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Falling Mortgage Rates Unlikely to Increase Soon

Fixed mortgage rates were lower this week after surging in the last report. A weak economic recovery is likely to keep rates from jumping in the near term, though the longer term outlook is for a gradual rise.

Secondary lender Freddie Mac reported in its Primary Mortgage Market Survey for the week ended July 18 that the 30-year fixed-rate mortgage averaged 4.37 percent this week.

The 30 year fell from the prior week, when it averaged 4.51 percent, but stands well above the 3.53 percent level in the same week last year.

“Fixed mortgage rates fell as Federal Reserve Chairman Bernanke helped ease market concerns about the Fed reducing its bond purchases,” Freddie Mac Chief Economist Frank Nothaft explained in the report. “During a question and answer session following a speech on July 10th, Chairman Bernanke indicated that a highly accommodative monetary policy is what’s needed in the U.S. economy.”

Nothaft added that indications the economic recovery is slowing also held rates down.

“Consumer sentiment fell to a three month low in July while retail sales in June grew by only 0.4 percent, which was half of the market consensus forecast. In addition, housing starts fell in June to the slowest pace since August 2012,” Nothaft said.

Minutes released this week from the Fed’s discount rate meeting on June 14 indicated that economic activity is expanding at a moderate pace, and the housing market is improving. But recent data on consumer spending, manufacturing and business investment were mixed. While the labor market has been improving, the unemployment rate is still elevated.

“Overall, directors continued to see downside risks to the outlook from the elevated unemployment rate and ongoing fiscal constraints,” the Fed said.

Mortgage Daily’s analysis of weekly Treasury market activity suggests that mortgage rates will be little changed in Freddie’s next report.

The 10-year Treasury note yield averaged 2.55 percent during the period when Freddie surveyed lenders for this week’s report, according to Treasury Department data. The 10-year yield closed at 2.56 percent Thursday.

A majority of panelists surveyed by for the week July 18 to July 24 predicted that mortgage rates will decline at least 3 BPS over the next week. No change was forecasted by 44 percent of the panelists, while none saw an increase ahead.

In its July 2013 Economic and Housing Market Outlook, Freddie predicted that 30-year loans will average 4.5 percent this quarter then rise 10 BPS both of the following two quarters.

The U.S. Mortgage Market Index report from LoanSifter and Mortgage Daily for the week ended July 12 had jumbo mortgages priced at a 30-basis-point premium over conforming loans, falling from the 40-basis-point spread one week prior.

A 12-basis-point decline from the week ended July 11 for 15-year fixed-rate mortgages left the shorter-term loan averaging 3.41 in Freddie’s report. Fifteen-year loans were priced 96 BPS better than 30-year mortgages this week, not as much of a discount as the 98 BPS in the previous report.

Also lower was the five-year, Treasury-indexed, hybrid, adjustable-rate mortgage, which fell to 3.17 percent from the previous week’s 3.26 percent, according to Freddie.

There has been no change with the average one-year Treasury-indexed ARM for three weeks, leaving the one year averaging 2.66 percent in Freddie’s survey. One-year ARMs were higher in the week ended July 19, 2012, when they averaged 2.69 percent.

Freddie expects that one-year ARMs will average 2.6 percent in the second-half 2013 then rise to 2.7 percent in the first-half 2014.

At 0.11 percent, the index for the one-year ARM — the yield on the one-year Treasury note — was 2 BPS lower than last Thursday.

The six-month London Interbank Offered Rate — or LIBOR — fell to 0.40 percent this week from 0.41 percent a week earlier, according to LIBOR is a lesser-used index for ARMs.

In the latest Mortgage Market Index report, ARM share was 9.6 percent, jumping from the previous week’s 7.9 percent.

ARM share is forecasted by Freddie to come in at 10 percent in the third quarter then increase 1 percentage point each quarter through the end of next year.

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