It was only a Matter of Time
We knew they wouldn’t last forever. An extraordinary confluence of circumstances, including a deep recession, deflationary forces and hyper-aggressive monetary policy, produced the lowest mortgage rates in history. As of July of last year, interest rates on benchmark 30-year fixed-rate loans were hovering around 3.5 percent, sometimes lower. They bottomed out at the end of November, when rates hit an unheard of 3.31 percent according to the Freddie Mac Primary Mortgage Market Survey. Until the last few weeks, these rates had managed to remain below 4 percent despite ongoing economic recovery.
But the mere possibility of slower bond purchases by the Federal Reserve produced a surge in mortgage rates. Recently, these rates have been in excess of 4.5 percent, a level that hasn’t been observed in over two years. As pointed out by MoneyWatch and other publications, at the end of June, rates leapt nearly 0.5 percent, producing the largest week-over-week increases in more than a quarter century. Many economists viewed the bond market’s reaction to possible Federal Reserve policy shifts as overdone, but rates have not declined significantly since their initial surge.
For those who prefer to view the glass as half-full, the rise in mortgage rates is to a large extent the product of better economic news. The nation is now in its fifth year of economic recovery. It has added more than 2.2 million jobs over the past year, including nearly 200,000 in construction.
Improvement in the housing market has taken center stage. Since the final quarter of 2011, advances in homebuilding have been responsible for roughly a fifth of total economic expansion. As a result of improvements in homebuilding and remodeling, housing’s overall share of the economy is gradually climbing back toward historic norms.
Correspondingly, the housing sector, which led the economy into recession in late-2007 and into near financial collapse in September 2008, no longer needs as much monetary policy support as it once did. Home prices are now rising, creating a level of urgency among prospective buyers that did not exist during earlier stages of the economic recovery.
According to the S&P/Case-Shiller Index, a leading measure of U.S. home prices, average prices rose 11.6 percent and 12.1 percent for the 10- and 20-City Composite indices for the 12 months ending in April 2013. Atlanta, Dallas, Detroit and Minneapolis posted their largest annual gains since the inception of these indices. Atlanta, Las Vegas, Phoenix and San Francisco generated year-over-year gains exceeding 20 percent.
In Maryland, median sales prices are up 5.9 percent over the past year (June 2012 versus June 2013) and average sales prices are up 4.3 percent. Unit sales are up 13.1 percent.
It is quite possible of course that the recent rise in mortgage rates will slow progress in the housing market going forward. Already, there has been major impact in the market for mortgage refinancing, with refinancing demand recently slipping to a 2-year low.
To date, loan applications for home purchases have not been as significantly impacted. With mortgage rates having risen, some prospective purchasers have undoubtedly reconsidered their selection of mortgage product, with more opting for adjustable rate mortgages than would have had rates remained unchanged. That flexibility allows would-be buyers to continue to benefit from ultra-low rates even in a rising rate environment. Moreover, the latest data continue to indicate rising home prices, which means that the motivation to purchase and enjoy future appreciation still remains.
Anirban Basu, Economist, Sage Policy Group, Inc. & First Mariner Bank Board Member
Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.