Strengthening Economy Pushing Up Rates

That data was the real gross domestic product update by the Department of Commerce, which showed the economy grew at an annual rate of 3.3% in the second quarter — up from the previously revised 2.8%. Residential fixed investment was one of the listed major contributors to the increase.

“The financial market thinks we’ve passed the ‘soft patch’ in the economy, which would translate into stronger growth in the coming months,” said Freddie Mac’s deputy chief economist Amy Cutts in a written statement. “Stronger growth means a greater threat of inflation and that means interest rates will start to rise in response to the threat.”

Mortgage rates already reacted with the 30-year fixed-rate mortgage average coming in at 5.82% and the 15-year at 5.24% — up 10 and 12 basis points (BPS), respectively, from last week, according to Freddie’s latest survey of 125 thrifts, commercial banks and mortgage lending companies.

The current spread of 58 BPS between the 30-year and 15-year is the narrowest it has been during the past month, and is narrower than a year ago at 69 BPS.

The 1-year Treasury-indexed adjustable-rate mortgage (ARM) average leapt 11 BPS to 4.08% — a level not seen since mid-August, according to Freddie. The direction of the competing index for ARMs, the cost of funds index, or COFI, reportedly edged up for the third consecutive month to 1.875% in August. Compared to figures reported a year ago, the current ARM average is nearly half a percentage point higher while the COFI is about 10 BPS lower.

Bankrate.com’s surveyed panel of mortgage brokers, bankers, and other industry participants continued on its thought that rates will rise over the next month and a half; 60% predicted rates would increase, 30% forecasted they’d remain unchanged (give or take 2 BPS), and only 10% thought they’d drop.

However, Freddie’s Cutts pointed out that “current forecast calls for rates to remain at low levels through the end of next year.” The government-sponsored enterprise’s October outlook has the 30-year averaging 5.8% this quarter, slightly lower than its prediction a month ago, and still has it averaging below 6% until the second quarter next year.

Mortgage application volume was almost unchanged from seven days ago — with the Market Composite Index ending at 724.8 — due to a 2% drop in purchase applications which offset an increase of nearly 3% in refinancing activity, the Mortgage Bankers Association (MBA) reported. At this time last year, the composite index stood at 817.3.

The refinance share of total applications climbed to 47% from the previous week, MBA said, and the ARM share edged up to more than a third.

At Thursday’s close, the 10-year Treasury note traded at a price of 100 1/32 and 4.24% yield. Last week the note closed at a 4.10% yield.