Mortgage rates have seen a relatively sharp rise this month. The average 30-year fixed-rate loan hit 4 percent earlier in June — a big jump from the record lows of recent years. Some investors are now concerned that the housing recovery could be stifled if rates continue to rise quickly.
The Federal Reserve has two main missions: to maximize employment and minimize inflation. Right now, there are few, if any, signs that prices for goods are spiking, and the job market is still crawling out of its long, deep slump.
The central bank has tried to protect the nascent recovery by keeping interest rates low. One of the ways it does this is by buying massive amounts of Treasury bonds and mortgage-backed securities. The Fed has also reminded investors that it will continue taking such steps until the jobless rate declines to 6.5 percent.
But investors aren't heeding the Fed's assurances that, when the time comes, it will wind down its stimulus very slowly.
"I think we, along with many other forecasters, had anticipated that rates were going to rise this year," says Michael Fratantoni, a vice president of research for the Mortgage Bankers Association. "But [we] had anticipated a gentle floating up of rates as opposed to a sudden jump like we've seen."
Fratantoni says that last week, refinancing activity declined 36 percent from the previous month, largely because most eligible homeowners already locked in record-low rates near 3.5 percent.
"Once rates are up close to 4 percent, as they are now, you have a very large number of people that just have no incentive to refinance anymore," Fratantoni says.
Guy Cecala, CEO of the trade publication Inside Mortgage Finance, says 4 percent is still well below the historic norms, and he doesn't expect that rate would have any negative effect on the housing market.
Cecala says investors buy into safe havens like Treasury bonds when they fear the stock market or don't trust that the economy is stable. So the fact that demand for Treasuries is down and that interest rates are rising is a sign of greater investor confidence, he says.
"It's a very positive sign. If the price we pay for an improving economy and everything is 4 percent interest rates long term, so be it. That would be a great outcome," he says.
The Fed's Open Market Committee is scheduled to meet to discuss policy next week.
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