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: