Mortgage Rates Soar Following End to Fed Purchases

In its weekly press release, the Mortgage Bankers Association just announced this morning that 30-year mortgage rates soared last week to 5.31 percent from 5.03 percent a week earlier.  This is the first week following the end of the Federal Reserve’s massive purchase of mortgage-backed securities, designed to prop up the housing market.  The Fed’s program of purchasing mortgage-backed securities began in January, 2009 and since then has injected $1.25 trillion into the mortgage market.  The result was that mortage rates have held steady at historically low levels, with 30-year fixed rates barely budging from 5.0 percent during that time frame.  That program ended on March 31st.

The result of the big jump in mortgage rates this week is that refinance applications fell by 16.9% while applications for new home purchases rose by only 0.2%, a level that is below year-earlier levels by 18.1%. 

Late last year, the Federal Reserve ended its program of purchasing U.S. treasuries.  Since then, rates on 10-year treasuries have jumped dramatically.  With the end of the Federal Reserve’s massive injection of liquidity into the economy through these two programs, the economy has now been left to stand on its own two feet (with the exception of federal deficit spending of $1.5 trillion) for the first time since early 2009.  These soaring interest rates don’t bode well.  The housing market has struggled to stabilize in the past year in spite of the Fed MBS purchase program.  What will happen now that a big rug has been pulled out from under it?  Will the Fed jump back in with an ever-expanding balance sheet if mortgage rates soar and the housing market resumes its collapse? 

In the past year, federal deficit spending ($1.5 trillion) combined with Federal Reserve balance sheet expansion ($2 trillion) has accounted for a full 25% of our $14 trillion economy (as measured by GDP). 

It’s no wonder that the Federal Reserve has vowed to keep interest rates at near-zero as far into the future as anyone can see, or that Obama administration officials warn that the economy is not out of the woods and that unemployment will remain high for a long time.  They are all holding their collective breath in the hope that the economy doesn’t resume its collapse while all this injected liquidity is removed.  Happy talk about the economy should be taken with a grain of salt.

Here’s a link to the Mortgage Bankers’ Association press release:

http://www.mbaa.org/NewsandMedia/PressCenter/72484.htm

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8 Responses to Mortgage Rates Soar Following End to Fed Purchases

  1. Mark Hall says:

    Have you noticed AGAIN for the 5oth time that JOB CREATION has taken the far rear seat.

    The phrase “Don’t Know How” comes to mind.

    The word “Coward” also comes to mind.

    I’m glad it is spring so that I can finally start my newly created “green job” of mowing the lawn.

    Thank God my lawn isn’t Kentucky Bluegrass!

  2. […] Mortgage Rates Soar Following End to Fed Purchases « "Five Short Blasts" Forum […]

  3. […] Mortgage Rates Soar Following End to Fed Purchases « "Five Short Blasts" Forum […]

  4. mtnmike says:

    Mark,

    Just an item for discussion. I have contended for many years that viable jobs cannot be created; they materialize to fill viable needs.

    When our viable needs are being fulfilled in Japan, China, Mexico, etc., the only jobs being created are non-viable, make believe government employment that are absolutely unsustainable. We must experience a massive paradigm shift…soon.

    • Mark Hall says:

      I Agree.

      Before you can apply the theory of supply and demand you must first create and/or sustain demand.

      When we outsourced our supply, we also outsourced the bulk of our “cash paying” demand.

      To create demand and a false sense of actual economic growth, we boosted credit availability by various means including home price inflation.

      The “MAKE & BREAK” Solution.

      Let’s hope that it is not the “Final Solution” for the U.S.

  5. mtnmike says:

    Mark,

    VERY, well put.

    I recently wrote an article on the subject of mindsets. As history has so eloquently demonstrated, mindsets are subject to change.

    The majority of major shifts in mindset (ingrained accepted social beliefs) occur when there becomes a great disparity in wealth. As we watch our government ship out jobs and ship in job seekers, that wage disparity train is on a high-ball roll.

    Change is a comin’, let’s hope it is in the right direction.

    • Pete Murphy says:

      Economists see it as a matter of meeting “needs” and “wants.” Once “needs” are met, new “wants” are constantly created (through a process they call “creative destruction”) by new innovations. Capital and labor are are constantly shifted and applied to these new innovations. But another factor is infrastructure. Adequate infrastructure must always be maintained and even grown to support a growing economy. Trade, they believe, simply frees up capital and labor to work on other, higher value things. The aim is to constantly increase per capita output, which results in constantly growing GDP. It is assumed that all per capita output translates into per capita consumption, since every product and service produced has to go somewhere.

      Those are the assumptions. They (economists) model all this stuff with mind-numbing equations, but rarely delve into real-life data. Never do they consider the possibility that an excessive population density (or anything, for that matter) could begin to strangle per capita consumption. Choke off per capita consumption and the models break down.

      Not understanding this, economists enamored with their growth models continue to drive our economic policy.

  6. mtnmike says:

    Pete,

    Thanks for the explanation of the dance that is the rave of the land, “the economists spin.”

    Main stream economist’s are educated (job trained) to believe that there are no physical limits. Any mention of physical limits brands one derogatorily as a Malthusian.

    Of course your example of population density as a limiting factor flies in the face of the cornicopian views of the modern economist. Your view is of course mathematically provable, but why let a little thing like math get in the way of our accepted delusion?

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