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Mortgage borrowers backed away last week, as suspense continued to build ahead of this Thursday's Federal Reserve decision on the future of interest rates.
Total mortgage application volume decreased 7 percent on a seasonally adjusted basis for the week ending September 11th versus the earlier week, according to the Mortgage Bankers Association (MBA).
The reading included an adjustment for the Labor Day holiday, although the comparison to volume one year ago is skewed because the holiday shifted from the first week in September last year to the second week this year.
Applications to refinance, which had a brief surge on a temporary rate drop, fell 9 percent from the previous week, seasonally adjusted. Applications to purchase a home, which are far less rate-sensitive, fell 4 percent week-to-week. Purchase volume has fallen 17 percent in the past four weeks, signaling a potential slowdown in home sales ahead.
Mortgage rates have moved in a very narrow range, hovering just above or below 4 percent for most of this year. Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.09 percent from 4.10 percent, with points increasing to 0.42 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, according to the MBA. They may continue in this range for the rest of the year.
"Given recent economic growth and job market health, we had been expecting a September rate hike, however, given recent financial market volatility and global growth concerns, along with still-low US inflation, we are expecting the first rate hike to be moved to December 2015," said Mike Fratantoni, chief economist for the MBA.
It is still possible the Fed could make a move this week, and analysts are split as to what a potential rate hike could mean for the housing market. Mortgage rates do not follow directly rate moves set by the Federal Reserve, but instead follow bond yields, which can be affected by Fed moves.
"While lenders may temporarily raise rates, they'll probably lower them again in a repeat performance of what we saw when the Fed announced it was ending the QE [Quantitative Easing] program: Rates jumped up by almost a point; applications cratered; home sales slowed down; rates returned to lower levels; home sales and loan applications picked back up," said Rick Sharga, executive vice-president at Auction.com. "Most likely we'll see slow, incremental rate increases over time as lenders test the waters."
Rates actually began moving higher Tuesday, as anxiety built among investors ahead of the Fed meeting.
"They want to get to the sidelines before the Fed. As far as bond markets are concerned, 'sidelines' means 'selling bonds,' which in turn implies higher rates. These extra anxious folks had an outsized effect on rates today [Tuesday], largely because the high-anxiety among the rest of the marketplace didn't make anyone feel like buying extra bonds right now. All sellers and few buyers means prices tumble and rates rise," wrote Matthew Graham, chief operating officer of Mortgage News Daily.
Perspective is key in all of this. Mortgage rates are still quite low by historical standards. While higher rates certainly don't help affordability, a decision by the Fed to raise rates would indicate growing confidence in the strength of the U.S. economy. A strong economy, in the end, is the best thing for housing.