After a spike in March, April, and early May, the number of home applications reported by banks has fallen to levels not seen since February. Continued efforts by the Federal Reserve to keep current mortgage rates down are proving insufficient. Today's mortgage rates, after spikes last week, are at the highest levels this calendar year. Rates on 30-year fixed mortgages ballooned to 5.45% last week.
Rises in Treasury yields, specifically the benchmark 10-year Treasury, are what is pushing mortgage rates higher. While the margin between mortgage rates and Treasury yields has narrowed, a continued rise as demand for bonds falls will likely push rates on home loans higher. The recent drop in new home and refinancing applications has cooled down hopes that an economic upturn was in the making.
With lower mortgage rates, homeowners are able to purchase homes or refinance current mortgages and create more expendable income. This is one reason why a number of economic experts and politicians in Washington have pointed to the importance of reviving the nation's housing markets. By seeking to lower loan rates, the Fed was attempting to improve the purchasing power of Americans, in turn creating economic upturns in other areas of the economy.
Fears that the Feds created a temporary mortgage rate floor this spring by announcing the purchase of some $1.25 trillion in Treasuries and mortgage-backed securities are legitimate. While these actions did create lower rates for a season, a growing deficit threatens long-term recovery. It is impossible to separate Treasury yields and home loan rates. As demand for Treasuries fall rates will subsequently rise. Lower overall prices on homes will then be needed to give back consumers the necessary purchasing power for those homes.
As noted in HULIQ's story on mortgage rates and treasury yields earlier this week, the Treasury's next policy meeting is scheduled for the end of this month. Investors at home and abroad will be watching to see what comes of that meeting and what steps the Treasury will take with concern to combating rising mortgage rates. Worries also abound that the current problem will grow worse if the Fed continues purchasing debt.
Ironically, worries last year of a surplus in available homes could prove beneficial for the housing market, at least in the short term. If mortgage rates continue to rise as Treasury yields climb higher every week, it will be lower prices on homes for sale that will rebuff these rate climbs. A lower sale price is needed to save a homeowner money on the overall life of a loan with higher rates. For those seeking to sale a home, dark days continue on the horizon.
Current mortgage rates are unlikely to hold steady for long. Rates have been on the rise for weeks now with no real ceiling in sight. The Feds attempt to mediate mortgage rates worked for the short-term but a change in policy is needed for long-term outlooks. Discussion on federal spending and growing deficits are what is needed as the U.S. economy faces very real dangers from inflation in the coming decade. It will become impossible for anyone, government or otherwise, to control rates for consumers with the spending policies of recents months and years.
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