Jump in Mortgage Rates Overshadows Rebound In Application Activity
A sharp jump in mortgage rates was the week’s most significant development.
- 30-year mortgage rates rose to 6.32%, largely in response to growing inflation fears
- Federal Reserve officials may also respond to the inflation threat, as they’ve begun to hint at possible hikes in the Fed rate later this year
- The grim news on the interest rate front overshadowed what otherwise would have been a bright spot, a bounce back in mortgage application activity
Inflation Fears Drive Interest Rates Higher
Inflation has become the lead story on pretty much every nightly newscast these days, so the jump in 30-year mortgage rates was somewhat inevitable. Indeed, it might well have happened sooner, save for the competing fear that the economy would tip into recession. Recessions reflect a slackening in demand, and thus they tend to dampen both inflation and interest rates.
In recent weeks, it has appeared more and more that the economy has managed to stay just clear of recession, allowing economists and the general public to focus more clearly on inflation. The Federal Reserve has caught on as well — after possibly overreacting to the recession threat, Fed officials are now sending signals that they may be prepared to raise rates to head off inflation. This would mark a return to the inflation-fighting role that has been perhaps the Fed’s greatest strength over the past quarter century.
Mortgage rates aren’t waiting for the Fed. After spending nearly two months in a fairly tight band near the 6.0% mark, 30-year mortgage rates surged to 6.32% as of June 12th, 2008. This represents their highest level since late October of last year. Free-market interest rates often react more swiftly than the Fed to shifting trends, and it seems the market’s read is that inflation has gotten the upper hand over the possibility of recession.
Mortgage Application Increase — Blip or a Trend?
If it weren’t for the inflation clouds and the resultant rise in mortgage rates, the tick up in mortgage application activity might have been a nice story. Mortgage application volume rose 10.9% for the week ended June 6th.
It would be easy to argue that this was just a short-term blip, coming as it did on the heels of a sharp decline the week before. However, recoveries often start with a bounce off the bottom, and what was noteworthy about the June 6th figures is that they were driven more by new purchase activity than by refinancings. It’s too early to tell whether this is the start of a trend, but application activity is worth keeping an eye on, since logically home sales are preceded by mortgage applications. Under the current circumstances though, there seems to be a significant chance that this recovery in mortgage applications might be snuffed out by rising mortgage rates.
Inflation vs. Recession, or Both
While inflation and recession are often discussed as opposing forces — and for the most part, they are — that doesn’t mean both can’t occur at the same time. The U.S. economy had a win-win period of low inflation and sustained growth in the 1990s, just as it had a lose-lose period known as “stagflation” in the 1970s. This is just a reminder that economics are never as simple as people might like them to be.
Tags: 2008, home sales, interest rates, markets, mortgage, mortgage application, mortgage rates, refinancing, US economy
