect taxpayers from another housing crisis. In a policy fact-sheet released during the speech, Obama reiterated his plan — first outlined last summer—to reform housing finance.
The primary reason the president is not pushing a housing agenda is that mortgage giants Fannie Mae and Freddie Mae are making money hand over fist — money that goes directly to the federal government because of its conservatorship.
It's also just too big an issue to tackle with Congress facing midterm elections.
"The housing market is in the best shape of Obama's presidency," said Jed Kolko, chief economist at Trulia.com. "Construction and sales in 2013 were both at their highest levels since before he took office, and prices have bounced back to within range of their long-term norms."
Kolko also noted that the president's two main initiatives, mortgage refinancing and modifications, don't work as well in a higher interest-rate environment.
So will mortgage rates really rise in 2014? Probably, but not entirely because of the Fed's moves or more mortgage regulation. Despite a new regime at the Fed, policy will still depend largely on the employment picture.
"What Janet Yellen will do in March will depend on a few more jobs numbers and a clearer view of how markets deal with the current reality of less QE [quantitative easing]," wrote Peter Boockvar, an analyst with the Lindsey Group.
Mortgage rates will rise because interest rates always increase with an improving economy and a strong stock market, which appears to be the current trajectory, though they likely will rise more slowly than some have predicted.
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I have great loan to value ratios, more than sufficient income, long time on the job, credit score >800 and I find myself needing to refi for personal reasons.
I'm looking for a great deal considering I have all of the above going for me BUT my shopping around has been fruitless. Most have come so close to each other that I could flip a coin and decide. I don't like that. In the current economy, if you are someone with excellent credit, great LTV ratios, etc. I expect companies to compete for my business.
I have a 5year ARM at 2.5% ..... a special deal from the lender because of my large down payment and our credit scores (806 and 825).
There ARE good rates out there for those who have not hopped on the band wagon with everyone else and actually saved money, lived within their means and paid their bills on time.
So sick of deadbeats and those wanting to spend their money on dining out instead of paying the mortgage and then crying about it. It's easy to be a deadbeat, it's hard to do what's right and take care of your obligations no matter what you need to sacrifice.
These volatile mortgage interest rates are getting covered by the mainstream media more than ever before. Adding social media and smart phones to the mix results in a population that is more "aware" of movements in mortgage interest rates than ever before in history. This new public awareness triggers a larger proportion of people to actually SHOP AROUND for their mortgage, rather than just using their depository institution or getting a referral from their Realtor or family member. People are shopping online, so competition between lenders is high (especially in the US where we have a dual banking system that results in thousands of lenders to choose from).
Mortgage comparison websites such as RateBid.com and Zillow.com are great places to start, especially since they both allow borrowers to get personalized quotes and remain anonymous at the same time. This prevents people from receiving a bunch of sales calls, since many mortgage and real estate websites only intend to collect data, grab a phone number, and sell the information as a lead. RateBid even lets borrowers log in and actually watch mortgage lenders compete, often as they "bid" their rates and fees against each other, adding an entertainment factor to the experience. It may be a good idea to "buy the dip" (lock in a mortgage rate) when we see rates dip down like this since these dips could very well be temporary. Like the article states, interest rates increase as the economy improves.