Rates have been trending lower of late due to trouble overseas and the weak U.S. employment picture. That uncertainty continues to send investors to the safety of the 10-year Treasury, pushing yields lower. Mortgage rates loosely follow those yields. But that turned pretty quickly on last week's positive jobs report, and Tuesday the Dow Jones Industrial Average closed above the 15,000 mark for the first time in history.
"I think the higher stock market and low rates is a function of the Fed [Federal Reserve] just pumping liquidity into the system," said Paul Miller of FBR. "What you see, I believe, is some of that liquidity is leaking into the stock market, which is resulting in higher valuations for stocks. But the bond market is still flush with liquidity, and that is keeping mortgage rates low."
Should the Fed start winding down its asset purchases later this year, mortgage rates will rise. That would make home buying more expensive in an already rising price environment. But is that enough to stop housing's momentum? Perhaps not.
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"For mortgage payments to return to their long-term average of 22 percent of disposable income, 30-year fixed rates would have to rise all the way to 9 percent," noted Paul Diggle of Capital Economics. "Accordingly, we're optimistic that the nascent improvement in mortgage applications will be sustained."
In any case, it hasn't been the rates holding borrowers back, but the availability of mortgage credit. That may be easing as well.
Nearly 10 percent of senior loan officers surveyed by the Federal Reserve in April reported easing their lending standards for low-risk mortgages. That's an increase from the previous quarter. Banks were not, however, more willing to lend to borrowers with lower credit scores. This as 44 percent of loan officers surveyed reported demand for "prime" mortgages was moderately stronger.
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