Refinance Rush Ahead of Fed's Decision

DAILY REAL ESTATE NEWS | WEDNESDAY, DECEMBER 16, 2015

Some home owners rushed to refinance their mortgages last week before the Federal Reserve raised interest rates Wednesday. The Fed raised its key interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent, according to reports. But prior to that, owners were bracing themselves, with refinance applications for the week ending Dec. 11 rising 1 percent from the previous week on a seasonally adjusted basis.

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Still, the uptick in refinance applications couldn't keep overall mortgage activity up last week. Total applications for refinancings and home purchases dropped 1.1 percent overall, pushed down by a 3 percent week-to-week drop in home purchase applications. However, home purchase applications are still 34 percent higher than the same week one year ago. 

"Some borrowers may have moved to lock in current rates in advance of the Fed's increase this week," said Michael Fratantoni, chief economist for the Mortgage Bankers Association. The Federal Reserve's move Wednesday to raise the Federal Funds rate was the first in 7 years.

The average 30-year fixed-rate mortgage currently averages 4.14 percent, unchanged from last week, MBA reports.

Mortgage rates follow longer-term bond yields, so an increase in the Federal Funds rate will not necessarily send mortgage rates up, CNBC reports. That will greatly depend on how investors react to Fed Chair Janet Yellen's statements about the economy. Mortgage rates are largely predicted to edge higher by the end of 2016.

Even if there weren't Federal Reserve intervention, "the income a first-time home buyer will need to buy today's starter home a year from now will increase," says Mark Fleming, chief economist at First American. "Yet, we estimate the difference to be only $700 more. The price of admission into home ownership is going to rise, in part because of the leverage-assisted asset inflation caused by the low-rate environment. The time for rock-bottom mortgage rates needs to end, and the end of this era will only have a very modest impact on affordability for the first-time home buyer."

Source: “Mortgage Refinances Up 1% on Rate Fears,” CNBC (Dec. 16, 2015)