As with every Thursday, it’s worth taking a couple minutes to look at the results of Freddie Mac’s Primary Mortgage Market Survey. This week the average rate on a 30-year fixed rate mortgage was unchanged at 3.53%. The 15-year fixed rate mortgage was also unchanged at 2.77%. 5/1 ARMs ticked up a basis point to 2.64% while the 1-year ARM rose from 2.53% to 2.61%. Frank Nothaft, vice president and chief economist for Freddie Mac commented in a press release:
“Mortgage rates remain near record lows and continue to support housing demand, translating into a pick-up in home prices in most markets. The median sales price of existing homes rose 10 percent between fourth quarter 2011 and 2012, the largest year-over-year gain in seven years. Among large metropolitan areas, 88 percent saw positive annual increases in the fourth quarter, compared to 81 percent in the third quarter and 75 percent in the second. The largest gains occurred in Phoenix (34 percent), Detroit (31 percent) and San Francisco (28 percent).”
The rate on the 30-year fixed rate mortgage rose over twenty basis points in January before plateauing in February. It seems as though the increase has mostly been a result of fears over what will happen when the Fed curtails/stops asset purchases. I would argue that this is not an immediate concern as our fundamental economic situation isn’t much improved over several months ago (we’re a long way away from the 6.5% unemployment/2.5% inflation numbers that would trigger a change in Fed policy). Furthermore, none of the Fedspeak that we’re hearing of late indicates that changes to the asset purchase programs are imminent.
Furthermore, it seems that the Fed members are not entirely sure how to exit the markets without causing massive disruptions. Take a look at what Esther George, President of the Kansas City Fed (and notable , said two days ago in a speech:
“[The Fed's plans to sell assets] could be potentially disruptive to markets and market functioning. These actions are untested by the Federal Reserve and could cause an unwelcome rise in mortgage interest rates.”
I think we can rest assure that the Fed is aware of the perils in changing course, and will be extremely deliberate in doing so. Interest rates are going to have an adverse reaction no matter what, but the Fed should and probably will do its best to make sure there are no seismic changes that would disrupt our “recovery.”
Anyway, it will be interesting to see what happens with rates as the March 1 sequester date comes closer and closer. Slashing government spending (further) would be a major disruption to the economy (although likely beneficial for interest rates).