Mortgage Rate Slide May Be Nearing End, Experts Say
Despite the Federal Reserve’s surprise rate cut Wednesday, the yearlong decline in mortgage rates appears to be nearing an end, analysts say.
Economists said mortgage rates may fall slightly in the next few days and again if the Fed slashes rates at its next scheduled meeting May 15. But mortgage rates are expected to start rising this summer in anticipation that the economy will improve toward year-end.
Perhaps sharing that anticipation and excited over the latest Fed cut, consumers rushed to refinance on Wednesday.
Call volume doubled at Countrywide Home Loans within minutes of the central bank’s announcement. The majority of the calls were requests to refinance existing home loans, said Doug Perry, first vice president of the company’s consumer markets division.
Consumers who can cut at least a half-percentage point off their current mortgage rate by refinancing should move now, economists said.
“If people are waiting and they have a mortgage rate of 8% or 8.5%, that’s a slam dunk,” said Randy Merk, chief investment officer of fixed income at American Century Investments mutual funds. “If you have a 7.7% rate and the best you can get is 7.5%, I’m not sure I would do that.”
The expectation that mortgage rates, which have hovered around 7% for weeks, are nearing a low point was underscored by the bond market’s reaction to the Fed’s move. Mortgage rates tend to follow yields on long-term Treasury bonds and notes.
Yields on 30-year Treasury bonds showed little change Wednesday despite the Fed announcement, while the yield on 10-year Treasury notes declined only modestly. This is largely because those yields already factored in an expected Fed rate cut in May, economists said.
In fact, both long-term bond yields and mortgage rates have been climbing steadily since the Fed’s last rate cut March 20. Rates for a 30-year fixed mortgage with one point in fees climbed from 6.89% on March 22 to 7.04% last week, according to the Federal Home Loan Mortgage Corp., or Freddie Mac.
That jump--and expectations that continued Fed rate cuts may spur investors to move money out of bonds and into stocks--made economists pessimistic about a continued decline in mortgage rates. Many note that if the Fed’s cuts do the trick, the economy will rebound--putting upward pressure on all rates eventually.
“We are near the bottom,” said Doug Duncan, chief economist for the Mortgage Bankers Assn. of America. “Except in a recessionary environment, we don’t see rates getting down to 6.75% or below.”
Mortgage rates are still down markedly from a year ago, as interest rates in general have tumbled amid a weakening economy. The rate for a 30-year fixed mortgage with two points in fees was 6.77% last week in Southern California, down from 7.76% a year ago, said Earl Peattie, president of Mortgage News Co.
But the good times are quickly coming to an end, economists said, pointing to several factors keeping mortgage rates from moving lower. These include a refinancing boom sparked by last year’s dive in rates that drove up the demand for mortgage securities and widened the gap between mortgage rates and long-term Treasury yields.
In addition, a seasonal surge in real estate activity and a subsequent increase in loan applications also are putting pressure on rates, keeping them from falling further, American Century’s Merk said.
Indeed, mortgage loan applications for the week ended Friday were up 81% compared with the same period a year ago, according to the Mortgage Bankers Assn. of America. Refinancing activity represented about 54.6% of applications.
Even though long-term bond yields didn’t respond much to the Fed’s move, short-term bond yields fell markedly, leading mortgage bankers to suggest adjustable-rate mortgages as a good buy for consumers who intend to stay in a home for a short period.
These products, known as “fixed adjustables,” lock in at a lower rate that stays fixed for three to 10 years, but then require homeowners to refinance at market rates after the end of that period, Countrywide’s Perry said.
Mortgage bankers said they are advising clients to move now, no matter what type of mortgage the clients want.
“I’ve been calling all my clients and telling them they better get going,” said David Soleymani, managing director of Santa Monica-based First Capital Mortgage. “The psychology has changed.”
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Warning Sign?
The yield on the 10-year Treasury note, a benchmark for mortgage rates, has resurged since late March. That suggests investors were already beginning to bet on an economic rebound, even before Wednesday’s Federal Reserve rate cut.
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10-year T-note yield, weekly closes and latest
Wednesday: 5.15%
Source: Bloomberg News
