Mortgage rates rose again on Thursday. Are you yawning right now? Then try this one on for size: After rising gradually for four weeks in a row, the average rate for a 30-year fixed mortgage took a big leap on Thursday, ending the week 22 basis points higher than the previous week’s average, and reaching its highest point since May 10, 2012.
I have your attention now? Good. Let’s press on.
30-Year Mortgage Rates Jump Nearly Half a Percentage Point
Here are the facts. On May 30, 2013, mortgage giant Freddie Mac reported that the average rate for a 30-year fixed-rate home loan rose to 3.81% from 3.59% the previous week. That was the biggest one-week gain we’ve seen in a long time. It also marked the highest average for 30-year mortgage rates in over a year.
The chart below spans from May 2012 (left side) to May 2013. Notice the one-year high point for the blue line, which occurred on May 30 of this year.
For the past few weeks, many mortgage analysts were predicting only small changes to the benchmark 30-year mortgage rate. Most expected the benchmark rate to hover in the 3.5% range at least into the summer months. What made them so sure? Mostly the Fed…
Will the End of Fed’s QE3 Be the End of Artificially Low Rates?
The Federal Reserve began its third round of quantitative easing (QE3) in September 2012. That policy helped keep interest rates low for many months, and was expected to do the same through the end of 2013.
Quantitative easing is an unconventional – read ‘desperate’ – monetary policy used by central banks during times of financial distress. The end goal of such a policy is to lower interest rates and, by extension, spur the broader economy from stagnation toward growth.
The Fed’s QE3 program largely involves the monthly purchasing of mortgage-backed securities (MBS). And that’s what they’ve been doing since September 2012. In December 2012, the Federal Open Market Committee (FOMC) — a meeting of the minds for Federal Reserve bigwigs –decided to increase the asset purchase program from $40 billion to $85 billion per month.
These and other actions taken by the Federal Reserve have had a suppressive effect on interest rates, including mortgage rates. That’s one of the reasons we’ve seen so much stability with the benchmark rate in recent months. The average rate for a 30-year fixed mortgage loan has hovered between 3.3% and 3.55% since July of last year.
This stability was expected to continue for a while, due to QE3 and other factors. So it came as a surprise to many when mortgage rates jumped up to 3.81% on May 30.
What caused 30-year mortgage rates to rise from 3.59% to 3.81% in a single week? According to Frank Nothaft, vice president and chief economist at Freddie Mac:
“Fixed mortgage rates followed long-term government bond yields higher following a growing market sentiment that the Federal Reserve may lessen its accommodative policy stance. Improving economic data may have encouraged those views.”
So there seem to be a variety of factors pushing rates upward. We are seeing improvements in every aspect of the economy right now, including the housing market. U.S. home prices recently posted their biggest year-over-year gain since April 2006, according to the Case-Shiller Home Price Index. Such positive trends typically lead to an increase in interest rates. At the same time, the Fed has signaled an end to the long-running QE3 program.
The FOMC meets roughly every six weeks to decide fiscal policy. At their last meeting, which took place on April 30 – May 1, the committee came to the following semi-conclusion regarding QE3 (emphasis added):
“A number of participants expressed willingness to adjust the flow of purchases downward as early as the June  meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.”
Future of Mortgage Pricing Uncertain
There is much uncertainty in the world of mortgage rates right now. Rates have been artificially low for a long time, driven more by the Fed’s actions than true market conditions. But all signs point to an end of QE3 sometime this year, or at least a major draw-down in MBS asset purchases.
This comes at a time when demand is growing in both the housing sector and the secondary mortgage market.
As a result of these and other factors, it’s possible the benchmark rate will bust through the 4% ‘ceiling’ within the next few months. Of course, when you consider that mortgage rates reached 15% toward the end of the Carter administration, 4% still seems like a bargain.