Higher Interest Rates Drop Refi Applications

We are beginning to see a bit more volatility with rates as compared to the past several months as the stock market continues to post gains despite continued economic uncertainty. Rates have been held down by the Federal Reserve’s program of buying up mortgage-backed securities and the minutes from their last meeting released last week revealed they are considering purchasing an additional $750 billion for a grand total of $1.5 trillion. This news helped thirty-year mortgage rates remain barely below 5% despite a broad sell-off in the bond market that saw the yield on the ten year Treasury note rise to 3.43% – its highest level in months.

On Tuesday, a dismal housing report showing home prices decline some 19% year over year in the first quarter was outweighed by a report showing consumer confidence jumped by its biggest amount in six years to its highest levels in eight months reigniting the rally in the stock market. On Wednesday, the Mortgage Banker’s Association of America reported that applications dropped 14% last week as the highest interest rates in two months have sharply curtailed refinances.

If the current exuberance in the equity markets continues to put downward pressure on bond prices, we may see the last of sub 5% mortgage rates. Investors are looking for higher returns and seem to believe increasingly of late that the end of the recession will be sooner rather than later. Still, I do not expect mortgage rates to spike dramatically but, rather, slowly rise as risk aversion diminishes in the markets. Look for rates to stay around 5% for the next month or so with increased day to day volatility.

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