Average on US 30-year mortgage slips to 3.96 pct. a week after Fed raises short-term rates

FILE - This June 4, 2015, file photo, shows a sign indicating a site has been sold in a new home development in Nashville, Tenn. One week after the Federal Reserve raised short-term interest rates from record lows, the average on a 30-year fixed-rate mortgage went the other way: It dipped to 3.96 percent from 3.97 percent last week, mortgage giant Freddie Mac said, Thursday, Dec. 24, 2015. (AP Photo/Mark Humphrey, File)

Associated Press Dec. 24, 2015, at 12:24 p.m. + More

By PAUL WISEMAN, AP Economics Writer
WASHINGTON (AP) — What Fed rate hike?
One week after the Federal Reserve raised short-term interest rates slightly from record lows, the average on a 30-year fixed mortgage went the other way: It dipped to 3.96 percent from 3.97 percent last week, mortgage giant Freddie Mac said Thursday.
The drop is a reminder that the Fed has only an indirect effect on long-term mortgage rates, which more closely track the yield on the 10-year U.S. Treasury. And that yield, in turn, tends to stay down as long as inflation remains low and investors keep buying Treasurys. The 10-year Treasury yield has declined slightly since the Fed's hike last week.
"The Fed raising short-term rates by itself doesn't have a very profound effect on mortgage rates," said Sean Becketti, Freddie Mac's chief economist.
Back in the mid-2000s, when the Fed raised rates at 17 straight meetings, mortgage rates barely budged, Becketti noted.
Still, the average 30-year mortgage rate is up slightly from 3.83 a year ago and from 3.76 percent in late October. Becketti said a few additional modest Fed rate hikes won't likely have much effect on longer-term rates until the central bank starts reducing the huge portfolio of bonds it accumulated during and after the Great Recession.
The Fed's bond purchases were intended to lower longer-term loan rates to try to stimulate borrowing and spending and energize the economy. The Fed ended its bond purchases last year as the U.S. economy strengthened. But it has yet to begin selling the bonds, which would tend to nudge up longer-term rates.
Fed Chair Janet Yellen has signaled that the Fed is in no hurry to start reducing its portfolio of bonds — one reason long-term mortgage rates could remain low for a while.
What's more, inflation remains unusually low — well below the Fed's 2 percent target level. In addition, economic weakness and financial volatility overseas are drawing many global investors to the safety and relatively higher returns of U.S. Treasurys. This is putting further downward pressure on longer-term U.S. yields and keeping long-term mortgage rates low.
John Canally, chief economic strategist at LPL Financial, says mortgage rates "should not be a major impediment to the housing market" even if they do rise a bit in 2016. He notes that 30-year fixed-rate mortgages averaged 6.5 percent during the housing boom of 2000 to 2007.
Historically low mortgage rates have helped the American housing market recover from the real estate bust of the late 2000s. Despite a recent decline, sales of existing homes are likely to rise 5 percent this year from 2014. Year to date, new-home sales have advanced 14.5 percent, driven by job growth that has pushed the unemployment rate to a seven-year low of 5 percent.
On Thursday, Freddie Mac also reported that the rate on 15-year fixed-rate mortgages, which are popular with homeowners who are refinancing their home loans, was unchanged at 3.22 percent.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country at the beginning of each week. The average doesn't include extra fees, known as points, which most borrowers must pay to receive the lowest rates.
One point equals 1 percent of the loan amount. The average fee for a 30-year mortgage was unchanged from last week at 0.6 point.
The average rate on five-year adjustable-rate mortgages rose to 3.06 percent, highest since September 2014 and up from 3.03 percent last week; the fee remained at 0.4 point. The average rate on one-year ARMs increased to 2.68 percent, highest since September 2013 and up from 2.67 percent last week; the fee held at 0.2 point.
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Average US Mortgage Rates Dip Slightly

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Effects of Past Interest Rate Increases Offer Guide to Future Risks

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Traders at the Chicago Board Options Exchange on Dec. 16, the day the Fed announced a rate increase of .25 percent. Credit Tannen Maury/European Pressphoto Agency

When expansions end and the economy tips into recession, one or the other is usually to blame.

In the past, the culprit has frequently been fire — an overheating economy and rising inflation — that prompted the central bank to push up interest rates until they ultimately choked off growth. Ice is more unusual, at least in the United States, but often more painful, as excess capacity, weak demand and falling prices foster a deflationary slump that can prove difficult to escape.

As the Federal Reserve embarks on a new chapter in monetary policy, having raised rates on Dec. 16 for the first time in nearly a decade, policy makers are acutely aware of the risks posed by either possibility.

“Raising rates the first time may have been the easy part; now comes the challenging part,” said Mike Ryan, chief investment strategist for UBS Wealth Management Americas.

Fed officials do not have to look far for real-world examples of what can go wrong.

European central bankers raised rates twice in 2011, killing off a nascent recovery and plunging the eurozone into a double-dip recession that it is still struggling to overcome.

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The Chicago Mercantile Exchange in January 2004, before the Fed began a streak of 0.25 percentage point increases later criticized as too incremental.

