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June 20, 2013

Making Sense of the Jump in Mortgage Rates and Federal Reserve Policy (+ June 19 Rate Update)

by Rylan Stewart
Wall Street (1)

Stocks, bonds, and mortgage rates plummeted on Wednesday, June 20 after the Federal Open Market Committee’s (FOMC) decided to maintain its policy of fiscal stimulus by applying downward pressure to both short- and long-term interest rates. The announcement came after the FOMC concluded its two-day policy meeting.

The reaction came not due to the Fed’s current policy itself, but to perceived indications that quantitative easing (QE) could be reduced by the end of 2013.

The Dow Jones Industrial average dropped over 200 points, and the 10-year Treasury yield rose to 2.33% (plus 0.13% from the previous day), a two-year high. The jump in yield indicates dropping prices for bonds, as traders left the market.

(6/19) 30-year Fixed Mortgage Rate Jump

30-year Fixed Mortgage Rate Jump on June 19

Mortgage rates were caught in the maelstrom, and from 11 a.m. EST  (pre announcement) to 5 p.m. EST, the 30-year fixed rose 7/8 of a point in cost (see graph to the right). Since then, the cost is continued to rise, and is now up over 1.5 points.

For a market that typically moves in slight, 1/8 cost shifts, the jump in cost was “brutal” for people in mortgage transactions, according to Central Coast Lending owner Daniel Podesto.

 

What Happened?

Federal Reserve

The Federal Reserve

Markets moved primarily on interpretations of the FOMC announcement and Federal Reserve Chairman Ben Bernanke’s subsequent press conference.

The FOMC announcement indicated increased optimism about the future of the United States economy, although the upwardly revised projects rose just slightly from an already slow bottom-line.

With unemployment growth slow and GDP muddling along, the Fed decided that its monetary stimulus policy of quantitative easing remains necessary.

The FOMC forecasts that GDP will rise between 2.3% and 2.6% in 2013, and that the unemployment rate will stay between 7.2% and 7.3% during this time.

The markets were looking for an indication about when the Federal Reserve could scale back (“taper”) its quantitative easing monetary stimulus policy (QE).

Indication that “tapering” was on the horizon would send stocks and bonds lower, and mortgage rates higher.

[Related: Explaining Quantitative Easing and the Effect of "Tapering" on Mortgage Rates]

This is exactly what happened, although the “indication” seems to be the Fed’s slightly increased optimism and Bernanke’s statement that the Fed would decrease QE when the economy improves.

 

So… the FOMC Indicated that “Tapering” Would Begin at the End of 2013?  

Actually, no.

The FOMC did improve its economic projections, but neither Ben Bernanke nor its policy announcement explicitly stated when tapering would begin.

Federal Reserve Chairman Ben Bernanke

Federal Reserve Chairman Ben Bernanke

Rather, in his press conference Chairman Ben Bernanke focused on the state of the economy, maintaining that the Fed would move as needed and that action is still necessary with the current, fragile pace of growth. When economic growth is adequate, then the Fed will reduce its activity.

“Bernanke is working really hard to get investors to focus on how the Fed reacts to the economy, not the other way around,” wrote Wall Street Journal writer Sundeep Reddy on a live blog of the Bernanke press conference.

Traders, though, interpreted the statements to mean that they should begin to prepare for Fed tapering, gambling that if the economy continues at the current pace that less QE will be imminent.

Podesto isn’t buying it.

“In my opinion, there is a huge disconnect between what the Fed and Bernanke are saying and reaction in the stock and bond markets,” said Podesto, noting that the Federal Reserve voted to continue QE with no promises for future tapering, beyond stating that it would increase or decrease its bond purchases “as the economy dictates.”

Bill Gross, co-founder of Pacific Investment Properties (PIMCO) agrees. Speaking of the market reaction to the Fed’s announcement, Gross, the “Bond King” told Bloomberg News, “The market basically has misinterpreted the growth and unemployment targets while leaving out the inflation targets going forward.”

The Fed is wary about deflation, and the inflation rate is well below the Fed’s 2% target. Gross implies that this alone would justify continued bond purchases for the Fed.

Based on the press conference, markets seem to be misinterpreting the information.

