Spike In Mortgage Rates Slows Mortgage Refinancing

Ben Bernanke, head of the Federal Reserve, called the lower mortgage rates "green shoots", or the initial stages, of economic recovery. With rates climbing again mortgage refinancing applications dropped nearly 20% last week as compared to previous weeks. Prior to mortgage rate spikes, applications increased for five consecutive weeks. Drops in the number of applications means less consumer spending power and equals bad news for the rest of the economy as less homeowners have less disposable income.

Rates on 30-year fixed mortgages hit a low in April of 4.78%. The drop in mortgage rates was initiated by the Federal Reserve's announcement that it would buy up to $1.25 trillion in mortgage securities and more than $300 billion in Treasury notes. This announcement drove rates down leading to the increase of mortgage refinancing as homeowners sought the new lower rates. Now comes the concern of how much debt the Fed is buying up and what it means to long-term interest rates and Treasury yields.

Last week yields on 10-year and 30-year Treasury notes hit a six month high. This spike in yeild rates is important since mortgage rates are based heavily on the Treasury return rates. Some officials and industry leaders worry the debt of the U.S. government will stifle the real estate market, some say of which is key to the U.S. economy's recovery.

One way to push rates back down is for the Fed to buy longer-term Treasurys. This will only be a temporary fix, however, creating the same problem that currently exists, only on a longer time scale. This is because as the Federal Reserve buys up debt from the federal government, money is essentially being created out of thin air. These steps lead to inflation and weaken an already floundering dollar against other currencies. This in turn will push foreign investors away, thus pushing up yield rates in the end anyways.

Reducing federal debt is crucial to mortgage rates in the long term. Quick fixes by the Federal Reserve did create lower rates helping some homeowners refinance to lower rates. However, as Washington continues to pile up debt, future rates for homeowners appear bleak. Treasury yields will continue to grow as the Fed buys up more debt, pushing all types of mortgage rates higher. With less Americans applying for home loans and less current homeowners refinancing to lower rates, consumer spending power will stay stagnant or even taper off. The real estate market is an important aspect of economic recovery efforts in the U.S. Steps to lower growing federal debt are needed sooner rather than later.