Higher mortgage rates are beginning to take a toll on the housing recovery.
With the economy not firing on all cylinders and good-paying jobs still at a premium, consumers lacking employment security or sufficient incomes are balking at the growing cost of mortgages.
Capital Economics (CE) says mortgage applications suffered setbacks in May after posting month-to-month gains in March and April.
The average number of mortgage applications made in May dropped by 2 percent with both refinancing and home purchase applications taking a dive.
An even sharper drop can be seen comparing the first week in May with the last week when applications came in 25 percent lower.
CE says more recent figures for the first week in June reveal applications are down another 11.5 percent.
"The fall appears to have been driven by the sharp rise in mortgage interest rates as markets have fretted about the potential withdrawal of the Fed's program of mortgage bond buying," CE reported.
Rising mortgage rates
Mortgage rates rose every week in May and on June 5, a day before Freddie Mac was likely to report another jump in interest rates, HSH.com said, by its measure, rates zoomed to their highest rate in more than a year, nearly 4 percent.
HSH.com's Weekly Mortgage Rates Radar said the average rate for conforming 30-year fixed-rate mortgages jumped by nineteen basis points (0.19 percent) to 3.99 percent.
Conforming 5/1 Hybrid ARM rates increased by ten basis points, closing the Wednesday-to-Tuesday wraparound weekly survey at an average of 2.74 percent.
"Bond and mortgage markets continue to prepare themselves for an early exit by the Fed," said Keith Gumbinger, vice president of HSH.com.
"Up until recently, expectations were that the Fed would begin to taper purchases of mortgage-backed securities (MBS) and Treasury bonds late in 2013, but that timeframe appears to have moved to September, possibly sooner," Gumbinger added.
CE said refinancing applications were hit hardest, dropping by 15 percent in the most recent week and by a total of 40 percent since the first week of May. Home purchase applications have also dropped by 15 percent in May.
Impact on housing recovery
On a positive note, CE says growing consumer confidence is sufficient to cause mortgage applications to reverse recent loses over the next few months, but if higher rates continue "the housing recovery will slow in the second half of the year."
CE also said just how much the recovery will slow is anyone's guess, but to keep an eye on mortgage applications for home purchases, which is a better indicator than refinance applications.
Gumbinger said he doesn't think the Fed will pull back on its mortgage-backed securities purchases without stronger economic news. The purchase plan has helped keep rates low.
However, as long as the economy keeps growing, even at a snail's pace, mortgage interest rates will continue to inch up.
"The news of late suggests that the economy is holding its own, but little more, and that's with QE (quantitative easing) still fully in play. It could very well be that investors are getting ahead of themselves, given the lack of compelling evidence that the economy is ready to run without these supports," Gumbinger added.
Published: June 6, 2013
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