Mortgage Rates Move Upward as Cycles Get Out of Synch
Mortgage rates and housing prices run on different cycles, but they are somewhat related. However, coordination between the two cycles got somewhat out of synch over the past week:
- Mortage rates broke out of their month-long holding pattern and edged upward
- New home sales declined by 13.3% for the year ending March, 2008
- Existing home sales declined by an even faster rate for the same period
From a potential home buyer’s perspective, it has been possible to sit back over the past year and watch prices steadily get cheaper. However, the tick up in mortgage rates could signal a call to action — it might be best not to wait too long before getting a mortgage.
Mortgage Rates Back Over 6.0%
30-year mortgage rates edged upward by 0.15% in one week, ending at 6.03% as of April 24, 2008. An increase of 0.15% is not an extraordinarily sharp jump in mortgage rates, nor is 6.03% a particularly high level — quite the opposite, in fact. What made the increase noteworthy is that it broke a remarkable string of five straight weekly readings in which 30-year mortgage rates were virtually motionless, fluctuating within a range of 0.03% over that entire span.
This change is an important reminder that mortgage rates respond to market forces, and are not controlled by the Federal Reserve. After a rare stretch of tranquility, mortgage rate volatility might be back, but for the time being, 30-year rates are still relatively low.
The Housing Market Remains Slow
Economists looking for signs that the housing market slump is finally nearing the end were frustrated again, as March data showed that both new and existing home sales remained slow.
The 13.3% decline in new home sales was the largest one-year drop in that index since July of 1970. Existing home sales declined at an even faster rate, falling 19.3% for the year ending March, 2008.
This data echoes earlier releases on housing starts and new construction permits, which also showed steep declines. Notably, the housing start, construction permit, and new home sales indexes all reached lows last seen in 1991 — when the economy was struggling to recover from an oil shock and a recession.
Slower housing starts and new construction will eventually dry up what has become an excess supply of housing. This is what could turn around the price cycle even without a robust rebound in housing demand. In other words, prices won’t continue to fall forever.
Two Cycles in Different Phases
Theoretically, a weak housing market should be reflected in falling mortgage rates — both are usually symptomatic of a weak economy. And yet, without any sign of the economy or housing gaining strength, mortgage rates have moved upward rather than downward. What gives?
The “x” factor here is inflation. Inflation has a very direct impact on interest rates. While inflation tends to fade when the economy is weak, that is not the case this year, just as it wasn’t in the 1970s.
The bottom line is that the cycles may be unhinged, with mortgage rates pointing upward while the housing market is still headed downward. That’s why it may be best not to wait for housing prices to hit bottom before getting a mortgage.
Tags: 2008, existing home sales, Federal Reserve, housing prices, interest rates, mortgage rates, mortgages
May 17th, 2008 at 9:51 pm
I enjoyed reading your blog. It is so interesting reading other peoples personal take on a subject.
May 19th, 2008 at 2:35 am
I didn’t agree with you first, but the last paragraph makes sense for me.
May 19th, 2008 at 4:16 am
I don’t understand it.
May 29th, 2008 at 11:59 am
Basically, the last paragraph means that people often expect mortgage rates to fall in a weak economy, but they shouldn’t count on that this time, since inflation will create upward pressure on rates. Note that inflation has, in fact, risen since I first wrote this blog.