But being too slow to tighten the reins of monetary policy can prove perilous, too.

A series of steady quarter-point rate increases by the Fed between 2004 and 2006 seemed prudent at the time, but in hindsight the central bank has been blamed for moving too slowly, failing to head off the economic catastrophe that followed the implosion of the housing bubble in 2007.

The biggest problem is that higher interest rates do not bite in predictable ways. Not only do they take time to percolate through the real economy, but there is also a difficult-to-foresee threshold at which the impact can suddenly shift from mild to severe.

“I’m sure there is a tipping point,” Mr. Ryan said. “It’s just hard to know in advance precisely where that is.”

At least for now, though, few analysts expect the Fed’s initial moves to bring the nation’s six-and-a-half-year-old expansion to an abrupt end.

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“The rate hike this month and those next year may not really be felt until 2017,” said Michael Hanson, senior United States economist at Bank of America Merrill Lynch. “Evidence from past cycles suggests it could take a year, rather than the next quarter or two.”

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Why the Fed Raised Interest Rates

Officials said the economy was strong enough to keep growing with a little less help from the central bank. They said rates would rise slowly, but borrowing costs already have started to climb.

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The Fed’s task this time is even more complicated because other central banks are leaning in the opposite direction.

With growth in Europe still sputtering, the European Central Bank has belatedly turned to the tools embraced by the Fed several years ago, buying up securities and pumping money into the financial system. But even with some interest rates there in negative territory, Mario Draghi, president of the E.C.B., is under pressure to loosen monetary policy further.

In Asia, the People’s Bank of China is also in easing mode, as officials try to cushion what looks like an increasingly hard landing for the economy there, the world’s second-largest. Similarly, Japan’s central bank is keeping interest rates at rock-bottom levels to encourage growth.

The combination of lower rates abroad and rising ones at home is making the United States dollar surge against other currencies. While that might be good for American tourists heading overseas, it hurts American manufacturers seeking export markets and makes imported goods more competitive, undermining the country’s trade balance.

For now, most economists say the danger of too little inflation outweighs the risk of too much: Ice, in effect, may be more of a worry than fire.

“The risk is skewed toward moving too fast,” said Michael Gapen, chief United States economist at Barclays. “That’s especially true as the strong dollar and lower-priced imports keep inflationary pressures at bay in the United States.”

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A History of Fed Leaders and Interest Rates

The chairwoman of the Federal Reserve has begun the process of raising interest rates, a move that her predecessors have taken in recent decades as they put their own distinctive stamp on the economy.

Although Mr. Gapen, like most seers on Wall Street, is generally upbeat about the economy’s prospects next year, some of his colleagues elsewhere are less sanguine. David Levy, a longtime private economist, is warning clients that the Fed may be forced to reverse course as weakness in China and emerging markets redounds to the United States.

The Fed’s rate increase on Wednesday, Mr. Levy cautioned, “may well mark a high point in economic expectations for 2016.”

In its statement Wednesday about the decision to raise rates, the Fed itself noted there had been a “shortfall” in terms of actual inflation’s not measuring up to the central bank’s 2 percent goal, which it considers helpful in supporting a more robust economy.

Scott Anderson, chief economist at Bank of the West in San Francisco, believes the reference to stubbornly low inflation is significant. “This is new language,” he said. “The doves on monetary policy are saying they will go along with the rate hike now, but want to see some acknowledgment that low inflation is still a concern.”

For his part, Mr. Anderson expects the economy to continue to grow at a moderate annual pace of about 2.4 percent in 2016. If that forecast for growth is correct, he predicts the Fed will raise rates three times next year, lifting the benchmark rate to a range of 1 to 1.25 percent by the end of 2016.

“Consumers are cautious but they still have the capacity to spend,” Mr. Anderson added. “Jobs and incomes are growing, debt levels are low and gas at about $2 a gallon should help. When people realize the sky isn’t falling because the Fed is raising rates, they will go back to their usual spending habits and save the day.”

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What Happens When the Fed Raises Rates, in One Rube Goldberg Machine

Exactly seven years ago, the Federal Reserve cut interest rates to almost zero in order to nurse the ailing economy back to health. Recently it changed direction. This is how it works.

A growth rate of about 2 percent would be in line with the steady, but disappointing, advance that has characterized the current recovery since it began in mid-2009. By contrast, the economy grew by 3.8 percent in 2004 when the last tightening cycle began, and by 4 percent in 1994 when an earlier round of rate hikes got underway.

The comparatively weak recovery, which has left most Americans struggling to maintain their standard of living, is the principal reason the Fed has promised to move more slowly during this tightening cycle than in past ones.

In the mid-2000s, the Fed raised rates by 0.25 percentage point at every meeting between June 2004 and June 2006, 17 straight increases that lifted rates by more than four full percentage points over two years.

The tightening campaign in the 1990s was even steeper, as rates moved up three points in one year. Although that wreaked havoc on the stock and bond markets in 1994, the move may have helped slow growth to a sustainable pace and set the stage for the 1990s expansion to extend for a full decade.

Many analysts say that the current expansion could display that kind of longevity.

