Market economics

Mortgage rates increased in the past several weeks.

Freddie Mac reported the average 30-year fixed rate mortgage increased from 3.93% to 4.46%. This rise is being attributed to the Federal Reserve stating that it would be ending a program that has kept interest rates low.

Many understood that to mean the Fed would start reducing its monthly bond purchases this year and end the program around mid-2014. But officials tried to do damage control by saying investors misunderstood. Instead, the bond purchases are intended to energize the economy by driving down long-term interest rates and increasing asset prices in hopes of increasing employment, consumer spending and investment.

Officials also tried to clarify by saying that they were opposed to increasing short-term rates.

The Fed has said when unemployment rates drop to 6.5% it would consider raising short-term rates. In May the unemployment rate was 7.6%. It’s unlikely when the unemployment rate decreases to 6.5%, interest rates will start increasing, the reason being that inflation is most likely to remain low and other underlying labor-market indicators may have not fully recovered.

Mortgage rates ticking up are not expected to adversely affect the housing market, according to housing analysts. Rising interest rates, however, will affect the refinance market.

Buyers are rushing to get a home while credit is extremely cheap. This explains why pending home sales increased 6.7% in May from where they were April. The national median home-price across the country is expected to rise 10%, according to the National Association of Realtors. Some market analysts are saying the market has been overreacting to the possible impact of higher interest rates. In Greenwich, Realtors are reporting that empty-nesters are and will continue to downsize their homes. Recent market studies indicate that younger buyers do not want large houses with acres of land, but prefer in-town living with homes having not so many nice-to-haves. They prefer to walk to shops, restaurants and take transportation to work.

Rising rates are also affecting banks in different ways. An increase in interest rates may not benefit some banks. While debt yields rise, investors are concerned U.S. banks’ unrealized gains on securities holdings will dissipate. Although banks are still holding onto gains, these can convert to losses should yields quickly increase. Security holdings are typically marked to market prices rather than income, even if the unrealized gains or losses go through shareholders’ equity.

Whereas bank loans are not marked to market prices. Rather they are held at their cost and banks create reserves against them. Therefore, their value won’t change because of a change in yields, even if they would sell for less should the bank need to sell them. Keep in mind many banks will hold loans to maturity so an unrealized profit or loss won’t become a problem. Finally, a positive sign was reported with respect to construction spending. The total spending on U.S. construction projects increased 5% in May, according to the Census Bureau. This increase was attributed to residential construction, which was at the highest level since September of 2009.

That means that builders are trying to satisfy pent-up demand for new housing. Also the increased demand for multi-housing, especially to be used as rentals, is also spurring construction.


Mary Ann Clark is a Realtor with Coldwell Banker at 177 West Putnam Avenue in Greenwich. Questions or comments may be emailed to [email protected]

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