“I did not hear at all that the Fed was likely to taper as soon as September,” said Podesto. “Bernanke clearly stated that late 2013 would be the earliest they would consider tapering it the economy continued to improve to the point we reached 7% unemployment.”

Bernanke further clarified that 7% unemployment “was not a trigger”, but instead “was a threshold” for considering changes to the current policy. The health of other sectors would also need to be considered before proceeding.

Podesto would expect markets to slowly correct in the coming days.

“I can only think this will correct over the next couple of days and weeks, and the 10-year Treasury bond yield will fall closer to the 2% range,” said Podesto.

Right… so What Does this Mean for Mortgages 

Should investors return to the bond market, Treasury yields will fall and mortgage rates will again reduce in cost.

A bit more context is also necessary. Through the rise, mortgage rates are still below 4.000% and well below the kind of 5.000% and 6.000% (plus) rates that we saw in the early- and mid-2000s. Historically, rates are quite low.

Still, the rise in rates does reduce the affordability of real estate and it will have an impact on demand for refinance. With a higher mortgage rate, borrowers will pay more per month.

Give us a call at 805.543.LOAN for a free, confidential discussion about your finances and an honest analysis about what you can afford. We are here and happy to help.

 

Conforming Loan Programs

(6/19) 30-year Fixed Mortgage Rate Jump

Conventional (30-year Fixed) 

3.875 percent (3.951 percent APR)

+ 0.250 percent Rate

For more information about the Conforming 30-year fixed loan click HERE

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15 yrConventional (15-year Fixed)

3.000 percent (3.138 percent APR)

+ 0.250 percent Rate

For more information about the Conforming 15-year fixed loan click HERE

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30 yr highConventional High Balance (30-year Fixed)

4.000 percent (4.101 percent APR)

+ 0.125 percent Rate

For more information about the Conforming 30-year high balance loan click HERE

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manu conventionalManufactured Conventional (30-year Fixed)

4.250 percent (4.326 percent APR)

+ 0.125 percent Rate

For more information about the Manufactured Conventional loan click HERE

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Specialty Loan Programs

fhaFHA (30-year Fixed) -

3.250 percent (4.335 percent APR)

+0.063 percent APR

For more information about the 30-year fixed FHA loan click HERE

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203kFHA 203k (30-year Fixed) -

4.000 percent (5.051 percent APR)

+ 0.250 percent Rate

For more information about the FHA 203k 30-year fixed loan click HERE

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VA (30-year Fixed) -

3.500 (3.632 percent APR)

+ 0.250 percent Rate

For more information about the VA 30-year fixed loan click HERE

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usdaUSDA (30-year Fixed)

3.625 percent (3.810 percent APR)

+ 0.375 percent Rate

For more information about the USDA 30-year fixed loan click HERE

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manu fhaManufactured FHA (30-year Fixed)

4.125 percent (5.190 percent APR)

+ 0.012 percent APR

For more information click the Manufactured 30-year FHA loan click HERE

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jumboJumbo (30-year Fixed)

4.250 percent (4.331 percent APR)

No Change

For more information about the Jumbo 30-year fixed loan click HERE

 

If you would like to receive a more detailed Mortgage Rate report, you can subscribe to our “CCL Rate Tracker.” The CCL Rate Tracker follows 10 loan programs and publishes three rate options closest to 1 point, par, and 1 rebate for each program every two weeks and delivers the results in an email. To sign up, please email [email protected] with the text “Rate Tracker.”

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APR is subject to increase and terms subject to change. APRs may vary depending on loan details such as points, loan amount and loan-to-value, your credit, property type and occupancy. Closed rate and APR assume a rate and term refinance of a single family detached owner-occupied primary residence, loan amount $417,000 ($561,200 for high balance), and a minimum FICO score of 760. Situations vary based on applicant.

 

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Central Coast Lending is a California mortgage brokerage based in San Luis Obispo County. With offices in San Luis Obispo, Morro Bay, Paso Robles, and Arroyo Grande, Central Coast Lending is the top source for Central Coast mortgage, real estate, and home loan needs. To see why using a broker offers lower rates and superior service, click HERE. For a free, hassle-free online pre-qualification click HERE or call 805.543.LOAN to talk to one of our expert loan officers.

 

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