Mortgage rates drop dramatically

By Holden Lewis

After the Federal Reserve raised short-term interest rates, the opposite happened to mortgage rates. They fell -- dramatically.

The benchmark 30-year fixed-rate mortgage fell 22 basis points to 6.08 percent, according to the national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 5.61 percent.

The benchmark 15-year fixed-rate mortgage fell 23 basis points to 5.48 percent. The benchmark 1-year adjustable-rate mortgage fell 10 basis points to 4.33 percent.

Not exactly what you'd expect the week after a Fed rate increase.

The Fed raised the target federal funds rate by one-quarter of a percentage point on June 30, to 1.25 percent. Mortgage rates already had been rising on expectations of a series of Fed hikes.

Then came the July 2 release of the June employment data. Wall Street had expected nonfarm payrolls to grow by 250,000 jobs. Instead, the economy created a net 112,000 jobs -- not terrible, but still rather disappointing.

Doreen Woo Ho, president of Wells Fargo's consumer credit group, attributes the drop to "the fact that the jobs created was a little less than people expected and volume on the stock market is a little less than expected." The good news about the economy hasn't been especially positive, she adds.

Fannie Mae chief economist David Berson attributes the drop to the disappointing June employment report and a weaker-than-expected manufacturing survey from the Institute for Supply Management. "With the economy expanding strongly, core inflation moving upward and the Fed in tightening mode, this sort of drop in interest rates wasn't supposed to occur," Berson writes in his weekly economic commentary.

He suggests two potential explanations: Either economic growth is more fragile than previously believed, or "the recent figures may represent nothing more than a brief pause in the upward movement of the economy." Berson falls in the optimistic "brief pause" camp.

Other economists steer a middle course, noting that vehicle sales fell more than 13 percent in June from the month before, and that gasoline prices peaked in May and were still high in June. These could be signs that economic growth is slowing, but not stalling.

What does that mean for mortgage rates? The consensus seems to be that the economy will pick up in the second half of the year, bringing a modest rise in rates.

Homeowners and home buyers snatched the lower-rate opportunity last week. Mortgage applications jumped 19.5 percent, according to the Mortgage Bankers Association.

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