Rates for Mortgages Jump as Economic Outlook Brightens
After steadily declining to a 30-year low, mortgage rates shot up this week to the highest level in two months, giving relief to an industry overwhelmed by refinancing applications but prompting some consumers to back out because they were unable to lock in at the low rates they sought.
The average 30-year fixed rate rose by a quarter point from last week to 6.75%, mortgage company Freddie Mac reported Wednesday. That was the largest one-week gain since May 2000 and came after mortgage rates had fallen to 6.45% two weeks ago, triggering an outpouring of applications for refinancings.
But in the last two weeks, mortgage rates have climbed back up amid signs of a more favorable outlook for the economy, which have changed sentiments among bond investors, thus pushing up bond yields that are linked to mortgages.
Mortgage rates are expected to edge higher in coming weeks, moving toward the 7% range for 30-year fixed mortgages by earlier next year, said Matthew Freedman, an analyst at Economy.com, a research firm in West Chester, Pa.
Although mortgage rates are still well below the historical average of about 10%, the recent increase means that mortgage lending could soften somewhat in the coming months as fewer people may qualify for home loans. Already, higher rates have led fewer consumers to see a financial advantage in refinancing their homes, which has been on a record pace nationwide this year.
The Mortgage Bankers Assn. said Wednesday that refinancing activity fell 10% last week. The association’s index for home purchase applications went up slightly.
The sudden increase in rates in the last few days has caught analysts and apparently consumers by surprise.
“The folks who had been beating the doors down for the past six to eight weeks when rates reached 6.5% will probably back out of the market,” said Doug Duncan, chief economist at the Mortgage Bankers, a Washington trade group. He said mortgages that could have been redone at 6.4% earlier this month now cost 6.8%, resulting in a modest decrease of those looking to refinance their homes. “For some people, it’s enough to make it economically unfeasible to refinance.”
Southland lenders echoed those sentiments. At Washington Mutual, the state’s largest lender, refinanced home loans had been on record pace in October and through mid-November. But in recent days, the number of applications have begun to slow down, said Gregory Sayegh, senior vice president at Washington Mutual, who manages retail lending in California.
“We’ll see a steady flow of applications,” he said, “but not the dramatic spikes we’ve experienced over the past two months.”
Washington Mutual had been averaging about $20 billion of mortgage applications per month this year. But in October, when many lenders were swamped, Washington Mutual saw its originations volume surge to $32 billion, Sayegh said.
Nationwide, lenders are still expected to handle about $1.95 trillion in originations for refinanced mortgages this year, about 30% more than the previous record in 1998, according to figures from the Mortgage Bankers group.
The rise in mortgage rates follows a spate of favorable economic news that suggests the economy may be closer to emerging from a slump than believed since the Sept. 11 attacks.
The average mortgage rate in the Southland this week is 7.19%, compared with 6.91% from the previous week, said Earl Peattie, who compiles a weekly report of 70 lenders across the region for Mortgage News Co., a Morro Bay, Calif., research firm. The rate does not include add-on fees known as points.
Analysts said mortgage rates are still low enough to keep the Southern California market strong. But for those on the fringe of being able to buy a home, the recent spike in rates may spur them into the market before rates go up higher.
“For those dealing with marginal affordability, where every rate point matters, this definitely creates a sense of urgency,” said Leslie Appleton-Young, an economist at the California Assn. of Realtors.
