Mortgage Rate Market Update

This year has been an interesting one, so far, for mortgage rates. At the beginning of the year all signs pointed towards rising mortgage rates over the course of the 2014. At the end of 2013 mortgage rates had been trending higher and ended the year at 4.75% on the 30 Year Fixed. Over the first 6 months of this year the market has defied all logic and actually pushed rates lower and they've been running around 4.25% lately.

There are a number of factors that have led to lower rates. The primary one being that the US economy has not performed as well as people were predicting. The economy was projected to grow at a 2.5 to 3% pace in the first quarter but actual growth in Gross Domestic Product (GDP) was actually just .1%! The severely long and cold winter has been blamed for this poor performance so everybody is going to really be looking closely at GDP data for the second quarter which will be out next month.

The second main factor in rates falling this year has been global unrest. First the Soviet Union invasion of Ukraine and now the problems that are going on in Iraq. This type of geopolitical unrest causes a "flight to safety" move to US financial assets by global investors and these dollars flowing to the US financial markets can cause interest rates here to fall.

The one single most important thing that influences interest rates - inflation - has not yet reared it's head and that has also allowed rates to drift lower this year. Last week, however, the Consumer Price Index (CPI) was released for May and that showed a .4% rise and that was on top of the .3% rise in April. Although this doesn't seem like much, if you annualize these monthly rates you'd have annual inflation running at a 4 to 5% pace! This is way higher than the 2% rate that the Federal Reserve targets as ideal. These CPI figures are going to be watched closely.  Also, the most recent jobs report was a lot stronger than expected with 288,000 new jobs created and that can also put upward pressure on rates.

The Bottom line is that if the economy accelerates further and inflationary pressures continue then we are going to see mortgage rates rising as we go through the second half of 2014. I believe rates are going to trend upwards towards the high 4% to low 5% range later this year. Should not be a big enough move to have any real impact on the housing market.

Ken Mascia, Licensed Loan Officer NMLS 135323
(248) 644-1200, ext 15