Markets Fairly Calm About Rate Hikes Commentary ~July 3, 2013
The 6-month T-bill didn’t move last week, and the 10-year T-note—which mortgage rates track very closely—edged down a very slight 2 basis points. Nothing going on with interest rates? Look further!
Last week, the Freddie Mac weekly average rate for its 30-year fixed-rate loan skyrocketed 53 basis points—slightly more than half a percent. For a few moments, it felt as if it was time to hide under a rock.
The number of applications for refinancing loans fell by 5%. The only thing surprising about this was that it wasn’t an even more dramatic fall. If other mortgage rates are rising in a way that parallels Freddie Mac loans, a 5% decline in the number of applications is no match for a 53-basis-point-spike in the mortgage rate.
Even more significantly, applications for new purchase money mortgages actually grew by a solid 2%, rather than slowing in the face of higher rates. This was anything but a severe panic.
Three things are suggested here: First, a lot of pressure had surely built up under the Freddie Mac rate, which has been holding for weeks at about 20 basis points below 4%. Pressure was released, apparently belatedly, and the rate rose precipitously.
Second, the effects of that rate hike were somewhat mild—given that applications for refinancing loans fell by only 5% (having declined the prior week by 3.3%, when pressure was still building)…and, more important, given that applications for home purchase loans continued to rise.
Quite possibly, investors didn’t see the upward surge for interest rates as the end of the real estate market’s recovery. Indeed, one of the reasons that pressure for higher rates may have been building up is that the credibility of the real estate market’s strength is more and more evident.
Third, then, instead of marking a reversal in the advance of the real estate market’s strength, the rise in rates may suggest that real estate is indeed where the recovery is strongest and most evident.
At the end of the day on Monday, by the way, the latest data for housing starts seemed to confirm this view. Last month, starts grew by 6.8%. And as Josh Mitchell and Jonathan House noted in The Wall Street Journal, “Builders are ramping up for an increase in construction of single-family homes in future months. Building permits for single-family homes, a measure of future demand, rose by 1.3% last month to the highest level since May 2008.”
Of course, it is possible that further rate hikes will slow the recovery—but it appears that investors are betting on the real estate sector to keep the economy steady on its growth path.