Mortgage Rates Up, Refinancing Down Again

Mortgage rates rose nearly a third of a percent last week, according to figures released today by the Mortgage Bankers Association (MBA), further dampening interest in mortgage refinancing, which had flourished in the weeks after rates hit record lows in March.

Last week's 30-year fixed mortgage rate averaged 5.57 percent in the MBA survey, up from 5.25 percent the previous week and nearly a full percent higher than the all-time low of 4.61 percent the survey reported for the week ending March 20.

Mortgage refinancing continues to decline

Applications to refinance a mortgage have been declining in recent weeks as interest rates have risen, dropping a seasonally adjusted 11.2 percent last week in the MBA survey. However, applications for mortgages to purchase a home have continued to post small, but consistent gains even as rates have risen, posting a 1.1 percent gain in the current survey.

The MBA's mortgage refinance index has declined nearly 60 percent from its high point the first week of April, although total refinance activity remains fairly strong from a historical perspective. Applications to refinance a mortgage made up 59.4 percent of all mortgage applications for the week ending June 5, representing its lowest share of total applications since last November.

Home purchase applications rising slowly

Declining housing prices and a tax credit for first-time homebuyers have continued to make home purchases attractive despite rising interest rates, most of which have occurred within the last month. Mortgage rates remain relatively low in historic terms, and are still below the 6 percent - 6.5 percent rate where they stood for much of last year, which, combined with the other factors still makes it a very attractive time to purchase a home for consumers with sound finances.

Mortgage rates have been rising in recent weeks as improving economic signs have encouraged investors to move money out of safe, low-yielding bonds into riskier investments with higher yields. The effect has been to push up the interest rate on mortgage bonds and U.S. Treasuries, pushing mortgage rates up in the process.

Concerns over inflationary pressures

In addition, concerns over long-term inflation due to government stimulus efforts that have increased the money supply have been another factor, as investors seek higher returns to balance out inflationary risks. Ironically, some of this stimulus is from the over $1 trillion in mortgage bonds and U.S. Treasuries the Federal Reserve announced it would purchase in March. That action caused mortgage and other rates to drop over the short-term, but ironically, could cause them to rise in the longer scheme of things.

The Fed could take new action to bring rates down again when it meets later this month. However, recent remarks by the chair of the New York Federal Reserve seem to dismiss that possibility, saying that further stimulus was unlikely if other economic indicators continue to improve.