Falling Rates May Not Last

All rates dropped 9 basis points (BPS) within the past seven days — the 30-year fixed-rate mortgage average came in at 5.99%, the 15-year at 5.40%, and the 1-year Treasury-indexed adjustable-rate mortgage at 4.08%, according to Freddie Mac’s latest Primary Mortgage Market Survey.

The 30-year and 15-year, both are lower than their levels a year ago of 6.14% and 5.44%, respectively, but the 1-year ARM is well above its average at that time of 3.68%, according to the survey.

“Additional economic indicators this week confirmed that June was a weak month for the nation as a whole,” Freddie chief economist Frank Nothaft said in a written statement. “Consequently, the upward pressure on interest rates eased, allowing mortgage rates to return to earlier, lower levels.“

But rates are not likely to continue downward during the next six weeks, according to the mortgage industry panelists surveyed by Bankrate.com this week; half believe rates will increase while the other half said they’d remain the same (plus or minus 2 BPS).

Bankrate.com analyst Greg McBride was one of the panelist who voted for an upturn.

“Rates have been volatile amid the uncertain pace of economic expansion,” he said. “But the economy is expanding and the Fed will boost short-term rates again Aug. 10. Strength in the manufacturing and service sectors provide hope that the economy is still expanding, just more modestly.”

In accordance with the anticipated Fed rate hike, Fannie Mae economist David Berson expects long-term rates to rise at a more modest pace than short-term rates, which will likely keep the spreads between fixed rates and ARMs below May’s peak levels, and indicates the ARM share probably peaked in that month also, he said in a weekly commentary.

In May, the ARM share reached a “peak” 35.2% and the spread between the 30-year and the ARM widened to 2.54%.

Berson pointed out that there have been three episodes over the past 14 years in which the ARM share has jumped and reached peaks of nearly 35%, and “in each case, the peak in the ARM share came within a couple of months of the peak in the differential between (fixed rates) and ARM rates.”

While the current spread is only 1.91%, the ARM share edged up from the previous week to over a third — 33.5% — of total applications, the Mortgage Bankers Association of America (MBA) reported.

The overall level of applications barely budged from the previous week, bringing the Market Composite Index to 620.4, MBAs survey said.

A small increase in purchase applications was offset by decreased refinancing activity — which has remained on the downward path for four consecutive weeks, MBA said. The refinance share of mortgage activity slipped to 35.8% of total applications.

At midmorning, the 10-year Treasury yield was 4.38%, while the price was 102 27/32.