A mortgage is a loan that is secured against a property. A home buyer can purchase a home through the financing provided by a mortgage, paying an interest rate on the principal called a “mortgage rate.” Mortgage rates vary with the length of the term, whether the interest rate is fixed or variable, payment frequency and the ability to prepay. A fixed mortgage rate is one in which the interest rate remains the same for the duration of the contract. A variable or adjustable mortgage shifts over time based on the prevailing interest rates that the financier is using to benchmark that particular mortgage.
Well, that didn’t take long. Over the past few months, I’ve been warning readers that higher interest rates are coming, and this will affect millions of Americans through increased levels of mortgage rates.
In just the last couple of months, we’ve seen the rates for mortgages jump significantly. While many pundits believe that the housing market could continue at its torrid pace in spite of higher mortgage rates, the evidence appears to show just the opposite.
Two recent data points in the housing market indicate, in my analysis, that mortgage rates are indeed having an impact on the market.
New residential sales for July 2013 were 394,000 on a seasonally adjusted annual rate, a drop of 13.4% from the level in June, according to the U.S. Census Bureau. (Source: U.S. Census Bureau web site, last accessed August 28, 2013.)
Following that dramatic drop in new sales, we just got a report on pending home sales. Pending sales are a forward-looking indicator in the housing market, and this report shows the contracts that have just been signed.
The Pending Home Sales Index for July was 109.5, a drop of 1.3% from June, according to the National Association of Realtors (NAR). In the report, the organization specifically cited higher mortgage rates as having an impact on lower levels of pending sales. (Source: “July Pending Home Sales Slip,” National Association of Realtors web site, August 28, 2013.)
I’ve always been a big advocate for using data from multiple sources. Here are two separate organizations that are clearly showing higher mortgage rates are indeed having an impact on the housing market.
This should not … Read More
One reaction that should not surprise long-term investors is that the market will move far quicker and further than most people expect. Even before the Federal Reserve has made any statement regarding the timing of reducing its asset purchase program, investors have already begun selling their fixed-income investments, which is causing yields to rise.
This is now resulting in higher mortgage rates.
According to the Mortgage Bankers Association, the average for 30-year mortgage rates increased to 4.15% last week, a substantial move from May’s average for 30-year mortgage rates, which was approximately 3.59%. (Source: “Mortgage Rates on Six Week Streak Higher,” Wall Street Journal, June 13, 2013, accessed June 14, 2013.)
Even though long-term mortgage rates at 4.15% are still near historically low levels, this has impacted refinancing, which will in turn affect certain bank stocks that have benefited from the boom of lower mortgage rates.
The Mortgage Bankers Association also reported that applications for mortgage refinancing are down 36% since the beginning of May. This is a direct result of higher mortgage rates.
Many bank stocks have benefited from refinancing revenue brought on through lower mortgage rates. This revenue generation appears to be in jeopardy, at least resulting in lower revenue growth rates, since fewer homeowners will refinance as mortgage rates continue to rise.
However, the positive sloping yield curve is a benefit for bank stocks, as they make the spread between paying short-term rates and lending at long-term rates. The greater the spread, the larger the possibility of profits.
The question regarding bank stocks is: will new lending be large enough to compensate for the decline in refinancing … Read More
This is just the beginning of the London Interbank Offered Rate (LIBOR) scandal that came to surface last week, exposing the alleged fact that some big banks have been fixing interest rates in order to increase their revenues at the expense of, well, almost everyone else in the world.
As the investigation widens, more big banks—20 big banks are implicated thus far—will be named, and central banks and regulators will possibly be revealed to have been part of the scandal as well.
Hopefully this crime provokes fever-pitch levels of anger against the big banks from people around the world, because the interest rates that are set literally affected the interest rates and mortgage rates people save with and borrow from every single day.
Quoted daily, the LIBOR is created by a group of big banks. The LIBOR is the basis by which 10 currencies are set, including many interest rates that affect mortgage rates. For example, representatives of 18 big banks come together to tell those that publish the LIBOR what they would be paying to borrow U.S. dollars on that day from other big banks. The four highest rates submitted and the four lowest rates submitted are tossed out. The rest is averaged out and, voila, the LIBOR to borrow in U.S. dollars appears.
The obvious problem with this process is that the big banks, not the market, are setting the interest rates. The second problem is that nothing prevents the big banks from colluding and submitting interest rates conforming to the interest rates or mortgage rates they want.
The e-mails made public uncover just this type of collusive … Read More
The Federal Reserve is frustrated that its low interest rate policy and thus low mortgage rates are having no effect on the U.S. economy. The Federal Reserve was hoping to stimulate borrowing to get the U.S. economy growing again.
The problem is the record number of people whom are long-term unemployed: 5.4 million were unemployed for longer than 27 weeks as of May.
There are over 80.0 million Americans who are not even counted as unemployed because they are discouraged when it comes to finding a job in this economy.
With no available jobs and the housing market continuing to languish at the low end, it doesn’t matter how low mortgage rates are. Also, because of the reality of the jobs market, the Federal Reserve is well aware that more and more Americans fall into the category of poor credit scores.
Banks and mortgage companies in the U.S. are very hesitant to lend, because they are still healing from the crisis. Regardless of how low mortgage rates are, they are tightening their lending standards to protect themselves.
The Federal Reserve should pay attention to a report from Moody’s Analytics that noted 90% of new mortgages in 2011 were given to people with only high credit scores.
There is no question that those with high credit scores are taking advantage of Federal Reserve policy to refinance and borrow. The problem is Americans with low credit scores are finding they need to pay much higher mortgage rates than what the Federal Reserve intended.
The other issue is that those Americans who had their credit scores cut down due to the ramifications of … Read More