Mortgage rates likely to continue to increase

By Pete Southern in LiveWire Economics Blog | August 13, 2009 10:40 |

New data Wednesday (August 12) showed that mortgage applications fell last week as mortgage interest rates are currently at the highest level they have been since June. The current national average for a 30-year fixed interest rate mortgage is 5.5 per cent according to Bankrate.com, which compiles rates from a broad range of lenders.

According to the Mortgage Bankers Association, its index of mortgage applications showed a roughly 3.5 per cent drop in applications for the week ended August 7th. While new purchases have been slow, refinancing has been massively popular in the last year thanks to historically low rates. However, the group cites rising rates and slowing demand for refinancing as reason for the decrease in mortgages.

A positive sign in the data report was that there has been a slight increase in applications by people making new home purchases. This signal coincides with other data in the last several weeks that has led many to believe the housing market has already hit bottom and that a very slow recovery process may already be under way.

While mortgage rates may not be as attractive now as they were under 5 per cent a few months ago, compared to last year’s rate of 6.57% at the same time, interest is still fairly cheap. The mortgage group says that right now it is unemployment (recently reported at 9.4%) and more restrictive borrowing conditions that are affecting mortgage demand, not interest rates. In order to offset these challenges to home buying and credit, the group suggests it would take a return to near 5 per cent interest rates.

Unfortunately, given the growing expectation of economic recovery, including the housing market, it is hard to see rates dipping that low again anytime soon without strong government intervention. The Fed is widely expected to leave its fund rate near zero per cent when it shares commentary and a rate decision Wednesday afternoon following its two-day policy meeting. Despite signs the economic recession might be over, most expect that the group wants to give the economy plenty of time to get headed in the right direction before increasing rates again.

Another reason it would be surprising to see mortgage rates drop much farther in the near future is that while it may not be high now, demand for mortgage-backed securities is likely to pick up as more signs of housing and broader economy recovery come in. High interest in this type of speculation is a key driving force of rates as it shows investors view mortgages as being more stable.

While they may not go lower, rates are still quite low for most good credit borrowers. However, as is the case with other sectors of the economy, people need jobs to be able to borrow money and spend money. The recent dip in the unemployment rate was a positive sign that some companies have reduced labor cuts. However, a more consistent showing in the next several weeks will be important.

Neil Kokemuller
9:55 AM EST
Wednesday, August 12, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices .
Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.


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