“Expansions don’t die of old age,” Mr. Ryan of UBS said, echoing comments by the Fed chairwoman, Janet L. Yellen, at her news conference on Wednesday. “They die from exhausted demand, but consumers aren’t exhausted.”

“And the backdrop of low inflation won’t force the Fed into an aggressive stance,” he predicted. “This expansion can go on for a while.”

The Federal Reserve Shouldn't Raise Interest Rates, It Should Reverse Quantitative Easing Instead

I’ve already mentioned this in passing today but it’s worth laying out why I think that raising interest rates would be the wrong decision this week. Instead, the Federal Reserve should be reversing quantitative easing. Do note that this would have very much the same effect so I’ve already agreed that monetary tightening should be taking place. It’s how that is done, the technique, that I am concerned about, not the specific policy aim itself.
It’s also rather too late for anyone to adopt my preferred policy because everyone is being geared up for the rate rise already and the expectation of it already built into market prices. But it is still, I think, a better policy for one single reason: granularity.

So let’s walk back to what the whole thing has been about. We wanted to have looser monetary conditions–that meant lowering interest rates. Once we’d got to near zero there wasn’t much lower we could go (it’s possible to have slightly negative rates, but not very negative rates) and thus quantitative easing. That is the Fed creating money to purchase low risk assets and thus raise their price and lower their yield. This pushes investors out into higher risk assets as they search for that elusive yield. That, in turn, lowers long-term interest rates which is what we wanted to achieve.
Note that this isn’t any different in principle from the normal open market operations the Fed uses to try and fine tune interest rates. Indeed, we could call QE simply the Mother of All Open Market Operations (not that MAOMO is all that impressive an acronym). And just as with those open market operations QE should and will work both ways. Reduce the assets held by the Fed and this will reduce the price of those assets being held and thus increase their holdings. That again will bring people in along the risk curve and so raise long-term interest rates.
As, also, raising interest rates directly will raise interest rates. So why prefer one method over the other?

Granularity: How fine-grained can you make the policy be? An interest rate rise is an all or nothing thing. Either you raise rates by 0.25% (and no one thinks it’s going to be in any units smaller than that) or you don’t. But we already know how the Fed intends to reverse QE in the long term.
Those bonds it currently holds mature over time. Indeed, some of them are maturing right now, as they have been in dribs and drabs for some years. Currently, as bonds mature the Fed goes out into the market and purchases more in order to maintain their stock. All they have to do to reverse QE is stop buying more as bonds mature. That means the borrowers, in order to roll over their debt, have to issue new bonds to the market. The Fed’s holdings reduce, the market’s increase and that’s a reversal of QE. And it also raises long-term interest rates in exactly the manner that the original purchases lowered them. Which brings us to that granularity.

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The Fed can do this in any volume it chooses. It could simply not replace $100 million’s worth each month. Or a billion’s, or $50 billion. It’s entirely at liberty to do as much or as little tightening as it wants. It thus has much more control over what happens to the markets than that all or nothing raise rates or don’t. And yes, by the way, they do indeed know how much replacement or not replacement of those maturing bonds would raise rates. Precisely because this is just a larger version of those open market operations they’ve been doing for near a century now.
It’s much too late for the Fed to change their minds and do this of course, but I do still feel that it would be a better way of managing things.

Mortgage rates fall for the third week in a row

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Win McNamee/Getty Images

Mortgage rates wandered down for the third week in a row, according to the latest data released Thursday by Freddie Mac.

The 30-year fixed-rate average slipped to 3.93 percent with an average 0.6 point. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 3.95 percent a week ago and 3.89 percent a year ago. After gaining 22 basis points — a basis point is 0.01 percentage point — in two weeks in early November, the 30-year fixed-rate average has steadily declined the past three weeks but has given back only five basis points.

The 15-year fixed-rate average ticked down to 3.16 percent with an average 0.5 point. It was 3.18 percent a week ago and 3.1 percent a year ago.

[New rules for lenders seem to be raising costs for mortgage consumers]

Hybrid adjustable rate mortgages were mixed. The five-year ARM average dropped to 2.99 percent this week with an average 0.5 point. It was 3.01 percent a week ago and 2.94 percent a year ago. The five-year ARM average has stayed below the 3 percent mark for 22 of the past 24 weeks.

The one-year ARM average rose to 2.61 percent with an average 0.3 point. It was 2.59 percent a week ago.

“Treasury yields ticked down 3 basis points after weak manufacturing data,” Sean Becketti, Freddie Mac chief economist, said in a statement.

“After the survey [of mortgage lenders by Freddie Mac] closed, [Federal Reserve Chair Janet] Yellen implied that the economy is ready for a rate hike in December. However, all eyes remain on this Friday’s jobs report, the last significant release prior to the [Federal Open Market Committee’s] meeting.”

[New disclosure rules for mortgages prove to be a headache, but not for all]

Meanwhile, mortgage applications were flat, according to the latest data from the Mortgage Bankers Association.

The market composite index — a measure of total loan application volume – slipped 0.2 percent from the previous week. The refinance index dropped 6 percent, while the purchase index rose 8 percent.

The refinance share of mortgage activity accounted for 56.6 percent of all applications.