So, Why Are Rates Rising?

May 26, 2015
ECONOMIC COMMENTARY
Last week we made the point that rates are still very, very low. But they have risen over the past month and the next question is-why are they rising now? On the face of it, there are not very many reasons for rates to be increasing. For example, our economy barely grew in the first quarter of this year. There is also no signs of inflation right now or on the horizon. On the other hand, one must remember that markets move in mysterious ways, which often leaves us guessing.

For example, are the markets predicting a big rebound in the economy for the second and third quarters? That would mean that the numbers released for economic growth in July will be watched very closely. A paper was recently released by the Federal Reserve Bank in San Francisco which has argued that seasonal adjustments to the numbers had understated growth during the first quarter.

Another factor that helps us explain recent movement in rates is the fact that oil prices are rising. While no one is expecting oil prices at their present levels will spark inflation, for a while last year many were concerned that we could be heading into a period of deflation with oil and other commodity prices plummeting at the time. Now the prices have stabilized and are rebounding slightly. Thus, the deflation factor has been removed from the equation and bond prices are adjusting accordingly. If this is the major factor, the increases should level off. However, if the economy does rebound strongly, we may see continued rate increases.

WEEKLY INTEREST RATE OVERVIEW

The Markets. Last week rates on home loans were stable. Freddie Mac announced that for the week ending May 21, 30-year fixed rates decreased one tick to 3.84% from 3.85% the week before. The average for 15-year loans also decreased slightly to 3.05%. Adjustables were mixed, with the average for one-year adjustables increasing to 2.51% and five-year adjustables falling to 2.88%. A year ago, 30-year fixed rates were at 4.14%, which is 0.30% higher than today’s levels. Attributed to Len Kiefer, deputy chief economist, Freddie Mac — “Rates rose on home loans were little changed this week amid positive housing news. Housing starts surged 20.2 percent to a seasonally adjusted pace of 1.14 million units in April, the highest level since 2007. As the homebuying season moves into full swing, home builders remain positive about home sales in the near future. Although the NAHB housing market index slipped 2 points to 54 in May, it is still above 50, indicating that on balance builders remain optimistic about housing markets.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.  
Current Indices For Adjustable Rate Mortgages
Updated May 22, 2015
Daily Value Monthly Value
May 21 April
6-month Treasury Security  0.07%  0.09%
1-year Treasury Security  0.22%  0.23%
3-year Treasury Security  0.95%  0.87%
5-year Treasury Security  1.53%  1.35%
10-year Treasury Security  2.19%  1.94%
12-month LIBOR  0.697% (Apr)
12-month MTA  0.166% (Apr)
11th District Cost of Funds  0.687% (Mar)
Prime Rate  3.25%
REAL ESTATE NEWS
 U.S. consumers are finding it easier to get a home loan, after years of near frozen credit following the financial crisis. This, in turn, is giving way to more creative loan products, as well as more unusual ways of using existing loan products. The heat behind the credit thaw is simple clarification. After the crash of the subprime market, lenders were hit with billions of dollars in lawsuits and loan buybacks by Fannie Mae, Freddie Mac and the federal government. Afraid of having to buy back future loans, even pristine ones, lenders shut the door to anyone without virtually pristine credit. That is finally changing. New rules from the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, conservator of Fannie Mae and Freddie Mac, have recently clarified which loans will be safe from repurchase risk. “We have listened closely to your concerns about the impact that loan repurchases have had on your businesses, and we understand that addressing these concerns in ways that are mutually satisfactory to you and the enterprises is critical to ensuring that there is liquidity in the housing finance market and to providing access to credit for borrowers,” FHFA Director Mel Watt told lenders last fall at the Mortgage Bankers Association’s annual convention. Source: CNBCMore than one in four renters use at least half of their household income to cover housing and utility costs, according to a new analysis of Census data by Enterprise Community Partners. The number of renters who are constrained financially from growing household expenses has surged 26 percent since 2007, now at 11.25 million. “It means making really difficult trade-offs,” says Angela Boyd, a vice president at Enterprise Community Partners. “There are daily financial dilemmas about making their rent or buying groceries.” Household incomes have not kept pace with rental increases. A recent analysis by the National Association of REALTORS® showed a widening gap between rental costs and household incomes that is widening to unsustainable levels across the country. NAR’s analysis showed that over the last five years a typical rent increased 15 percent, while the income of renters grew by only 11 percent. Source: The Associated Press

The foreclosure picture continues to brighten, as the number of foreclosures dwindle across the country. Foreclosure inventory dropped 27 percent in February while completed foreclosures fell by 15 percent year-over-year, according to CoreLogic’s National Foreclosure Report. Even bigger: Foreclosures have plunged 67 percent from the peak reached in September 2010. The number of home loans in serious delinquency also has dropped – a good sign that foreclosures will continue to fall. Overall, delinquent home loans dropped 19 percent in February year-over-year. About 4 percent of these loans are now in serious delinquency (90 days or more past due). “Fewer Americans are seriously delinquent in paying their home loans, which in turn is reducing the foreclosure inventory across the country as a whole,” says Anand Nallathambi, president and CEO of CoreLogic. The foreclosure inventory represented 1.4 percent of all financed homes nationwide in February. Still, “while the drop in the share of mortgages in foreclosure to 1.4 percent is a welcome sign of continued recovery in the housing market, the share remains more than the 0.6 percent average foreclosure rate that we saw during 2000-2004,” says Frank Nothaft, chief economist at CoreLogic. Source: CoreLogic

 

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